Subscription Businesses: The Future of E‑commerce

Subscription businesses are not a new concept. However, in the digital age, they’ve come to take on a new role in the global economy. Many experts believe that this is the future of e-commerce and that almost any business can follow this model of recurring payments. Let’s have a look at what popular models exist and what you need to keep in mind if you want to use this method of selling.

Contents:

• The evolution of subscription businesses
• Advantages for the consumer
• Advantages for the business
• Types of subscription businesses
• Other things to keep in mind

The evolution of subscription businesses: the model for the digital age

Before we get into the details of why or how to run a subscription-based business, I thought it might help to look at how the business subscription model became so popular in the first place and why it makes perfect sense in today’s commercial climate.

The subscription business model seems both old and new at the same time. It’s because of this that it may indeed be the perfect solution for consumers and business owners in the digital zeitgeist, especially when it comes to media content.

Turn your clocks back to the 80s and 90s if you will. Can you remember going to the video store to rent the newest film just released on VHS (or DVD)?

Sure, it’s fun to get nostalgic about walking through the shop, reading the back of the film boxes, and being excited to watch that movie on the way home. However, I bet you can also remember the disappointment of having that new video being “sold out” (or out-of-stock) because the movie was so popular as well, right?

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Although these video stores are outdated and rare (or impossible) to find these days, ironically, these were some of the most popular subscription-based businesses of the 20th century. The concept is simple, right? Pay a small annual fee for membership (sometimes this was free) and then pay a few pounds for the movie you want to see whenever you want to use the service.

Why buy a movie you’re only going to watch once or twice if you can rent the movie for a fraction of the price? It kind of reminds me of a library - remember those?

As video (and music) content started to show up on the internet in the late 90s and early 2000s, people got really excited. Why buy DVDs and CDs (or even rent them) if you can download them for free from the convenience of your home? Especially, if digital downloads meant that an item was never “sold out” or out-of-stock.

It’s probably difficult for Generation Z to imagine now, but all this “free” content created a huuuuge problem just a few years ago. It took some time, but thanks to a few major lawsuits, plenty of news stories, and the development of the Apple Store, buying movies and music digitally (and for a relatively fair price) started to become mainstream.

On top of that, it could be argued that companies with subscription models like Netflix and Spotify saved their respective industries by finding a pretty solid solution to online piracy.

Advantages for the consumer

A few years after (legal) digital downloads became the norm, companies like Netflix and Spotify took the digital content industry to the next level. With high-speed internet more readily available, these brands saw the future: Let users subscribe to their service and get access to all of their content. Instead of paying and owning a single song, users could now access an endless library of content as long as they paid a small monthly fee.

And that is the main concept behind the subscription business model: access more and own less.  

Companies like Netflix were quick to realise what Apple perhaps failed to see: people don’t necessarily want to “own” movies or songs, they just want to have access to them at their convenience. The question was simple. Would you rather buy 8 songs for 99-pence each or pay 8 quid a month for access to millions of songs whenever you want.

That is the huge advantage that subscription models bring to its users: access.

A lot of companies have followed suit and seen plenty of success. Adobe, the maker of popular apps like Photoshop, has moved away from a one-time purchase price model for their software. From a user perspective, this makes sense because they could now access the software for as long as they needed to instead of paying hundreds for software that might be outdated in a year or two.

More and more companies are moving to this business model. Even computers themselves have moved in this direction with the advent of cloud computing.

Companies like Paperspace let people that need high-processing power (and gamers who need strong and up-to-date graphics capabilities) to subscribe to their service. With such services, users essentially stream the more powerful computer hosted elsewhere to their less-capable computers. Users can now turn a very basic computer into a powerful PC for a small monthly fee. It seems like Microsoft will also use this concept for its next gaming console.  

Advantages for the business

Considering all this, it seems like a great deal for consumers, but businesses can get plenty of advantages from this business model as well.

For starters, the obvious answer is that businesses can get a steady stream of income this way, making forecasting and tracking easier and more accurate.

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However, taking it a step further, businesses with a recurring payment system can have a better understanding of the relationship their customers have to their products. For example, who do you think has better insights into the customer experience and customer satisfaction: the company that sold a fitness DVD once or the company that has a user paying for monthly access to their videos and spends 20 hours a month using this service?

Another great example of this is Netflix. This world-famous company started creating their own content just a few years ago and they’ve been very successful at it. A big reason why they were so successful is that they took advantage of the information their customers provided them with.

By knowing which movies people watch, how often they watch them, and what combinations of shows their viewers watch, Netflix got amazing insights into their users’ tastes and the company was more or less able to create an “algorithm” for creating popular shows and movies.

Naturally, not every show has been a success, but the reality is that they are a giant in show business these days when just a few years ago they were nothing more than a DVD delivery service.   

Types of subscription businesses

Not everyone can create the next Netflix. So, what about small or medium-sized businesses? There’s been plenty of success with this business model for smaller companies as well.

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When it comes down to it, there are basically two types of subscription business models:

• Content access services

• Repeat services

There are definitely plenty of opportunities for small businesses to find success with both of these options. Let’s take a look at each one.

Content access

Content access subscription businesses are probably the first thing you think about when talking about such business models. We mentioned a few examples earlier - Netflix, Spotify, etc.

Companies like those offer their customers access to their media for a monthly fee. Although they are quite similar in that sense, they have different strategies for acquiring and keeping customers.

Spotify, for example, offers a paid version (premium) and a free, ad-supported version (freemium) to users. With the freemium version, all people can have access to their service by simply creating an account. However, as you might have guessed, these freemium users must listen to ads here and there.

Spotify hopes that by giving all users access to their product, the freemium users will eventually become paid users. In the meantime, Spotify can make some revenue from businesses that advertise to these free users.  

Netflix, on the other hand, only has a paid version, which has no ads whatsoever. Their pricing plans differ depending on how many users can access the account at once.

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It’s worth noting that allowing users to share access with friends was a welcome feature. It came across as very consumer-friendly and probably helped Netflix gain even more members.   

These are just a few examples of subscription-based businesses whose main product is content.

Keep in mind that small businesses can do things like this as well. Many “educators” use this business model as well. For example, an English-language trainer might have video lessons to complex topics for paid members while giving basic lessons away for free on YouTube to gain exposure.

The paid members' website might also include forums and a Q&A section or worksheets available for download as well. The same might go for a motivational coach or any kind of “industry expert” offering tips to succeed.

This concept is not limited to digital businesses either. Physical businesses can use this model to keep engagement high. For example, Wanderlust, a yoga business that arranges yoga events around the world, created a site for users to “attend” these events virtually and access lessons from their favourite trainers. This is a perfect tool for keeping past participants engaged and for motivating potential users to sign up for live events in the future.   

Repeat services

A “repeat service” is a type of business where users sign up to receive products on a regular basis. A typical product for this would be home goods.

For example, when users buy household goods on Amazon, they will be asked if they want to “subscribe & save”. By allowing users to get a discount by setting up a recurring delivery of these goods, Amazon is ensuring repeat business from their customers in exchange for a small discount.

Once again, it might seem overwhelming to try to replicate something that Amazon does, but many smaller businesses and start-ups have found success with this business model.

Take, for example, Dollar Shave Club, who are in internationalising and in 2018 expanded to the UK. They took a really simple idea - deliver high-quality razor blades (and eventually other grooming products as well) to their users at regular intervals - and they built a loyal following of repeat customers.

Founded in 2012, Dollar Shave Club was acquired by Unilever for $1 billion in 2016 after reaching 3.2 million members.    

Thanks to a viral video and a smart business model, Dollar Shave Club went from a business selling a single product to a company worth a billion dollars!

(Click on the image to watch it on YouTube)

When it comes to repeat services (or subscription boxes), this category can be broken down into three subcategories:

• Pre-selected boxes: Like with Amazon, the customer chooses what they will get with every delivery

• Mixed bag: When users first sign up for Dollar Shave Club, they will get a “starter set” with a mix of groom supplies. The general idea with “mixed bags” is that the boxes contain a mix of pre-selected items along with new items for the user to try.

• Mystery box: as you might imagine, users receive a box of surprise gifts. This is model is used by companies that send food products (e.g. Flaming Licks)

Other things to keep in mind

If you’re inspired to start a business or expand an existing one into a subscription business model, there are a few things to keep in mind.

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Pricing

This is always an extremely important element for any business. Customers can become very finicky over the price of goods and services.

Even a popular service like Netflix receives enormous backlash whenever it announces a price increase.

At the end of the day, Netflix made sure that their content offer justified the price increase and they’re doing as well as ever. This is the biggest takeaway here: Make sure your prices reflect the value of your offer.

Recommended reading:
How to Create a Suitable Pricing Model for a Business

As an example of bad pricing, you can look at many of the failed “prepared food delivery” services (meal-kit boxes). The general concept sounded good - get the ingredients for healthy meals delivered to your home already prepared (cut, peeled, etc.). There were multiple variations of this idea, but they all faced similar challenges in that consumers didn’t want to pay a huge markup on food.

Many of these brands gave away discounts and offered sign-up specials to acquire these customers, but once those initial prices increased, they lost many of those customers. At the end of the day, consumers simply found that the benefits these brands offered did not outweigh the prices they were paying. In other words, shoppers didn’t believe they were getting true value for money.

A lot of factors will determine the price of your box, such as the cost of goods, shipping, fulfilment prices, materials, marketing costs, desired profit margin, etc. Cratejoy created a subscription box pricing guide tool to help businesses figure out what they should charge for their boxes. Generally speaking, it is recommended to aim for at least a 30% profit margin, at least early on.

Packaging

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In a world where unboxing videos are insanely popular, it’s important to give users a unique experience and that begins with the opening of their package.

Having a nice package and making the unboxing of your product a special experience is important for the perception of your brand and product. This connects with the point of pricing mentioned above. Consumers’ perception of value can be heavily influenced by the unboxing experience, so make sure it is a nice one, even if it simply means creating a nice design for the outside of your box.

Differentiating yourself

This might seem obvious, but it’s an important point to remember. Even if you work in a niche market and you are the only one who offers anything close to what you do, there’s a good chance other entrepreneurs are paying attention to what you do. Someone might look at your product and say “What a great idea, but I bet I can do it better!”

Staying on top of your game, improving your offer and broadening your product range is advisable for any business, and subscription businesses are no different. Make sure to keep track of your competitors and try to differentiate yourself from them.

Build trust

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This might sound like it’s easier said than done, but there are definitely a few things you can do to build trust as a new business.

First of all, you might want to get third-party accreditation to show that you are a trustworthy business. For example, the Trusted Shops Trustmark helps businesses become more transparent by auditing their website and making sure that a business follows best practices based on EU guidelines.

Other than that, you should do your best to collect customer reviews. With shop reviews, you are letting potential customers know the value of your brand in terms of customer service and general reliability. Product reviews naturally focus more on the quality of the products you offer. After all, according to Bright Local, 91% of 18-34 year-old consumers trust online reviews as much as personal recommendations.

Another underrated element to building trust through reviews is how you respond to negative reviews. According to the same Bright Local survey, 89% of consumers read businesses' responses to reviews. Therefore, it’s important to be transparent.

Every company slips up with a customer order here and there. It’s best not to pretend that it doesn’t happen or try to bury the review. People will go out of their way to search out those reviews to see how you handle them, so be open about it and show your users that you care about their experience and that you can admit when something was your fault. It may very well end up humanising your company. People respect that.

Conclusion

Subscription boxes are very trendy at the moment. For many products, it’s a matter of convenience and practicality. For other products, it might be an excitement factor. Either way, if you can provide a unique product that offers value for money, you might have a winner on your hands (and “in the box”).