As ecommerce businesses evolve it should come as no surprise that many different business models would urge along the way. While most ecommerce businesses monetize the traditional way, by selling the product to the customer while remaining in charge of their own fulfillment, there are many other approaches to selling products and services that a business can opt for, and it doesn’t need to be only one.
Exploring different business models and defining which one is most suitable to your product and business will allow you to make one or multiple choices that will be an important card on the game of scaling up your business.
Surely with each business model you will find a handful of advantages and also disadvantages, such as retention rates and customer acquisition costs. In this article we will discuss one model in particular: the subscription business model that was responsible for driving 37 million visitors in April 2017.
At this point you may have stumbled upon a few brands and websites that offer the final customer a subscription plan. For instance, Netflix operates with a subscription business model. It is as simple as: you pay a monthly fee, your product or service is delivered or you are provided with access permissions, and then with many plans you can cancel your subscription at any time. Additionally, you can add on different features and price levels to it, which we will be exploring soon.
Are Subscription Boxes for you?
The Benefits and Challenges of Subscription Business Models
As mentioned above, you don’t have to pick only one business model for your ecommerce business. There are many websites that are selling products online and at the same time curating signature boxes to their subscribers. But let’s discuss the benefits and challenges of relying solely on a subscription model to monetize.
Customer Acquisition Cost
When the customer commits to a periodic subscription, even when they are allowed to quit at any time without a cancellation fee, it takes them longer to make this decision. Especially when compared to the amount of time it takes a consumer to finalize their decision to purchase a single item, as subscriptions seem to be a larger and stronger commitment to make. Which means that with the subscription business model it may take longer to convert your visitors into customers and this may increase your customer acquisition cost.
The Importance of Offering Easy Opt-Out
Because of that, if you want your website’s visitors to click on your “subscribe” button, you would want to make it easier for them to opt out and downgrade as customers don’t want to feel trapped on a purchase decision. Which means offering free cancellation at any time and easy exchange and return processes.
Find Your Niche
Also, most customers that subscribe to periodic plans tend to have higher levels of interest on the subject of that website rather than a simple likeness. For example, someone that likes to drink wine occasionally but doesn’t have a passion for it is less likely to subscribe to receive a wine box monthly - as they would prefer to simply buy a bottle whenever they feel like drinking. Which means that the majority of the wine box subscriber will probably be wine lovers who enjoy wine tasting and pairing their meals with wine more than once a month.
Create a Community on Shared Interests
On the bright side this will most likely make your communication easier, as your customers all share specific interests. If you manage to create quality and unique content on your blog and social media channels, you are able to engage your customers and create a community that is interested in what you have to say, which would also make your marketing campaigns better targeted, as it happened for Loot Crate (keep reading to find out what happend).
If on one hand it might be harder to acquire customers, on the other hand it makes it easier to keep them. As they subscribe you increase your retention rate since you don’t need to keep attracting them back to your website in order to sell. Just make sure your product assortment remains relevant so they won’t feel like opting out.
Change the Way People Look at Products
At this point it is also important to mention that the subscription websites don’t tend to launch products and trends, on the contrary: they deliver products that are already loved and used by their customers – from books, to shaving accessories, beauty products and fashion. What they actually do is change the way the customers look at those products, by curating what’s in each box.
Surprise your Customers and Improve Customer Experience
That happens because customers don’t just want what they want, especially because most of the time they don’t really know what they want. Simply put, subscribing to receive a monthly box of products that are curated for a category of your choice means discovering new things, increasing your passions and being surprised periodically.
Personalize Your Products and Services
Let’s say now that you do have a passion for wine but you don’t know exactly what your taste is. By subscribing to receive a monthly box of wines, you will discover labels and terroirs you haven’t tried yet. If you subscribe to a website that offers exquisite customer experience and listens to their clients, then you will be able to rate the wines you receive each time, and each upcoming box will be composed by bottles that suit your palate. This is called personalization.
Examples of subscription business models
There are a few different types of subscription business models, and although we have been repeating the word ‘box’ in this article, not all of them come inside one.
Most subscription sites do offer products in a box on a monthly basis and oftentimes you get to choose which ones you want, although most of the times it comes out at a better price to keep all the products in it.
Other subscription sites call themselves membership websites, like Netflix, that you pay monthly to watch whatever you want, and you can opt out at any time. Spotify is another example of a membership business model. But despite the fact that the customer can pick whatever they want, the service is still curated and personalized to them as the website recommends videos and artists to their customers based on what they have recently seen/listened to.
Given the abovementioned examples let’s look into 5 online stores that are scaling up their businesses with a subscription based model.
5 online stores with subscription business models that are killing it
Birchbox was born to suit the woman who is interested in beauty products but has no interest – or time – to visit department stores and Sephora alike stores to browse through countless different brands of lipsticks and foundations. The idea was to choose the products for customers and have them delivered right to their doorstep. No trips to the beauty store needed.
Co-Founder Katia Beauchamp told Forbes that at the beginning of their business many other signature beauty box companies started to arise, but Birchbox would stand out for also selling the full sized products on their ecommerce platform instead of relying solely on the signature boxes. Surely it is a much more complex operation to run with two different business models instead of only one. But the advantage is that you also gain access to much more complex data about your consumer which has been key to scaling up the Birchbox business, according to Beauchamp.
As if we haven’t talked enough about wine in this article, let me tell you about Wine.com, which is a Brazilian website that follows the same structure as Birchbox. Wine.come sells curated wine boxes to their customers divided into different categories – you get to ask for specific types of wine or categories and pick the number of bottles you want to receive monthly; but you also get to purchase great wine deals on their online store. Of course, if you are already a member of the signature model, you have access to even more exclusive deals.
Wine.com became the largest wine ecommerce in South America by 2015 according to local business magazine Epoca Negocios. In 2017 they decided to expand their reach. Apart from selling a few bottles of wine monthly to the avid wine drinker, they started selling it in bulks with a further discount to wedding planners, and even offering them commission to purchase wine for weddings and other events.
Dollar Shave Club
The Dollar Shave Club that was not-so-recently sold to Unilever for $1 billion delivers personal grooming items to the customer by mail, being cost-efficient and more convenient than purchasing personal care items from brick and mortar stores.
The Dollar Shave Club is a perfect example to what we mentioned above when talking about the features that a successful subscription business model should offer: it is convenient, it’s personalized, easy to join, to downgrade and upgrade, and even easier to opt out, and you will receive your grooming box on a monthly basis. Oh, and it starts for as little as $3 dollars a month.
The Brazilian business GlutenFree Box was created to reach a large slice of the population that has food allergies, especially those who have celiac disease and have gluten intolerance. As most packages on the market has the “contain gluten” sign, and the ones who don’t can be harder to find, the GlutenFree Box will be delivered monthly to the subscriber’s address with a variety of gluten free food.
The reason why the founders chose the subscription business model was because they only had BRL 30,000 to initially invest, and subscription box model would cost less than a regular ecommerce sales strategy. And it wasn’t long after they launched the GlutenFree Box that they created the LacFree Box, for lactose-free products, SugarFree Box, VeganBox and One that has a variety of healthy food.
With prices starting at BRL 80 customers decide which box they want and the periodicity they wish to receive them – which can be monthly, bi-monthly, every three months and even annually.
Loot Crate became a $160 million dollar business and was listed as #1 in the Inc. 5000 list of fastest growing private companies in the US by delivering geek stuff to people’s door. By subscribing to their monthly plan starting at $13.95 plus $6 for shipping you will receive 4 to 7 mystery items that could be anything from costumes to books and comics.
According to Matthew Arevalo, the company’s Co-Founder, much of this success is due to the importance given to content marketing. The intention is to remain present on social media channels and not only engaging with their audience but also educating them on their company and the products. The niche that was created with content marketing created what the founders expected from day one: a solid community of geeks.
There are several opportunities to monetize your online business and adopting a subscription model is one of them. But there are also several different types of subscription business models you can opt for and features you can add to it. Regardless of your company or product offerings, you will need to take into consideration the scenarios that a subscription business can offer you, including the benefits, costs, disadvantages and limitations. You may end up figuring out that a higher customer acquisition cost is worth it when that leads you to increase your customer retention rate.