You’ve set your ecommerce store up completely and it’s humming along. Great work! With all the logistics of manufacturing, sourcing, distributing, copywriting, advertising, managing client relationships and everything else, your mind is reeling, and you wonder how you can possibly keep all the plates spinning at once, much less add any more to the mix. But someone mentioned to you that you should really be offering your products via subscription, and it’s got you thinking: you love your own subscriptions—it’s so convenient for you to get your smoothie ingredients on subscription through Bumpin Blends, or your body wash and cologne on subscription through Outlaw Soaps. Should you follow suit? It’s likely you could increase your bottom line by offering subscriptions, and I’ll tell you why.

What's All This About?

First, what is the subscription model? For the purposes of our discussion today, we’ll define a subscription as an automated repeat order with limited involvement from you or the subscriber. Subscriptions ideally work on the set-it-and-forget-it methodology. Customers decide what they like and agree to purchase a certain number (or an indefinite number) of those products according to a certain schedule.

This is great for your customers because rather than having to notice that they could use another of your theeds, remember where they got it, find your store online, find the type of thneed they liked so much last time, and go through all the ordering and checkout steps, it all happens automatically without them having to think about it. This is great for you because a purchase is made automatically rather than requiring you to use advertising to find a new customer, or email marketing to encourage an old customer to buy another thneed. It’s a classic win-win scenario!

The Case for Giving Subscriptions a Spin

When you start digging into the case for subscriptions from a business perspective, it makes even more sense. A significant expense in any business is for advertising and marketing. Most experts recommend between five and eight percent of your total budget on these, and there’s a whole formula for determining whether their expense is justified by the returns gained in the form of sales that they lead to.

Put the process of reordering and repurchasing on autopilot, though, and first of all you spent zero advertising dollars to produced those repeat sales, and second of all the effect the advertising dollars you did expend is compounded, as now potentially the ads lead to not one sale but a whole stream of them.

Give a man a fish, and he will be hungry again to-morrow; teach him to catch a fish, and he will be richer all his life.

-M Loane, The Common Growth

A parody of the well-known proverb might go like this: “Sell a man a fish and you will both be hungry again tomorrow; subscribe him to your fish and you may be richer all his life.” Notice the element of uncertainty I introduced into the proverb, though: May.

Subscriptions have their fair share of gotchas, and you’d do well to plan for them if you do decide to get into the subscription game. Spoiler alert: despite the gotchas, we think you probably should get into this game.

Gotcha #1: High Cancellation Rate

McKinsey & Company, a research firm that helps its clients understand market trends in the digital age, discovered in their survey of over 5000 consumers that more than a third of subscribers cancel their subscriptions within three months, and over half cancel within six months. Thus, getting a subscriber doesn’t necessarily mean a lifetime of income for you, though I would point out that while over half may cancel the subscription, that still indicates that nearly half continue it beyond the six-month mark, which is very encouraging.

line graph of falling subscriptions over six months: 70% at 3 months, 50% at 6 months
data points are illustrative and not precise

Even if the cancellation rate rose to 100% after a year (the McKinsey study didn’t indicate it did anything of the sort), that still would have been three, six, twelve, or even more products that you sold the customer in a hands-off, automated fashion rather than just a one-off, or even a repeated series of one-offs.

Still, subscriptions in your business should be thought of as a compounder rather than a silver bullet that lasts forever. Think of them as a way to compound your sales from one-offs into multiples, and I think you won’t regret the decision to get into the subscription game.

Gotcha #2 Deal Sweeteners Cut into Profit

In exchange for agreeing to purchase your product on a schedule, most consumers might expect to get something in exchange: a discount, free shipping, a free gift or some other benefit. You can set your subscription service up however you’d like, so you don’t need to offer any such sweetener (or you could argue that the benefit you offer is convenience), but many businesses do offer extras, and these sweeteners would necessarily cut into the profit margin for those transactions.

There’s a case to be made for offering free shipping, as that gives your customers more of a predictable transaction where they’re sure to pay the same amount every subscription period even if shipping prices go up, and Growth Channel makes that very case, suggesting that free shipping is what consumers expect, but that it can result in a cut to your margins that you should be aware of and plan for. On the other hand, Growth Channel points out that subscription customers have a Customer Lifetime Value of 38% greater than other customers, so there’s that to weigh in the balance.

Final Analysis

While there are gotchas other than the two we discussed, and other factors to be considered and planned for when breaking into the subscription model, on the whole we at SeaMonster Studios feel that it is a model that many if not most ecommerce companies could profitably engage in to increase their bottom line with little and manageable risk.

Catch the next post in this series to get a primer as to how to get started with subscriptions in your business even if your business doesn’t seem particularly amenable to the subscription model.

Want to spin up the plate of subscriptions? Contact us for a consultation and we'll help you get it going and keep it spinning.