Using Subscriptions to Increase Customer LTV
Editor’s note: This post is part of our ‘Beyond Email’ series — an extension of the Beyond Email Track at Klaviyo:BOS. Check out the slides from this session.
You’ve probably seen subscriptions popping up left and right in ecommerce stores, and maybe even researched how to implement them for yourself. But how do you know if subscriptions are right for your store? And what kind of subscription should you offer?
Good news: you’re in the right place.
Who is ReCharge?
ReCharge’s mission is to empower merchants by making payments easy for everyone as the only Shopify Plus Tech Partner for subscriptions. They currently power over 10,000 Shopify stores’ subscription businesses. ReCharge also integrates with 21 technology partners, including Klaviyo.
Before we can understand why subscriptions are a fast-growing business model adopted by many industry leaders, we first have to understand where subscriptions came from.
What is the subscription economy?
The term subscription economy references how consumers are changing their mindset about daily purchases – shifting towards subscriptions as opposed to the classic pay-per-product model.
What started with Birchbox and the Amazon Prime “subscribe-and-save” model in 2010 has grown to Dollar Shave Club and the Apple “rental” model in 2016. In fact, in 2016 Zuora found that 78% of adults in the UK subscribe to at least one product or service.
Let’s be clear, subscriptions are not a new concept – consumers are very familiar with the model, but their customer experience has not always been excellent. For example, look at a gym membership: would you say it is easy it to cancel your membership whenever you’d like? Subscriptions also haven’t been easy to implement for merchants, so even though subscription services have grown 100% year over year since 2013, they are only recently becoming an option for smaller stores.
How and why subscriptions are evolving
The ecommerce space has fallen in love with subscriptions for lots of reasons. For customers, there are two major changes that make subscriptions more appealing than in the past:
- Intuitive Subscription Platforms: Subscribers have increased transparency, flexibility and control over their active subscriptions.
- Flexible Subscription Models: Seller flexibility lets customers choose exactly the experience they want.
For sellers, of course, subscriptions are a well-documented way to lock in repeat business, communicate directly with consumers instead of going through retailers, and cultivate customers with a high lifetime value. New payment methods and platforms, notably card vaulting services, have made them faster and easier to use. No wonder we’re seeing new brands launching subscription-first as well as legacy brands adding subscriptions.
The result: subscription revenues are growing 9 times faster than the S&P500 average.
Let’s dig into these benefits a bit more to really understand how subscriptions are a win for all parties.
Subscriptions are beneficial to both merchants and customers
For merchants, there are plenty of good business reasons to use subscriptions:
- Repeat customers are the best customers: Research suggests that a loyal customer’s lifetime value could be worth ten times their first purchase.
- Smooth out seasonality: nearly all ecommerce merchants are excited about the revenue spike for Black Friday and Cyber Monday. But how often does that translate to January revenue? Subscriptions offer the ability to see consistent sales across all seasons, so you’re not relying on a specific time of year to balance out the rest.
- Optimized supply chain: with a data-rich subscription model there are clear efficiencies to be made in the supply chain, logistics and sales.
- Deeper customer relationships: moving beyond simple transactional communications allows for developing a better rapport and faster feedback loops. Using this feedback allows you to develop future products to fit the market demand.
- Additional revenue streams: merchants can offer multidimensional value to customers by offering exclusive subscriber benefits like educational content, forum or community membership, and early access to sales or limited products.
- Optimized paid ad spend: your customers automatically buy from you each month, so you don’t need to market to them via paid channels like Google or Facebook Ads. Regular fulfillment of a subscription product gives you an engaging, low-cost way to communicate new offers and cross-sells. Additionally, what you don’t spend in additional advertising you can spend on acquiring new subscribers.
For consumers, the benefits are just as great, but more varied. Different customers will subscribe to different things for different reasons, and it’s well worth paying attention to how your customers regard your subscription service:
- Convenience: Whether this takes the place of trips to a brick and mortar store or saves time for more online shopping, convenience is the most commonly reported reason for subscribing to anything.
- Essential products: Many customers use a subscription to make sure they always have things they regard as absolute essentials. These are generally products that would be a disaster to run out of (diapers or toilet paper) or products that would be annoying to run out of (razors or makeup).
- Price: Somewhat surprisingly, only 20% of consumers report purchasing subscriptions to get a discount. Many companies offer a financial incentive to subscribe, but it’s important to test before deciding that a discount is essential to your business model.
- Curation and surprise: The “box” subscription is highly specific to each vertical, and works only if you’re able to analyze data to determine what customers want delivered each month. If you get the curation wrong, churn becomes a significant issue.
Maximizing LTV in Action: Replenishment
According to McKinsey, 32% of subscriptions are replenishment subscriptions, meaning the company sends the same product time and time again so you don’t run out. This style of subscription’s key benefits are flexibility and convenience. For this type of subscription, it’s especially important to keep your subscriber management experience transparent and open. One feature that’s especially popular with replenishment subscriptions is the ability to skip or pause an upcoming order. That way, if the customer has plenty of product on hand, they don’t have to cancel the subscription entirely.
This goes for cancellation as well. It’s important to understand why you’re losing some of your most engaged customers. By adding retention strategies, you can ask your customers why they’re canceling and provide potential alternatives, so they don’t leave your subscription entirely. If they do, take those reasons and build them back into your products for future subscribers.
Pricing is and has always been a topic of conversation regarding subscriptions: do subscriptions automatically deserve a discount or is the subscription convenient enough that it doesn’t warrant any additional favors? Carefully experiment with pricing incentives to determine what may work best for your business model.
To reduce the subscriber’s hesitation about entering into the model, ensure you’re being clear with the subscription terms. Consider offering a free trial incentive or the option of a smaller trial size that can be upgraded later.
Let’s look at Dr. Axe as a great example of these suggestions:
Offering a free trial is a great way to get potential subscribers into your sales funnel. It also lowers the barrier to entry because all the subscriber has to do is pay for shipping.
Once you choose your product, Dr. Axe gives clear indication this is a subscription purchase and also ensures there will be a simple and intuitive portal for them to control the subscription in the future. They also leverage previous data to suggest an optimal frequency, reducing choice fatigue and helping ensure that customers are getting the right amount of product.
Here is the customer portal, where a customer can easily edit their subscription or swap it for another product. The power lies entirely in the customer’s hands, so they control every aspect of their subscription.
Maximizing LTV in Action: Membership
McKinsey states the membership model accounts for 13% of subscriptions. These models involve a consumer paying to get access to services that aren’t part of a specific product – think Netflix or Amazon Prime. Membership subscriptions generally offer benefits like preferred pricing, community membership, free shipping on consumables, exclusive products, or early access to sales or limited-edition items.
ReCharge merchant Freshly Picked developed their Fringe Program that pulled in 10,000 members in the first 3 months. The list of benefits for joining the program includes the following:
Combined with their robust customer portal, these clearly outlined benefits have put Freshly Picked among the leaders in subscription innovation.
Leveraging the Ecosystem
Subscriptions allow you to give your customers a richer and more rewarding shopping experience. The time has never been better to take advantage of the conversational touchpoints of subscription, reduce your cost per acquisition, and maximize lifetime customer value.
To learn more about subscriptions and how to leverage them for your store, contact ReCharge Payments.Back to Blog Home