Subscription Model in E-Commerce: How to Create a Sustainable Business

Many businesses in the e-commerce industry have been using the subscription model. Since more and more consumers are looking for new ways to save money as global economic inflation worsens, this business model is gaining popularity.

This is also among the e-commerce trends in India. But, can a subscription model in e-commerce really give you a sustainable business in this country? Let’s find out!

Introduction to the Subscription Model in E-Commerce

Before you start your subscription business model, it’s important to understand how it works. Subscription commerce works by allowing clients to pay for products/services by subscribing. By opting for a paid subscription, they’ll be required to settle a recurring fee.

Paying monthly, quarterly, or yearly for products may sound expensive. But, this will actually help them save money by making them avoid the temptation of impulse buying. Availing products from a subscription based model business will also help them better manage their budgets. Subscription model businesses also tend to offer exclusive benefits to their regular clients, allowing them to have access to more products unlike traditional businesses.

In India, subscriptions in ecommerce is becoming more and more popular as customers’ demands for personalized, seamless, and flexible products increase. Indian payment processing solution firm Razorpay stated that subscriptions greatly benefit both consumers and businesses in the e-commerce industry.

Benefits and Advantages of a Subscription Model

The subscription business model in e-commerce greatly benefits shoppers. Among the perks they can get are personalized products, a convenient buying experience, and more affordable prices. But, customers are not the only ones that can benefit from the subscription model.

Businesses also get advantages by transitioning to a subscription model in e-commerce. Below, we will review some of the benefits that you can get when starting your own subscription e-commerce business.

Profitability

Being a highly profitable subscription business, this model can give you predictable revenue, thanks to regular payments. It can do this since it can maintain consistent cash flow through a monthly or yearly fee, allowing you to calculate precisely how much income you’ll receive each month, quarterly, or yearly.

If there’s a steady revenue flow, you can effectively predict your financial future and make better business decisions.

Less Customer Acquisition Costs

The subscription e-commerce model is better than the pay-per-product business style when it comes to customer acquisition. The latter needs to spend a lot of money on advertising and marketing continuously just to attract new customers and retain them.

On the other hand, a subscription based ecommerce business has lower marketing costs since it doesn’t need to attract customers regularly and can retain consumers more easily. This can help you reduce customer acquisition costs and lessen customer attrition while increasing profit.

Lower Marketing Costs

Unlike other business models, subscription e-commerce doesn’t need to rely on marketing. 

Instead, this business can expand its product-based subscriptions and use different subscription options to improve customer satisfaction.

Highly Loyal Customer Base

Since your subscribers will pay you every month, quarter, or year, you will have a highly loyal customer base unlike in the pay-per-product business model. This is greatly beneficial since some studies revealed that repeat customers spend 67% more than new online shoppers.

Aside from this, they are also four times more likely to refer and seven times more likely to try new products/services.

More Revenue and Relationship Opportunities

The subscription model in e-commerce not only gives you a steady stream of income, but will also likely increase your profits regularly. If you have a steady income stream, then you can constantly improve customers’ shopping experience by offering new products and exclusive benefits, which is also used in upselling and cross-selling.

These efforts will likely make your customers come back for more, allowing you to open new relationship opportunities with them.

Types of Subscription Models

When starting your own e-commerce business, it is important to know the different types of subscription models.

Identifying the right one that’ll best suit your needs will let your business grow without any issues. Let’s understand what box subscriptions, membership subscriptions, and software subscriptions are below.

Software Subscriptions

Software subscriptions are under the access subscriptions or service subscription model since consumers can only have access to them by paying a monthly fee. Since people are always looking for 24/7 access to digital content subscription services, software subscriptions are always in demand.

Among the successful companies that use this model are Microsoft and Adobe. But, you can also take advantage of the access subscription model even if you’re not a software developer. You can create workshops and other digital content subscription products.

Membership Subscriptions

Membership subscriptions can be under curation or replenishment subscription model since they offer exclusive access to products and services to members. These could include media subscriptions, gym membership, personalized food delivery, etc.

Dollar Shave Club is one of the e-commerce firms that offer membership subscriptions, providing members with shaving product recommendations based on their preferences.

Box Subscriptions

The curation subscription, also known as the box subscription business model, is quite similar to membership subscriptions. But, in this model, a subscriber will receive a subscription package each month containing products of their choice.

Among the in-demand items in the box subscription model are health and beauty products. Merchants ensure that the subscription box products you’ll receive are handpicked that’ll your daily needs. The box subscription is one of the most popular ecommerce subscription models, especially during the peak of the COVID-19 pandemic when people were forced to have their daily needs delivered.

All these subscription commerce business models can help you become a successful entrepreneur. You just need to pick the right one.

Identifying Target Audience and Niche for Your Subscription Business

Knowing the type of ecommerce subscription model you’ll use isn’t enough. You also need to identify your target audience and niche if you want to compete with other subscription businesses.

To do this, you need to ask yourself, who are the ideal customers for your subscription service and what niche should you target.

Identifying Your Target Subscribers

As a new business owner in the subscription commerce, you need to focus on new customers to thrive. Just like in other businesses, you must establish a “buyer persona” by using consumers’ demographics and psychographics. Knowing these will help you better understand their problems and what solutions they’re looking for.

Identifying Your Niche

Once you know who your target consumers are, you need to determine if your subscription plan will work. You should know how your subscription-based services and products will perform in the e-commerce market; if they can attract long-term subscribers.

To do this, you need to consider the following factors:

• If your target consumers are subscribed to other products/services and what these subscriptions are.
  
• Their monthly expenses.
  
• What percentage of their budget do they spend on their existing subscriptions?

By knowing your target audience and niche, you can experiment with various subscription packages and find the best one you’ll focus on.

Developing a Compelling Value Proposition for Subscribers

Companies using ecommerce subscriptions need to develop a compelling value proposition to attract potential customers and keep existing customers satisfied. Since the value proposition will tell customers why they need your subscription services and products, it should be unique and concise.

When establishing your value proposition, you need to have a clear USP (unique selling point) that will help your subscription services or products gain popularity in the e-commerce industry. For example, Thrive Market’s USP is donating a portion of its yearly subscription fee to low-income families and individuals by feeding them.

If you’re planning to start your own ecommerce subscription business, below are some tips to help you develop a compelling value proposition for your future subscribers.

Let’s see them:

• Define your USP properly.
• Write a compelling and clear message.
• Be honest and keep it simple.
• Test your value proposition multiple times to refine it.

By crafting a compelling value proposition that will attract and retain subscribers, you can have a successful subscription business.

Pricing Strategies and Revenue Models for Subscription Businesses

Businesses using the subscription model in e-commerce should implement effective pricing strategies and use revenue models that’ll best suit their needs. Even if you have the best product or service in your chosen niche, a poorly-planned pricing strategy could still lead to your business’ downfall.

This means that subscription pricing strategies have a major impact on your e-commerce business’ success.

Before you create your pricing strategy, you must consider these costs:

• Customer acquisition costs;
• Product costs;
• Branding/packaging costs;
• Shipping costs;
• Fulfillment costs;
• Office rent, software used, and other fixed costs;
• Transactional and subscription management costs.

Once you tabulate these costs, you can now determine how you should strategize your subscription pricing.

To help you, here are some of the subscription based revenue models you can implement:

• Freemium: This revenue model is great for those that offer digital content since it uses a combination of free and premium offerings. The main goal of the freemium is to get customers hooked by showing them the product’s potential. The only time customers pay you is when they want more, such as add-ons or premium services.
  
• Tiered Pricing: In the tiered pricing model, subscribers are given different price options. The price options will vary depending on customers’ needs and wants. For example, premium subscribers can get exclusive features or products since they are paying more compared to other consumers.
  
• Flat-Rate Pricing: This revenue model is the simplest one since a fixed price is provided. Subscription businesses that use this don’t need to rely on tiers.

It is the best option for subscription based business models with a very specific service or product. 

Creating Subscription Tiers and Pricing Plans

Before you choose your subscription tiers and plans and automate your billing process, there are various things you should know. When creating pricing tiers and plans, you must remember that a tiered subscription’s main goal is to allow customization.

This means that you should offer the following:

• Payment Flexibility: You should allow subscribers to settle their recurring payments monthly or yearly. You can even offer a quarterly option.
  
• Different Packages: Many customers may not need some of your products/services. This is why it’s important to provide different packages or bundles.
  
• Customization: If you can, provide customization options that will allow subscribers to choose specific products/services they want to avail.

By offering flexible subscription plans, you can attract more customers and improve your earnings. Efficient subscription tiers and pricing plans will also ensure that your subscribers are getting the products and services they only want or need, creating a long-lasting impression.

Acquiring and Retaining Subscribers

A subscription based business model heavily relies on subscribers to generate revenue and keep itself afloat. This is why it is important to know you will market and promote your subscription services and products.

By using effective promotion and marketing strategies, you can acquire new customers and retain them as your regular subscribers. Here are some tips on how to market and promote your subscription business:

Packaging and Branding

Since the subscription model doesn’t always post advertisements, it would be best to market your business through branding and packaging.

The three main aspects you should take care of are business name, logo, and slogan. If you can make shoppers remember your packaging and branding daily, then they could become your loyal customers.

Work With Influencers

Subscription businesses are not really about selling products or services. They’re about creating a lifestyle that consumers can look forward to every month.

This is why working with influencers is more effective than just posting marketing content. You need to find an influencer that matches the lifestyle you’re promoting.

Upselling and Cross-Selling

Although upselling and cross-selling might sound bad for subscribers since they’ll have to pay more, they’re actually great techniques to promote your business to existing consumers. By introducing new subscription plans and offering additional products or services, you can give them something to be excited about.

These three marketing and promotion strategies can influence your subscribers to stay longer, improving your customer loyalty.

Designing a Seamless Subscription User Experience

Unlike in other kinds of businesses, designing a seamless user experience in a subscription-based model is easier. This is because you will always interact with your online buyers on a regular basis, giving you lots of opportunities to give them the best customer experience they can have.

To achieve this, you should:

• Make sure that online buyers can easily find you. You can do this by creating a website that they can easily access on the channels they regularly use.
  
• Use quality packaging to give them a seamless experience from the moment your product arrives to the time they’ll unbox it.
  
• Have a subscription management tool that can offer a smooth transaction experience.

Offering a seamless online shopping experience to customers can give your business a good reputation, allowing you to attract more subscribers.

Managing Inventory and Fulfillment for Subscription Orders

Managing inventory and fulfillment in a subscription e-commerce business is easier compared to other businesses. Since orders for your subscription boxes are more predictable, you can effectively manage your inventory levels.

This is also the same when handling fulfillment since you’re the one scheduling when the deliveries. But, there can still be issues if you can’t properly manage your inventory and fulfillment. 

To avoid problems, you need to:

• Wisely get your inventory ready before launching promotion campaigns to avoid false expectations from customers.
  
• Know your customers’ preferences and consumption patterns to reduce product waste and optimize inventory.
  
• Find a partner who has a well-established track record in handling fulfillment.
  
• Use an order fulfillment software that can effectively run a calendar of scheduled deliveries.

As a subscription business owner, it is your job to ensure that your products match your orders and they are delivered on time.

Customer Relationship Management and Engagement for Subscribers

One of the main reasons why e-commerce businesses are switching to a subscription model is to have a more engaged customer base. Being able to regularly interact with your consumers will give you more opportunities to generate future sales.

Although a subscription business offers you a more engaged customer base, it is still important to make efforts to enhance your customer relationship management and engagement. Launching an online store and letting it do its magic will not be enough to attract new users or even retain existing subscribers.

Here are the things you should do instead:

• Be proactive when encouraging your target audiences to sign up by asking them what their interests, problems, and needs are.
  
• Take advantage of their recurring payment transactions by thanking them for trusting your service.
  
• When subscribers comment on your social media posts, make sure to send replies to each one of them so they’ll feel they matter to your business.
  
• You can also use cross-selling and upselling to engage more with your subscribers.

Remember, as a subscription e-commerce entrepreneur, your priority should be creating a deeper relationship with your customers.

Churn Management and Strategies to Reduce Subscriber Attrition

Since your subscription business’ success depends on your subscribers, you need to reduce your churn: the metric that calculates the rate at which you lose subscribers each month. Churn, also known as attrition rate, should be taken seriously since it can drastically affect businesses that rely on recurring revenue models.

To keep your churn rate low, here are the things you can do:

• Give smooth onboarding experience: Make sure to give the best experience right from the start. The best way to do this is to ensure a smooth onboarding experience by giving subscribers guides on the initial steps.
  
• Personalize your communication: Instead of using automated replies, make sure that the way you communicate with new and existing customers is personalized. You can do this by leveraging data showing their preferences, behaviors, and demographics.
  
• Always offer a flexible subscription plan: Make sure that you will offer subscriptions that are flexible. This will give them a more personalized experience since they can find the best plan that’ll match their usage habits and financial means.
  
• Always seek feedback: Even if it’s good or bad, make sure to always seek feedback from your subscribers. This will not only help you know them better but will also let them know their importance to your business. To do this, you can send surveys, and polls, or ask for their reviews.

By using these churn management strategies, you can effectively retain customers who can become your loyal subscribers.

Subscription Analytics and Metrics for Performance Tracking

Once your subscription model business is operational, you need to track its performance to see how well it is doing in the e-commerce market.

Here are the subscription KPIs you need to track and analyze:

• Monthly recurring revenue: In a subscription business model, you need to track the monthly recurring revenue or MRR. It is a metric that measures the income generated from recurring fees. It helps forecast future revenue, determine growth trends, and allow you to make the best strategic business decisions.
  
• Customer lifetime value: Customer lifetime value or CLV measures how much you earn from a customer throughout their membership period. This will tell you if you’re giving a better subscriber experience based on how long they stay with your business.
  
• Customer retention: The customer retention rate measures how many consumers stay with your business. The higher your customer retention rate, the better. Since you’ll be using a subscription-based model, you need to prioritize customer retention over acquisition.

Now that you know everything there is to know about starting a subscription e-commerce business, you can begin establishing your own and become a successful entrepreneur!