Whether you’re looking for gourmet food samples, cosmetics, clothing or even toys for your pet, the odds are that there’s a subscription box out there for you. Nowadays, it seems that everyone and their mother are signing up for subscription boxes, but have you ever thought about why this model has become so popular?
At first you may be tempted to think about convenience for customers, and while you’re not wrong, the real reason subscription boxes have grown into the massive phenomenon we know today is for one simple reason… They make excellent business sense.
This week we’re diving into subscription-based ecommerce and highlighting 3 major benefits of the model. If you’ve ever thought about joining the world of subscription ecommerce, this post is for you.
1. Better ROI for Your Customer Acquisition Efforts
Even if you operate in a specific niche or offer a unique service, the success of every business directly relies on effective customer acquisition. As your business grows however, it can become more difficult to find additional customers and at this stage the focus must shift from acquisition to repeat business. In fact, 82% of companies agree that retaining existing customers is cheaper than acquiring new ones.
Selling your product or service the “standard” way is what’s known as a conversion-based model and means you will have to work hard to first convert a user to a buyer and then work harder to turn them into a repeat buyer. With that in mind you can see how the subscription model addresses this need directly. If your customer is subscribing to receive something on a monthly (or even weekly) basis, their repeat business is implied right at the time of purchase. A subscription model is a retention-based model, ensuring recurring revenue from repeat customers (provided you can keep the customers happy).
2. Better Revenue Predictions
Another benefit of a subscription-based business is that it allows you to accurately and reliably predict your business’ revenue stream. When a traditional business looks to make revenue predictions, they come with a range of assumptions and often require a considerable amount of analytics to get useful insight. A subscription model on the other hand provides a much simpler way to evaluate revenue streams, simply take your total subscribers, subtract cancellations, and multiply by your subscription cost.
Subscription models also make it considerably easier to identify things like a customer’s lifetime value (LTV). As an example, imagine you offer a make-up sample kit subscription box, if you offer a 3-month, 6-month, and year long subscriptions but consistently most users opting out after 6-months, you now clearly know that your average LTV is 6-months worth of subscription fees.
All this information can help you as business owner to make better decisions and understand how much capital is available to grow the business. One area where it is particularly useful is in relation to setting an appropriate marketing budget. If you understand your average customer LTV, you know exactly how much you can spend per acquisition and can identify which channels provide the best return on your marketing investment.
3. Better Inventory Management
In a standard ecommerce business model, inventory management can lead to stressful days and sleepless nights as business owner. In fact, poorly managed inventory can cost businesses a lot of money very quickly. Maybe you’ve bought a product upfront but it’s not selling as well as you imagined. Or on the flip side, maybe one of your products goes viral and inventory sells out in a day leaving you with thousands of customers but zero product to offer. The reality is that in a traditional model knowing how much product to order to maximize profit and minimize product waste is tricky.
With a subscription model however, nearly all these problems disappear. As a business owner you know exactly how many subscribers you have for every subscription period and know exactly how much inventory you need. You know what your “locked in” customers want and can ensure you have everything available to meet those needs. The result is that you can plan your stock and inventory more accurately and virtually eliminate waste.
In addition to all the great reasons we shared above, the best thing about a subscription-based ecommerce model is that everything you need to start one today is available. There are so many examples of companies doing this model right and plenty of opportunities to mimic their success in your own niche.
Do you already own a subscription-based ecommerce business? Are there any benefits you love that we didn’t include on our list? Be sure to let us know in the comments below and if your looking for more information on subscriptions, check out our page on recurring payments and subscriptions to learn how easy it can be to get your own subscription service up and running.