What Are eCommerce Subscriptions? And, Why Do They Matter?
It wasn’t too long ago that I was in my local Whole Foods, staring blankly at what felt like 400 different types of vitamins. You see, I had run out of my latest bottle and after three weeks of putting it off, I was on a mission to restock. But, by the time I finished the heroic act of grocery shopping, this wall of vitamin brands, each with their own inspiring guarantee (“brighter skin”, “longer hair”, “no more colds!”) felt extremely daunting.
As my stomach rumbled for dinner, I turned away and headed to the checkout line, promising myself “I’ll pick them up next time”.
To be honest, there was no next time. Just a few weeks after the unfortunate vitamin aisle experience a friend told me about a vitamin subscription company called Ritual. I immediately checked it out on my phone - it was so simple. I set up an account, selected my vitamins from a list of 8 simple choices, and purchased within 5 minutes. While the onboarding experience was fantastic, the subscription component is even better.
Now, instead of running out of vitamins and facing down the wall of choices in the grocery store, I am shipped a fresh bottle every month. I never run out and if I need to pause my subscription (like when I forgot to take them for a week) it is super easy to do on the ritual website.
Long story short, the way I shop for, and consume, vitamins has totally changed. All thanks to eCommerce subscriptions.
And, I'm not the only one. In 2020 subscription ecommerce sales took off with 41% growth, according to eMarketer. They forecast that 3.0% of US retail ecommerce sales will come from subscriptions in 2021, totally $26.67 billion and up more than $10 billion from just two years ago.
Of course, part of that massive growth can be attributed to the Covid-19 pandemic (more on that later) but consumer’s general transition to digital first and convenience always has also help to accelerate eCommerce subscription growth.
The History of Subscriptions
While eCommerce subscriptions are surging in popularity today, the concept of a subscription has been around for centuries. It’s true! The earliest forms of subscriptions were those for grain, water, and other crops in the early 1600s. Soon after, the subscription business model was used in the 1660s by fire and life insurance providers in England.
Authors and publishers embraced the subscription business model when they would create personalized content for their subscribers (ex: a custom binding, or added short story).
And, eventually, all sorts of businesses were selling subscriptions from universities and charities in the 18th century to opera and theatre in the 19th century.
As the world has evolved and digitized, so have subscriptions. Primarily, more and more brands have embraced eCommerce subscriptions. One well-known example of this is Netflix. Prior to Netflix, many consumers had a membership to Blockbuster where they could browse, rent, and return movies at a local brick and mortar location.
Netflix first came on the scene as an online DVD rental service where you could browse and select all from the comfort of your home and a DVD would be delivered to your door step. Not too long after, they transformed into a streaming service, making it even easier to consume content from the couch. Netflix tapped into consumer demands for personalization and convenience, and used technology to revolutionize subscriptions.
So, what exactly is a subscription? While there are many types of subscriptions (see below), Gartner provides an all-encompassing definition of subscriptions and related terms:
- A “subscription” is a contract between a supplier and a customer for the supply of a product or service over an extended period of time. The price of the subscription may be fixed (for example, access to a digital newspaper for $199 per year), variable depending on the level of usage (for example, mobile phone usage or flight hours on an aircraft engine) or a mix of fixed and usage-based charges.
- “Recurring billing” is the periodic (for example, monthly or annual) invoicing of a customer to collect payment for one or more subscriptions.
- “Subscription management” is the process of selling new subscriptions and amending existing subscriptions over time.
Four Common Types of eCommerce Subscriptions
There are many different types of subscriptions but four common trends I have seen in market include:
- Product Discovery subscriptions enable consumers to receive sample sizes of products on a regular basis. The godmother of this approach is Birchbox who sends its subscribers 4-7 sample beauty products every month based on their unique preferences. This type of eCommerce subscription is great for consumers as it’s a low cost, low risk way to try new products.
And, since Birchbox has become so popular, beauty brands will send them samples for free just to get in front of their audience. This enables Birchbox to make huge margins on samples while still keeping cost low for consumers.
- Commodity & Consumer Goods subscriptions seek to “reinvent the basics” such as cleaning products, razors (Dollar Shave Club), underwear (MeUndies), etc. Consumers are usually drawn to commodity subscriptions for either price or convenience. Dollar Shave Club offers regular deliveries of men's grooming products. Instead of running out of shaving cream or razor blades, they make sure consumers are always prepared AND they do it at a lower cost.
- Product Demoing subscriptions give consumers a chance to take products for a test run before they commit. Trunk Club (now owned by Nordstrom), Rocksbox, and Rent The Runway are well known examples of this type of subscription. Brands who win in this space invest in personalization to ensure that consumers receive products they are most likely to keep.
- Unlimited Services subscriptions can span industries and business models. But, most often we see subscription services in the form of software (an Adobe license) and media (Spotify, Netflix, etc). This isn’t an exhaustive list and other common types of subscriptions include education, healthcare, and IOT.
Factors Driving Adoption of eCommerce Subscriptions
Gartner Predicts that by 2023, 75% of organizations selling direct to consumers will offer subscription services. This rapid growth wouldn’t be possible without the adoption of customers.
We see several factors that contribute to the rise of subscriptions:
- Convenience: If you remember my vitamin purchasing story, you should understand how subscriptions fulfill the demand for convenience. Instead of having to run out of a product and remember to buy it, subscriptions eliminate any human error or laziness. With a subscription for vitamins, cleaning supplies, razors, or clothes, humans simply have to accept the package that shows up at their doorstep.
- Price: Subscriptions usually come with the promise of saving money. Whether the products are actually cheaper, or consumers save money by “trying before they buy” there often is a cost reduction benefit.
- Personalization: Many subscription services offer personalization that makes it easier and faster for consumers to discover the right product for them. Good examples of this are Stitchfix or Spotify, both of which leverage machine learning to power personalization.
- Covid-19: The Covid-19 Pandemic supercharged consumers interest in subscriptions because they often eliminating the need to go to the store. Therefore, providing a safer option for shopping. According to a new "FutureBuy 2021" study from GfK 34% of millennials (up by 16 percentage points) said they are likely to continue shopping via subscriptions.
Read more about Gartner’s subscription predictions here.
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What about B2B eCommerce Subscriptions?
Historically B2B businesses have centered around personal relationships between the business and their accounts. Specifically, a sales rep usually interacts directly with a buyer. This reality has made B2B businesses laggards when it comes to adopting digital technology.
However, due the to the factors above (especially Covid-19) we have seen B2B businesses eager to launch or transform their digital channels – including via subscriptions.
In reality, there are many wonderful B2B eCommerce subscription use cases that mostly center around increased convenience for re-ordering. A few examples:
- A B2B food distributor offering subscriptions to businesses who purchase the same quantities on a monthly basis, such as office or school cafeterias.
- Any sort of parts manufacturer who can offer subscriptions so that customers always have the products they need, for example a stainless-steel fastener company offering subscriptions to furniture businesses.
As B2B continues to embrace digital, I expect that their adoption of subscriptions will only continue to increase.
Top Four Benefits of eCommerce Subscriptions for Brands
- Guaranteed Revenue: Perhaps the number one benefit of subscriptions is guaranteed and recurring revenue. According to Forrester’s “The Rise of The Subscription Business Model” report by principal analyst, Dan Bieler, “The financial attractiveness of the subscription model for the seller is that it only sells a subscription package once — and then "harvests" a steady, predictable stream of revenue.
As a result, costs of sales should be lower and gross margins higher”. You can see this visualized below: We have seen this benefit be especially important for startups whose valuation is often based on their subscription rates.
(Source: The Rise of the Subscription Business Model)
- Anticipate Demand: Many types of subscriptions enable businesses to more accurately anticipate demand, making it less likely that they will be caught off guard by a large influx of purchases. In turn, this results in stronger ability to appropriately create target and hit them.
- Improve Customer Retention: Since many subscriptions are for multiple months, or even years, offering a subscription program will inherently drive customer retention. In addition, once a customer signs up for a subscription they are more likely to form a bond with your brand after months of engagement. This will increase retention and ideally, turn them into brand ambassadors.
- Expand Your Offering: For brands who are not solely subscription-based, adding subscriptions expands your offering and your ability to provide value to customers.
Since most of these brands already have fulfillment infrastructure, adding subscriptions is usually low level of effort for high reward. Great examples of brands who have done this are Target and Walmart.
Bringing Your eCommerce Subscription Vision to Life with Elastic Path
At Elastic Path, our goal is to empower all brands with the technology to bring their commerce vision to life- including eCommerce subscriptions. Our composable, API-first, microservices-based Headless Commerce solutions provide brands with the core technology to launch and optimize subscription experiences at the speed their business demands.
Want to learn how we could work together to bring your eCommerce subscriptions vision to life? Contact us today to speak to one of our commerce experts.
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