Are you considering starting an ecommerce business that’s powered by subscriptions?
Subscription billing has become a familiar pricing model for customers. They’re used to paying a monthly fee for certain services, and some even use them to have certain products reordered automatically on a regular basis.
In this post, we cover what ecommerce subscriptions are and what your options are as far as implementing them goes.
What is the ecommerce subscription model?
The subscription-based business model for ecommerce involves shipping the same product or type of product to the same customer on a monthly basis in exchange for a fee that the customer pays at a predictable interval, such as monthly or annually.
Examples of the subscription business model include services like Netflix and Dollar Shave Club.
Netflix is a streaming service that charges a monthly fee for access to its content.
Dollar Shave Club is a razor company that sends boxes of shaving razors to customers on a monthly basis in exchange for subscription fees.
It’s a different way to do ecommerce. It helps you establish a loyal customer base from which you receive predictable recurring revenue.
The pros of ecommerce subscriptions
- Easier customer acquisition
- Predictable monthly and annually recurring revenue through regular payments
- Increased customer lifetime value
- Easier to manage inventory
- Improved customer loyalty
One of the biggest benefits of starting a subscription business is how easy it is to acquire new customers.
Certain ecommerce subscription models allow you to offer free trials or reduced price trials, both of which enable customers to try out your service before they pay for a subscription at full price.
Ecommerce subscriptions also allow you to receive recurring revenue that’s easy to predict. This will come in the form of monthly recurring revenue (MRR) and annually recurring revenue (ARR).
Subscriptions also increase customer lifetime value. In traditional ecommerce, there are no guarantees that new customers will buy from your shop again. With subscriptions, you know each customer you acquire will likely buy again next month.
Subscriptions also make for easier inventory management. You’ll know at what rate you acquire new customers and how many subscriptions you can manage once you get your subscription business going.
These two figures will help you determine what products you need to have in stock, how much of each you need in stock and when you need to have it in stock.
Finally, ecommerce subscriptions improve customer loyalty since many consumers prefer to choose a single brand for certain purposes and stick with it.
The cons of ecommerce subscriptions
- Inventory issues
- Compliance rules
- Difficult to understand customer preferences
- Churn rate
Inventory management can become more difficult for subscription businesses.
While having all of your customers receive the same products on a fixed schedule can make it easier to determine how much stock you need and when you need it, you can run into a lot of issues if something happens within your logistics pipeline.
Whether your supplier is facing issues getting shipments out or natural and political disasters are preventing shipments, if something does prevent you from getting orders out on time, it doesn’t just affect a few orders, it affects all of them.
Starting a subscription service also requires you to store customer information so you can ship their orders out to them on their preferred schedule.
This means you’ll need to ensure your site is compliant with data laws that are mostly dictated by the European Union but are becoming commonplace elsewhere.
One other disadvantage of offering subscription services over a regular ecommerce store is how it removes your ability to easily see which products and services your customers prefer.
It all depends on which subscription model you decide to go with, but for the most part, your subscriptions and orders will look the same for all customers. This means you’ll need to work a little harder to segment them.
Finally, ecommerce subscription businesses have an additional metric to track: churn rate. Churn rate is calculated based on the number of customers who cancel their subscriptions versus the number of customers you have.
An ecommerce subscription service should track this metric on a monthly and annual basis to monitor the health of their business. It’ll help you nurture existing customers and not just potential ones.
Types of ecommerce subscription models
These are the subscription models we’re going to cover in this section:
- Auto restock subscriptions
- Subscription boxes
- SaaS subscriptions
Auto restock subscriptions
Also known as “replenishment” subscriptions, auto restock subscriptions are subscription services regular ecommerce stores can offer.
Most major online retailers offer them. They allow you to sign up to receive a specific product on a regular basis without you having to reorder it yourself.
Not only does this save you time and prevents you from forgetting to order something, you also receive a discount for subscribing in most cases.
For example, on Amazon, you can choose to buy a product as a “one-time purchase” or “Subscribe & Save” to receive the product as often as every two weeks or as sparse as every six months.
This type of subscription is fantastic for products customers need regularly in your niche. If you’re not sure what products those might be, check which products get reordered more than others.
Checking this will also let you know if auto restock subscriptions are a good fit for your store.
Subscription boxes
If your niche has at least one product type that gets reordered on a regular basis, consider creating a subscription box for it.
Subscription boxes are boxes filled with one or more products that customers subscribe to receive on a regular basis, usually once a month.
They can feature one product or multiple.
BarkBox is a good example of a subscription box company who offers multiple products in their boxes.
With this subscription, customers receive a box full of toys and treats for their dogs on a monthly basis.
The subscription company has a short survey you need to fill out before you sign up. It asks for your dog’s adoption date, breed, allergies and more. This helps the service optimize your box for your dog, but for the most part, you don’t know what you’re going to receive every month.
That’s part of the fun of a subscription box service.
Examples of single product subscriptions include “pie of the month club” or a t-shirt subscription in which customers receive a new shirt design every month.
SaaS subscriptions
Software-as-a-service (SaaS) subscriptions have become popular in ecommerce.
Examples include streaming services like Netflix and Spotify and professional apps like Adobe products, Microsoft Teams or Google Workspace.
If you have an idea for an application, consider offering it as a subscription service rather than charging a one-time fee for it.
The subscription supports ongoing development and fixes for bugs and security.
If you don’t have an application, you can still offer SaaS subscriptions in the form of online courses and memberships.
Memberships typically come with website perks, such as a customer loyalty program, access to premium content and even access to products not available in your regular store.
Tips for managing ecommerce subscriptions
- Conduct market research
- Use pricing options that make sense for your business, customers and product
- Consider using subscription software
- Use marketing automations and customer journey maps
- Align inventory and order shipments
- Audit the way your business handles inventory management regularly
- Protect customer data
- Hire a dedicated customer service team
Let’s elaborate on a couple of these tips.
Conduct market research
Do a bit of research in your niche in search of subscription services that already exist. This will give you ideas for your own ecommerce subscription service.
The global ecommerce subscription market is filled with services in all niches, so you shouldn’t have too much difficulty with this.
You should also research your audience and what their biggest pain points are to determine the best product or type of product to sell subscriptions for.
Pricing options
Determine what type of subscription pricing you want to offer to your customers:
- One pricing tier
- Multiple pricing tiers
- Hybrid (one-time price with optional subscription or vice versa)
Many businesses choose multiple pricing tiers as it tends to increase conversions. Customers will feel as though they have more say in how much they want to pay for your service.
When you offer multiple pricing tiers, try to make it simple.
For example, if you’re offering a subscription box service, offer three products in your lowest pricing tier, five in the middle pricing tier and eight in your highest pricing tier.
If you’re offering a SaaS subscription, make every feature available in all pricing tiers but have different allowances for each tier, such as one user in the lowest pricing tier, up to five in the middle tier and up to 10 in the highest.
You can make some features only accessible in certain pricing tiers, but some customers may not be willing to pay extra just to receive an additional feature or two. This is something you’ll need to experiment with on your own.
Many businesses also offer freemium subscriptions. These have a pricing tier that’s free forever with most features being locked behind paid subscriptions.
No matter what type of subscription you decide to go with, consider offering discounts on annual and restock subscriptions.