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Subscription Commerce: What You Need to Know in 2014

Names like Birchbox, Trunkclub, and Dollar Shave Club dominated headlines in 2013 and inspired small business owners and venture capitalists alike to jump on the subscription commerce trend. But even though these companies seem like revolutionaries, they aren’t blazing trails so much as they are reviving an old, trusted business model. It’s a model you’re undoubtedly familiar with. Newspapers, magazines, cable and phone services, music clubs, and food clubs are all common examples of subscription commerce. Heck, the milkman has been delivering on a subscription basis since the 1800s. So what explains the recent resurgence of subcom companies?

To start, technology has revolutionized familiar services and transformed them into modern-day essentials we can’t imagine living without. Think digital goods like online magazines, Spotify, Hulu, or monthly grocery items. Faster and cheaper delivery eliminates door-to-door salesmen, while digital subscriptions eliminate physical delivery altogether. Newer eCommerce platforms are designed to handle a large volume of orders, payments, and customer service problems.

Think of Netflix’s low $7.99 a month fee for thousands of movies and shows delivered to your screen(s) instantly. How much more efficient is that than Blockbuster? All of this technology was available, it just took Netflix to put it together under one roof. They recently reached 40 million customers, with more paid subscribers than HBO.

On the other hand, curated boxes of unique or hard to find samples offer an appealing service that delivers convenience, novelty, or both. Need your fill of Japanese snacks every month? Say arigato to Skoshbox. Looking for a little spice in your weekly tea tastings? Amoda Tea has you covered. Depending on consumer interest and the subscription price, your customers may consider investing in these unique, conversation-starting services.

So what does that mean for business owners looking to enter this booming field? What kind of capital do you need to begin? Well, if you’re relying on your website to be your sales staff, your personnel requirements go down. Outsource your customer service and it drops further.

There is also virtually no need to acquire an inventory prior to accepting subscriptions. Ever see the “Order before the 1st to get our January box!” deals? Deadlines like these allow subcom owners to acquire the proper supply for the demand, resulting in no excess product. Combine minimal personnel and just-in-time inventory and you’ve got a very low start-up cost.

Plus with subscription commerce, there’s no need to cut your store’s ribbon with every piece in place. With limited marketing and inventory, it’s easy to start small and grow along with your customer base. And, if you don’t have the cash, consider that subcom startups have received $302.6 million in venture capital in the past 2 years alone. With the lean startup cost of the subscription model, that number is especially impressive.

But like any business model, there are pros and cons to subscription commerce. Here’s a quick breakdown:

The Pros:

Very little capital needed — It’s cheap and easy to get started selling subscriptions. Many of the subscriptions won’t physically deliver a product for quite some time, so it’s not necessary to have the product stocked in order to sell it.

Quick initial growth — The subcom model provides recurring business and very little overhead, which in turn creates a climate where it is easy to acquire new customers.

Predictable demand — The unpredictable nature of demand causes a great deal of sales inefficiency. Did I stock enough of this product? Did I order the right breakdown of sizes and colors? Did I pick a dud? A recurring customer base makes predicting inventory turnover significantly easier and spares you the trickier operational logistics of running an eCommerce site.

Good customer retention — Presumably, you’ve got a built-in customer retention model. They’re there until they cancel. But, be careful — if you don’t provide genuine value with your service, you’re going to find more customers canceling than you’d like.

The Cons:

Built in market cap — At a certain point, the rate that you churn customers will match the rate you acquire them. For any given market, only a portion of potential customers will want a subscription for their products. Depending on what you sell and how well you sell it, this built in cap may be acceptable, or it may be limiting.

Low barrier of entry — The same low barrier of entry that made it easy to get started is going to be a thorn in your side as you grow. It’s cheap and easy for competitors to enter your market. You’ve got to have a value proposition that differentiates you, or the new kid on the block will pose a serious threat to your business.

Recurring subscription needs recurring value — At some point your customers will question the real value that your service delivers. If it doesn’t hold up, you’re going to see them start to drop off. Creating lasting value is not as easy as it sounds.

And for those of you already started, here’s a few considerations to make the most of your business:

6 Tips to Make Your Subcom Model Sustainable:

1) Diversify your offerings. Direct service and subscriptions go hand in hand. Consider including a companion service you lack. Amazon suggests a subscription when you buy basic needs like toiletries, diapers, or pet food. Plus you save when you enroll.

2) Go with the flow. Both Audible and Amazon offer direct purchase and subscription but they market themselves very differently. Shoedazzle dropped their subscription all together after making the switch to direct purchase. Don’t be afraid to experiment with other models to find the mix that works the best for your market.

3) Focus on creating the recurring value, not the initial hook. Whether that’s delivering convenience, fulfilling a constant need, or fixing a broken service, you need to ensure the subscription is valuable for your specific customer. If you own a designer clothing subcom, you need to consistently provide surprise, excitement, and shareability. Your growth potential is directly related to how well you retain customers, so make that your obsessive focus.

4) Experiment with membership options. Changing the size and/or frequency of the subscription could open your business to a new range of customers. Consider gift options for friends or discounts for the first box to entice subscriptions. A lot of successful digital subscriptions use the “freemium” model, where they tease the product offering with a free account, but to get all the bells and whistles, you’ve got to upgrade to a paid membership.

5) Make terms clear and convenient. If you can offer free shipping or a low fee, more customers will bite the bullet and sign up.

6) Make cancellation easy. Nothing puts a bad taste in your mouth like a deceptive or confusing cancellation process. Establish customer trust up-front by providing a clear explanation of the cancellation process. Knowing they’ll be able to easily cancel the subscription if they want to will encourage more sign ups.

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