In today’s retail market, it seems like almost every brand has a subscription or boxed service of some kind. Think of fashion or grooming shops who deliver a box of new clothes or facial care products to your doorsteps once a month. These services have burgeoned over the last few years to offer customers more curated and personalized experiences, particularly from small independent retailers.
Besides the digital media subscription services, there are three broad types of retail subscription services:
- Replenishment subscriptions allow consumers to automate the purchase of commodity items such as diapers;
- Curation subscriptions surprise by providing new items or highly personalised experiences in apparel, beauty and food; and
- Access subscriptions provide members with lower prices or member-only perks.
The model is particularly appealing for traditional retailers since they have been struggling with losing foot traffic and market share to online competitors. The subscription services allow retailers to build a recurring revenue model which keeps customers locked into a purchasing schedule.
A further appeal is that retailers often gain in-depth insight into the trends that their customers are currently interested in. For instance, some apparel retailers market themselves as fashion consultants and include a style quiz to ask customers to pick the items they would like to wear. Retailers are able to obtain such information without cost and thus are able to make better informed decisions about their inventory levels.
For these reasons, the subscription e-commerce market has grown by more than 100% a year over the past five years. Independent retailers and start-ups have been fueled by venture capitalists. Now, we see subscription services in a dizzying array of categories, including beer and wine, child products, contact lenses, cosmetics, feminine products, meal kits, razors, underwear and even vitamins.
Benefits for consumers?
Research has shown that consumers do not have an inherent love of subscriptions. In fact, the requirement to commit to a monthly subscription makes most consumers think twice and thus it tends to dampen demands. However, consumers are mainly interested in automated purchasing when it gives them tangible benefits such as lower costs or increased personalisation. For instance, certain subscription services offer discounts on movie tickets, groceries or transport costs. Some others provide a curated set of grooming or fashion accessories.
Benefits for retailers?
The industry for subscription services is a brutal one for retailers. Cancel rates are very high, particularly if retailers do not deliver an experience which consumers are expecting or if the benefits are not attractive enough. Consumer retention is particularly difficult since it is easy for consumers to cancel once they feel they are not getting sufficient value for the money paid.
Additionally, a key challenge for subscription retailers is to match their supply to consumers’ actual demand. For instance, consumers are more likely to cancel if the products continue to accumulate. In these cases, they would prefer to buy the products when they need them rather than to receive a set volume each month. Another expectation from consumers is the ability to customise order volumes to suit particular circumstances: if I am going on vacation, I may require less household cleaning products. Inflexible retailers would also see higher cancellation rates.
Conversely, the good news is that subscription consumers are particularly loyal once they find a service they like, especially for replenishment services. Amazon’s Subscribe & Save has one of the highest long-term subscription rates since they offer discounts over individual purchases and that consumers are given the option to amend their subscription quantities if need be.
Paradoxically, subscription services may be popular with consumers because it restricts their choices. Given the overwhelming choices available to the consumer particularly with the multitude of online retailers, subscription boxes offer a solution to the indecisiveness of buyers and to minimize buyer’s remorse after choosing a particular option. In addition, the unpredictability of curated subscription offers a surprise reward and consumers may then try new brands and trends.
YouTube: Are subscription services having a bigger financial impact than we think?
Questions for further personal evaluation:
- Do you use subscription services? If yes, what benefits do you think it offers? If not, what would make you consider subscription services?
- Do you think subscription services are just a fad, or has it irreversibly transformed the retail market? Explain.
Useful vocabulary:
- ‘burgeon’: begin to grow or increase rapidly; flourish
- ‘remorse’: deep regret or guilt for a wrong committed
Here are more related articles for further reading:
- The Guardian: Booksellers on subscription services
“From chocolate to coffee to beer to grooming products, subscription boxes are big business, and books are no exception. There are countless online companies that ship out a monthly read, some adding artisan teas, hot chocolate, or an adaptation on DVD of the book. But Heywood Hill’s subscription is as bespoke as possible: each package is individually tailored to the reader’s tastes following a conversation between the subscriber and a bookseller. Camille Van de Velde, one of Heywood Hill’s five subscription booksellers, takes me down a rickety staircase into the basement from where the scheme is run. Staff are at work in a series of pokey interlocking rooms, stacking titles on shelves, ready to be wrapped, packed and shipped. They won’t be specific about numbers, but each has hundreds of people to choose for each month, and it has, by all accounts, transformed the business.”
- Temasek: How consumers shape the subscription economy
“Subscription-based businesses are not new. Cable TV, mobile phones, newspapers and print magazines are some of the most common examples of businesses that sell goods and services on subscriptions. You sign up, pay a monthly subscription fee and have the good or service delivered right to your mailbox.
The turning point for this business model, however, is its move online. The ability to sign up for everything from shaving kits and meals to designer clothes and cars with just a click is proving to be a big hit among consumers. According to management consulting firm McKinsey & Company, the biggest subscription e-commerce players in North America earned over US$2.6 billion in 2016 — a big leap from just US$57 million in 2011.”