The subscription model in e-commerce and beyond

Before digital entertainment became a roaring success, subscriptions were synonymous with inflexibility and lock-in. But the disruptive impact of cloud computing and subscription platforms – the key technologies enabling a new type of media consumption – didn’t stop at music and film streaming. It has also spilled over into physical e-commerce, and is now filtering on to insurance and banking, a hybrid model postioned somewhere between payment per transaction and old-fashioned subscriptions.

In this new format, customers can throw caution to the wind and subscribe and unsubscribe to their hearts’ content, in the knowledge that there will be no traps hidden in the small print. They can even set the payment and delivery intervals that best meet their needs.

For some time, it seemed that this new-found flexibility would allow for any product to be sold on a subscription basis.

Some examples lent themselves more readily to the model than others: not many find any thrill in buying regular supplies of household staples or dragging heavy petfood bags into their cars, while many others view replenishing their personal care items as a necessary inconvenience. But other subscription ideas might sound convoluted and wasteful. A monthly pot plant subscription, for example, makes sense only for those bent on not lifting a finger, green or otherwise, to extend the lifetime of their existing organic interior decor.

Although subscriptions have proved to be a clever way of getting a foot in the door on a crowded market, seeing them as a secret recipe that can turn any business idea into an overnight success is flawed.

Added value is key to the commercial sustainability of the subscription model

The Dollar Shave Club, an oft-quoted example of replenishment subscriptions, could become a real success because it has redressed an anomaly on the market: even its premium subscription razorblades sell at half the price of the cheapest Gillette equivalent, the brand previously dominating about 60 per cent of the US market.

The 15-20 per cent savings that Amazon’s Subscribe and Save offers also make a great case for a long-term commitment, especially as it’s eased by “skip or cancel delivery” options. Subscriptions are also natural tools for brands that opt for selling directly to their customers and building a more intimate relationship with them based on loyalty.

Another area where subscriptions could provide a solution to a persisting problem is insurance. In a survey, Cuvva, an app-based car insurance provider, found that 62 per cent of respondents “feel comfortable trying out new subscription-based models for products [such as] insurance.” Here the flexible monthly subscription model, often combined with telematics and revolutionary usage-based schemes, removes the interests paid on monthly instalment schemes, as well as fees for changes and cancellations typical of traditional insurance policies.

Box subscriptions and the element of surprise

Regular curated box deliveries comprise a big chunk of e-commerce subscriptions, until recently at least – according to a McKinsey report they accounted for 55 per cent in the US in 2018. But although the hype over meal boxes and recurring deliveries of a surprise assortment of clothes, beauty products or snacks seemed to have been fizzling out by 2019, the pandemic, with non-essential shops and restaurants closed, has given them a new lease of life. In their case, the added value is that the recipient doesn’t exactly know what is inside. The excitement these deliveries generate is the direct opposite of the humdrum of regular top-up orders.

But the novelty can quickly wear off. Although for vendors, the undeniable benefit of subscriptions lies in a predictable revenue stream, churn rates with box subscriptions can get as high as 40 per cent. Although most of the time the first order is preceded by drawing a customer profile of needs and preferences, the chances of a miss or two per delivery are baked into the model.

But on a market awash with products, the job of finding the best available option suited to customers’ needs remains a strong proposition. There are entire new markets for box subscriptions to expand into, many of them with the potential of improving the sector’s sustainability credentials. Supplying a regular and renewing selection of vegetarian or vegan products unavailable in supermarkets or curated groceries that come in widely recycled or plastic-free packaging can save environmentally conscious customers a lot of time and effort.

The close engagement between customer and brand that the subscription model provides can also present a great opportunity for companies that aim to differentiate themselves by taking responsibility for the post-consumer waste of their products through recycling or refilling.

Whether the subscription economy will eventually complement its thrift and gratification features with an environmental sustainability strain is still unsure. But there will certainly be new areas such as insurance and finance experimenting with the model, and the average number of subscriptions per person and the complexity of managing them are also expected to grow significantly.

Although banking hasn’t exactly made the plunge into the subscription model yet, it has already dipped a toe by offering subscription management services. Visa and Mastercard merchants, for example, are notified before free trials turn into subscriptions, and Revolut, a novobank, offers a dashboard solution where all subscriptions can be seen in one place. These and similar apps can serve as simple but effective tools towards cutting the billions of pounds estimated to be wasted on subscriptions that consumers accidentally took out or forgot to cancel when they no longer needed them.

Today more than half of Brits have three or more subscriptions. If the sector is to expand at the breakneck speed forecast by business intelligence company Junniper Research (to over $263 billion by 2025 only for physical goods), staying on top of subscriptions – especially flexible, on-and-off ones – will become challenging for consumers. Unless subscription providers address the issue, this growing complexity may defeat the third major purpose of the model in addition to savings and surprise: convenience.

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