If you want to start an online store, selling subscriptions can be lucrative. You can gain long-term customers without investing a lot in acquisition. Moreover, you can generate a more predictable cash flow to scale your business. But how do you start to sell subscriptions online, and what are things to look out for?
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Online membership market continues to grow
The subscription business model is of course nothing new. Newspapers are a most common example of this. But in recent years, subscription sales in ecommerce have been especially booming.
Membership revenues grew nearly 6 times faster than S&P 500 companies between 2012 and 2020, according to Zuora’s Subscription Economy Index. And in the United Kingdom alone, over 80 percent of households receive subscription boxes in 2021. The trend is expected to continue in coming years, with especially millennials and generation Z’ers having a higher demand for subscription services than their previous generations.
Examples of companies leading the online subscription economy are plentiful. Firstly, there are media streaming services such as Disney+ and Spotify. By offering a digital product, these companies can save on shipping and scale even faster. But consumer products also continue to thrive in subscription sales. Think of meal services HelloFresh and Marley Spoon. But also razors from Dollar Shave Club, beauty products by Birchbox and My Little Box and coffee by Wakuli. There are even subscriptions for diapers, like Ontex, and electronics via Grover in Germany.
The value of a subscription-based business
Subscription sales have many advantages. First of all, you can gain customers for the long-term and build a strong relationship with them. This is different from selling your product once, where you keep having to find new customers to grow. Therefore acquisition will eat up less from your company’s budget. And because your acquisition costs are lower, your operational profit will be higher.
Memberships generate recurring revenue for your shop.
Secondly, and perhaps most important, memberships create recurring revenue for your online shop. This gives you some peace of mind as an entrepreneur. It also makes inventory management much easier, since you can better predict product demand. Moreover, a regular income stream creates a steady base from which to grow and scale your business.
Because customers stay with you for longer, you have the opportunity to really get to know them. What do they like about your product or service and how do they use it? You can use this information to serve your customer even better. For example, you know when their coffee runs out so you can offer them a refill immediately. Additionally, this data is useful to enhance and better your product. A subscription therefore offers you regular market insights.
Types of subscriptions to offer
Are you thinking of starting an online subscription business? There are multiple types of memberships you can offer. The first one is a curation model, often in the form of subscription boxes. The appeal of these services lies in providing new, exclusive products or personally curated items for customers. Curation subscriptions are often used in the segments fashion, beauty and food. This model is most effective for niche and high-end products.
Replenishment subscriptions tend to have higher retention.
Another type of subscription you can offer is one based on replenishment, namely restocking an essential product that runs out regularly. Customers tend to use these memberships for convenience and lower costs. Examples of this include a monthly shipment of coffee, razors, toilet paper and groceries. While curation boxes can struggle to keep adding value and novelty, this model tends to have high retention rates since customers get used to the service and rely on it more.
Lastly, access models are perhaps the most popular in the subscription economy. These memberships offer access to a service, such as a software program or streaming service like Spotify and Netflix. Access subscriptions can also function like a customer loyalty program which offers special perks, such as free returns and exclusive discounts on items. This can be a great add-on to your existing online shop. This way, you can also generate an extra stream of recurring revenue.
How to start a subscription-based business
By now you will have an idea what subscriptions can mean for your business and how to make it a success. But how do you start offering monthly memberships in your online store? Instead of a checkout built for one-time purchases, you need to organize recurring billing. And since the payment comes at regular intervals, you will want to automate this process.
If you offer a physical product like a subscription box, you also have to think about packaging. As an online shop, you probably already brand your orders in some way. Maybe there is a business card in your parcels or the packaging has your logo on it. For subscription boxes, branding your parcels is even more important. A monthly box should feel like a present. Think about using tissue paper, for example, and more attractive packaging than regular one-time orders.
You need to automate recurring billings.
If your product is not digital, the next step to think about is shipping. You may think this is not that different from shipping individual orders. The difference lies in having large batches that need to go out at the same time. This gives you the benefit of higher parcel volumes, so you can maybe get a discount with your postal carrier. You can also look into carriers that specialize in subscriptions or can handle shipping large batches. In addition, since you know that orders are coming at the same time, you can consider longer shipping times to save operation costs.
Sell subscriptions online successfully
Are you thinking of making your online store into a membership? There are some things to consider in order to make it a success. Firstly, a subscription is more of a commitment for customers than a one-time purchase. Therefore you need to take away as many hurdles as possible for customers to join. One way to do this is to offer a free trial.
For example, let customers try your product or service for free for a month. This may sound like a long time, but the power of subscription-based services is becoming a habit for customers. And habits die hard.
In addition, you want to prevent consumers from canceling their membership. This is also called the churn rate or attrition rate: the percentage of subscribers that cancel. One way to keep this number low is by adding value to your service over time. You can do this by using the data customers provide about their product usage. How do they use your product?
The power of subscriptions is to create a habit.
This way you can cater to your customer more specifically and personally. Another way to add value is by introducing new features or products within your online subscription service. Do you sell a monthly clothing box? Try adding new brands, offering repair services or choose clothes specifically catered to what a customer has liked in the past.