The subscription economy is nothing new. National Geographic has been regularly circulating editions of their magazine on a subscription basis for decades. That said, the past 5 years has seen the emergence of a number of highly successful and disruptive online subscription businesses. You can now buy a subscription for everything from dog food to fancy socks… or even dirt.

Spending in the subscription economy is expected to grow from around $421 million today to $1.4 billion in 2020. Is this the rise of the subscription economy?

 

Why Shoppers Love Subscriptions

The most obvious reason why shoppers love subscriptions is convenience. It’s convenient to not have to worry about purchasing something, especially if it’s something you buy on a regular basis. Take coffee for example. If you go through a pound of French roast every two weeks, then it makes sense to have it delivered on a subscription basis.

Subscriptions can also lower the barrier and risk for shoppers that want to try out certain products. Take Photoshop for example. They moved away from the single-purchase price of around $700 (or $1000 for the extended versions) and now their most basic plan is a $10/month subscription. If you were someone that was interested in trying Photoshop or wanted to use it for a non-commercial reason, $700 probably was too expensive to justify buying it. However, at $10 per month, a much wider range of users can justify buying it. Adobe has since come out and said that 20% of customers purchasing their new tools weren’t using Photoshop before.

Last but not least, subscription boxes are fun. It’s like sending yourself a gift every month (or however frequently you choose). Plus, savvy subscription retailers are adding surprise gifts into their boxes to delight customers and keep the fun going.

 

Why Retailers Love Subscriptions

Retailers also love the subscription business model.

Beyond the fact that subscriptions seem to be in vogue, they have a number of other notable advantages over the traditional retail model.

One advantage is that it helps retailers by allowing them to make more accurate revenue predictions based on the number of subscribers, churn rate, and growth rate. Contrast this with traditional retailers who may experience a high degree of volatility in sales from day to day and week to week. As you can imagine, predicting revenue is much easier for a subscription based business.

Subscriptions also help with inventory management. It can be difficult for traditional retailers to gauge demand for a given period, and as a result, many have to keep a fairly substantial amount of inventory on hand in order to avoid stock outs. Subscription businesses on the other hand have a much better idea of how much inventory is needed at any given time. Indeed, growth and churn will add some fluctuation in the amount of inventory needed but overall it is a whole lot easier to manage. Some subscription boxes tell customers upfront that they have to purchase before a certain day in order to receive their box for that month (ie. boxes ship on the 20th so you have to purchase before the 15th to receive this month’s box), so they know exactly how much inventory is needed.

Finally, most marketers and business owners have heard that it is cheaper to keep an existing customer than it is to convince a new one to make a purchase. Well the subscription model improves the return on customer acquisition by encouraging repeat business. Aside from the people that cancel their subscription after the first delivery, the majority of a subscription business’ customers will become loyal subscribers, which ultimately improves the return on investment for customer acquisition.

 

How It’s Done

A number of businesses that use a traditional retail business model have started entering the subscription space; Starbucks and Sephora being two big examples.

While the subscription economy represents a great way for retailers to add an additional revenue stream and improve their customer experience, it requires a slightly different approach. For example, your data has to be reoriented to be entirely focused on the subscriber: how many do you have? What is your average life-time value per subscriber? What is the growth rate of subscribers? What is the churn rate? This is why companies such as Apple have started to care less about how many devices they sell and more about how many Apple ID’s they have (and how much revenue per ID they can generate).

The customer experience for subscriptions is also quite different compared to the traditional retail model. Subscriptions are very much a two-way street and a relationship that involves some give and take from both sides. Just think about a Spotify subscription: the user interacts with Spotify and provides it more data about preferences and taste in music, Spotify takes that data and serves up a personalized selection of music suggestions. It’s a never ending back-and-forth.

Alternatively, consider a Trunk Club subscription. As a subscriber builds their wardrobe, their stylist gains a better understanding of what the customer likes and the kinds of clothes they already have – this allows for more personalized style suggestions. The back-and-forth continues.

Many experts are bullish on the subscription economy, and it will be interesting to see how the space evolves in the coming years.