Retail market watchers may soon refer to the growing popularity of this sales strategy trend as “the year of subscription sales.”
Subscription sales have been a marketing strategy for several years. It continues to garner much attention, according to Derrick Herbst, director of business strategies at e-commerce B2B e-commerce platform Conga.
“Companies and customers continue to transition from the one-time purchase to subscription purchases of products and or services across many different industries. Subscription-based models benefit customers and companies offering subscriptions,” he told the E-Commerce Times.
With the expanding reach of obtaining goods and services by subscription, several variations of the marketing model have become common. However, Herbst sees two primary models that often fit buyers’ and sellers’ needs. Savvy e-commerce retailers should adopt a subscription model by maintaining one-time and recurring sales strategies.
The subscription business models focus on enrolling customers to pay multiple payments for prolonged access to goods or services instead of making a large upfront one-time price. The economy is trending toward more subscriptions instead of ownership for cars, software, entertainment, and shopping. This approach increases the customer’s lifetime value (LTV); he offered as reasons for the growing consumer interest.
According to Herbst, moving to a subscription model accomplishes the goal of reduced one-time purchase expenditures. Limiting price increases during the subscription term can also achieve the second goal of delivering predictable future costs.
“Businesses can benefit by offering a subscription model to capture more business and do so more profitably as we move into this new inflationary era of expensive money,” he offered.
Dynamics of Access and Acquisition
The access and acquisition models can often fulfill needs across most industries. For access purchases, consumers “order” goods, content, or services for a defined time or until they decide to cancel.
Herbst gave examples, including using a PC as a Service (PCaaS) or car service. Think in terms of accessing Netflix or MS Office 365 subscriptions. Another is purchasing a maintenance contract on an HVAC system or security monitoring platform.
Acquisition subscriptions are more typically related to consumable items such as razor blades, food, beauty supplies, vitamins, and medical device supplies in the consumer arena. In the business realm, this could be supplies for devices such as an X-ray machine or ink cartridges for the office printer.
“While the above outlines pure access or acquisition subscriptions, there are also subscriptions that represent a combination of the two,” noted Herbst.
As a consumer example, he explained that a subscription that provides a free razor also includes access to a device in conjunction with the purchase of razor blades, the acquisition of a consumable portion, for a defined time period.
In the business world, a similar combination would be to provide a printer at a fixed monthly rate or no charge for the machine and related maintenance in exchange for a commitment to purchase paper and toner for a defined period. The seller could present that arrangement as price per copy, he added.
“The pricing for these combination models can be more complex, as they typically rely on a minimum purchase quantity of the acquisition item(s) at a given price.”
Flexible Models Fit E-Commerce Customers
Other subscription labels share the same essential selling premise. They provide a conduit to sell products and services through a regular, recurring payment schedule. For retailers and service providers, the approach can be a better marketing strategy than making a one-time-only sale.
Take, for instance, the curation model. It offers subscribers a selection of unique items regularly based on their needs and preferences. This method enables shoppers to discover new products, and it gives retailers a way to build customer loyalty.
The replenishment model lets consumers automate their purchases of commodity items on a regular basis. Think of this option as a way to subscribe and save. This form of subscription shopping is gaining popularity as consumers adapt to buying food, beverages, health and wellness, and grooming products online.
Consumers gain convenience and thrift by getting their consumables delivered to their door. They can monitor their consumption patterns to adjust the order timing and save money and time. Vendors gain a competitive advantage for their brand.
“As we are experiencing the end of cheap money, we should expect that customers — businesses as well as consumers — will strive to reduce upfront costs and cash outlays and have predictable costs going forward as inflation pushes prices up,” observed Herbst about a central driving factor for subscription sales.
Transition Time for Business Sales
Herbst noted that subscription selling is a well-known business model in the entertainment and software industries. He sees other industries transitioning from a one-time purchase to subscription-based business models. These include service sectors like ride-sharing, mobile phone services, fitness programs, travel services, and health care providers that now offer subscriptions for some primary care and telehealth services.
Beyond the automotive sector, many manufacturers of consumer electronics, major appliances, and industrial machinery now provide maintenance subscriptions, along with augmented offerings like communication features and the integration of the internet of things. These subscriptions make it convenient to enable notifications to customers of equipment status as well as self-monitoring and remote control of devices.
“Even one of my local car wash companies has been selling a car wash subscription for several years, so many industries beyond entertainment and software are moving to the subscription model,” he added.
Subscription Model Business Benefits
According to Herbst, companies offering subscriptions usually reap benefits that fall into three categories. The first is steady, recurring revenue for content and service providers. Instead of making a sizeable upfront sale and then hoping the customer returns to buy more, businesses can create a sustained income stream by nurturing ongoing customer relationships.
The second benefit is increased sales volume and or average selling price per unit. Most subscriptions have some minimum term, so the revenue over this term is reasonably reliable.
“Then, based on renewal rate experience, companies can further forecast their revenues into the future. Additionally, many customers often pay more per unit of product or buy a greater quantity or grade since they are making many smaller payments than a large one-time purchase,” he continued.
The third primary benefit of offering subscriptions is improved customer satisfaction, which leads to greater customer loyalty and increased renewals or reduced customer churn. With subscriptions, there is usually an ongoing engagement with the customer and often the ability to see how they use the product or service.
“This affords the opportunity to tailor products and services to what customers want or value, thereby increasing customer loyalty,” said Herbst.
He added that the ongoing monitoring of customer behavior also provides insights for upsells and cross-sells when the customer renews, or sooner, via tailored special offers and promotions.
Transitioning to a Subscription Sales Model
The reality is that customers can leave at any point. Businesses must win over their customers daily to leverage a subscription-based model to maintain a steady revenue stream. So, retailers must change how their customers think of things financially and conduct business to keep customers happy.
“If you are not taking good care of the subscription-based customer consistently, you risk losing them,” Herbst cautioned.
Similarly, businesses must have the right technology in place and focus on properly aligning processes, people, and solutions for billing and delivery to do things regularly, he added.
Companies must ensure they have the capabilities in place to handle a transition from a one-time purchase to a recurring business model supported by all their people, processes, and technology.
To effectively leverage subscription-based models, the best way to increase sales is for customers to see value in your offering. Therefore, he suggested that sellers should first ensure they deliver some or all the benefits that customers value.
Retailers must know their brand’s strengths and weaknesses. For example, a company that produces excellent capital products but lacks good software or field service capability may not be able to offer an appealing “solution” subscription.
“It is important to address such weaknesses to continue to win the business every day,” said Herbst,
Avoid Potential Pitfalls
Herbst’s final caution is ensuring that the company’s people, processes, delivery, and billing systems can accommodate subscriptions. If moving from non-subscription to subscription sales models, expect at least some period to accommodate both models.
“Once customers see value in your subscription offering, it is critical that they see that value as greater than competing offerings. The competing offering could be a different business model that offers greater value than your subscription or a direct subscription-based competitor that offers a different set of benefits and or price for a similar offering,” said Herbst.
To avoid this, assess whether sufficient market segments exist for the value you deliver to sustain your offering and business model profitably.
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