From Products To Services: The Online Economy Moves To Subscriptions, By: First National Bank of Omaha Senior Vice President of Treasury Services Russ Oatman
As consumers increasingly seek personalization and flexibility in their online purchasing activity, the subscription economy—in which consumers subscribe to services rather than making a single purchase—is booming. A recent report by McKinsey & Company maintains that the subscription e-commerce market has grown by more than 100 percent a year over the past five years. The largest subscription retailers, McKinsey says, generated more than $2.6 billion in sales in 2016, up from just $57.0 million in 2011.
Consumers like the “try-before-you-buy” opportunities afforded by subscription services. As demand has grown, subscription services have expanded beyond streaming services (like Netflix and Spotify) and software-as-a-service to encompass consumer products like beer and wine, baby supplies, cosmetics, meal kits, pet food, apparel, video games and more. Subscriptions can also be offered by service-based companies, including financial services companies. PYMNTS.com suggests that financial services companies provide subscription-based access to services that previously required a high minimum asset investment or a high consulting fee.
A Prime success story
Amazon is leading the pack in subscription success. In April, the company announced that its Prime membership had topped 100 million subscribers. In just one year, Amazon’s reported net income soared from $724 million to $1.6 billion, far exceeding analysts’ expectations. The company now plans to capitalize on Prime’s popularity by increasing the price of membership by 20 percent, from $99 to $119.
Thanks in large part to the free two-day shipping they receive with membership, Prime members tend to spend significantly more than non-members. According to an article in MarketWatch.com, Daniel Ives of GBH Insights says that Amazon Prime members spend twice as much as non-members, on average. In the same article, analysts at RBC estimate that Amazon accounts for an impressive 20 percent of online retail sales in the U.S.
Emulating Prime’s success is no easy task. Churn rates are high in the subscription economy, as consumers are quick to cancel if they fail to see any added value in their subscription. Nearly 40 percent of e-commerce subscribers have canceled their subscriptions, according to the McKinsey report.
McKinsey and others maintain that subscriptions appeal to consumers when they:
- Provide a great experience end to end.
- Come with tangible benefits, like increased personalization or lower costs.
- Improve upon a previously free service or provide something completely new and innovative.
- Are recommended by someone—through word of mouth or positive online reviews, for example.
While churn rates are high, the good news is that subscription customers tend to be loyal when they find a service they like. The key is to zero in on the right target customer from the beginning. As branding and marketing expert Kate Harrison notes in an article for Forbes.com, studies of the subscription economy indicate that subscription customers tend to be young, affluent urbanites with college degrees and young children. But more important than finding a customer who will subscribe is finding one who will stay. This is where data comes in. Businesses must tap into the considerable data they have in their customer relationship management systems to develop a profile of their ideal prospects—those who need and want their product and who are motivated by cost savings and personalization.
Payments are the backbone
A key piece—perhaps the backbone itself—of the subscription experience is the payment process. The automated subscription payment must be as frictionless as possible for consumers. With so many payment methods available today, companies considering a subscription offering must determine which payment method would appeal most to their prospective customers.
Zuora, the software company that coined the term “subscription economy,” says that businesses have two main considerations when developing a subscription payment strategy:
- Providing an easy, seamless customer experience that makes the customer feel like they are in control.
- Maintaining effectiveness by ensuring that the back-end office is efficient and meeting the business’s objectives.
Zuora notes that subscription payment processes are more complex than those of traditional e-commerce businesses, largely because the customer relationship is ongoing—often involving dozens of transactions a year—and evolving. Businesses, then, need to do their due diligence to ensure that their finance and operations teams can support the payment methods they choose to offer. No matter the method(s), it must make onboarding as seamless as possible, and it must be mobile-optimized.
Know your customer
In an article for Forbes.com, Jason Pressman of Shasta Ventures asserts that a successful subscription model depends on “a deep and intimate knowledge about customers.” Businesses moving to a subscription model need to know how many customers they can target, acquire, and retain, and how much revenue they can generate per customer—all in real time, Pressman says.
Fortunately, businesses today have a wealth of proprietary data they can mine to find the answers to these questions. The subscription business is all about the relationship; with a happy customer, that relationship promises to be both long-term and lucrative.