Think Tank: Why Established Retailers Will Continue Adopting Subscription Models
It’s not easy for many beauty and fashion retailers to change course and test new sales channels. But in this day and age where retailers must compete with Amazon and easy-to-launch digital-first brands, it has never been more important for large, established retailers to find new ways to connect with consumers.
Subscriptions and membership programs are one avenue that retailers from The Gap to Under Armour to Sephora have started to test in 2017, and we expect that trend to continue and expand to new categories in 2018.
It is not easy for any large retailer to get started in the subscription business. Executives tend to stick with what they know, especially when budgets and long-term plans are involved. But sticking with tradition isn’t always the best approach. Brick-and-mortar fashion retailers such as rue21 have shuttered hundreds of stores in the past year, and others like Wet Seal have closed entirely.
While brick-and-mortar establishments are facing challenges, subscriptions are undergoing a renaissance, and many businesses are looking to hop on the bandwagon. Zuora’s Subscription Economy Index reveals that revenue from subscriptions has grown to 17.6 percent from a meager 2.2 percent six years ago. Some of that growth can be attributed to retail sales, although much of it stems from the digital (think Netflix) and software (think Adobe) subscription booms.
How Is A Subscription Model Different?
Companies across more industries are starting to recognize that subscriptions work, largely thanks to the stream of recurring revenue that subscriptions create. Unlike retail, which focuses on single transactions and average order value, a subscription-based business model revolves around cultivating long-term customer relationships with a focus on lifetime value.
While both models incur a cost to acquire new customers, in a recurring model, many of those costs are offset by the long term nature of the established relationship. Executives hesitant to dive into the subscription business generally have two main concerns. At first, business leaders might consider switching to a new business model intimidating. But the up-front investment in media and low introductory offers are similar to the costs of opening a new store.
The second concern executives tend to have about starting a subscription is how to actually achieve success. Examples and mentors abound in the retail space, but subscription services and expertise are still new, leaving far fewer people to turn to for help.
What Do Subscriptions Offer Large Omni-Channel Retailers?
Incorporating subscription into a retail business model doesn’t have to be overwhelming; in fact, the two channels complement each other nicely. Retail, whether it is brick and mortar, e-commerce, or true omni-channel retail, is here to stay, and subscriptions are useful for generating revenue and retaining customers. The future is undoubtedly omni-channel, with store pick-up, returns, and exchanges becoming the new normal. Companies such as Julep, Rent the Runway, DailyLook, and Bespoke Post already allow some form of this model.
It’s unlikely that any retailers will shift their businesses entirely to subscriptions, but 2017 saw Sephora, The Gap, Ann Taylor, J.C. Penney, Under Armour, and Amazon among the crowd learning from subscription pioneers like Stitch Fix, Birchbox and IPSY adding a subscription element to their business plans. And 2018 is likely to see more retailers testing out subscription boxes than ever before.
What drew these top brands to subscription programs, and what should omni-channel retailers take into consideration as they consider adding subscriptions to their strategic mix? Here are just a few of the benefits subscription boxes offer:
Monthly Recurring Revenue
When managed and fulfilled efficiently, subscriptions give customers a sense of personalized belonging. Any sense that a company really understands them — whether due to skillful communication, customized products, personalized offerings, or a combination of the three — makes a customer more likely to remain loyal to a given company.
Loyal customers also lead to a stream of recurring revenue and, in many cases, referrals, rather than leaving retailers to rely on single transactions. Guaranteed monthly recurring revenue drives profitability and enables companies to forecast their cash flow, inventory, and marketing more accurately. For public companies, a press release mentioning such a model can create a market cap pop — recurring revenue-generating businesses are often valued higher than traditional businesses.
Rich Customer Data Profiles
Interacting with the same customers over extended periods of time, especially when your business revolves around learning and catering to those customers’ individual preferences, is a perfect way to amass vast collections of detailed customer data. The use of big data is no longer a differentiator; no matter the industry, every business should be turning to data and analytics to keep customers coming back.
Properly collected and organized subscription data relays not only what offer drew a given customer to your subscription, but which media channel delivered that offer, how the customer’s order has changed from their first box, how often he or she communicates with your team, and more. This data allows your marketing team to develop a deep understanding of the subscribers with the most long-term value, giving your company the chance to customize those customers’ offerings and keep them happy.
Long-Lasting Customer Relationships
The greatest asset companies gain from subscription boxes is tied up in both of the previously mentioned benefits: strong customer relationships that are built to last. When you successfully implement personalization and meet — or exceed — your customers’ demands for convenience, value, and curation, you’ll impress your subscribers and provide them with a solid incentive to keep using your service.
Having relevant goods that are tailored to each customer’s preferences delivered right to their door is an unbeatable level of customer connection. Taking the time to curate a successful subscription box does more than just boost revenue — it builds a customer base that will stay loyal.
With those benefits in mind, it’s no wonder so many large, established retailers are testing the subscription waters. Launching a successful subscription program to complement a traditional retail experience isn’t easy, but the rewards are more than worth the effort. Take the time to deliver your target customers the experience they’re seeking, and they’ll pay you back with their loyalty.
Georg Richter is founder and chief executive officer of OceanX, which is working to reinvent the membership economy by transforming customer-brand interactions and providing a powerful engine for subscriptions. Georg specializes in implementing next-generation subscription technologies and innovative solutions that transform commerce from transactions to relationships.
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