Case studies, Customer Management, Cloud Software, eCommerce

What does the subscription economy mean for retailers?

BY TradeGecko 17 Mar, "17

The subscription economy is the future of modern commerce. The internet has been a driving factor in changing the way people consume products. However, there’s more to the subscription economy than just technology. It’s a massive shift in the way people consume products and services, on a global scale.

Subscription Economy Matrix

According to a new survey by Ovum for Zuora:

70 percent of Australian and New Zealand businesses are planning to make the shift to a subscription model in the next two to three years.

This widespread change is a result of Australians and New Zealanders spending “an average of $660 AUD per month on subscriptions or recurring goods and services”. Similarly, Zuora cites a YouGov study claiming that 78% of the British population is already subscribing to at least one product or service.

Moving the goalposts

In Forbes, Kimberly Whitler uses the example of Rent the Runway to explain the benefit of the subscription economy to the consumer: “Why own a Prada […] when you can rent one and wear a different one a month from now?”

The same model applies no matter what the product is. For example, why should a customer buy a CD or DVD from a retailer when they can pay a monthly fee to Spotify or Netflix and enjoy an almost limitless selection of media? Why would they buy a book when they can read it on Amazon’s Kindle Unlimited?

These are great questions, and they should be of grave concern to retailers who sell those products. Especially when, as Business Insider reports, “3% of Americans will subscribe to at least two by 2018”, with that number climbing as high as 62% by 2020.

The popularity of these services has taken its effect already. Just look at your local video rental store. Or, more accurately, just look where it used to be. However, the subscription economy does not just affect media retailers. Almost every product is now affected in some way by the subscription economy.

Our customer The French Cellar is a great example, “The French Cellar’s model is buyer centric”, as they provide customers with “2 bottles of wine selected by a 3-star Michelin sommelier every month, alongside a tasting guide”.

French Wine cellar - The subscription economy

Obviously, this is a radically different experience to buying your own wine in a supermarket. It takes the pressure off the end user, and provides The French Cellar with regular business, not dependent on the whims their customers have each month.

Similarly, Chuck Longanecker at Entrepreneur points out that software-as-a-service (SaaS) providers such as Dropbox (and TradeGecko) are a perfect example of a subscription-based business. The success of these services, Longanecker says, means, “It’s more evident than ever that customers prefer subscriptions”.

Writing in Forbes, Monika Saha tells a story about a very unusual subscription product she encountered in India:

One month earlier, on a trip to New Delhi to visit my parents, I found out they had “subscribed” to fresh coconut water, delivered to their doorstep every morning. A subscription to fresh coconut water? The techie in me was tempted to call it CWaaS (“Coconut-Water-As-A-Service”).

Not everything can be outright replaced, of course. However, the way in which people buy, use, own, and interact with goods has changed – forever. Zuora explains:

At the heart of the Subscription Economy is the idea that customers are happier subscribing to the outcomes they want, when they want them, rather than purchasing a product with the burden of ownership.

Tien Tzuo, writing in Medium, suggests that we will even see “the beginning of the end of car ownership” in 2017. He suggests that car subscription services will replace traditional car ownership:

You won’t buy it — you’ll subscribe to it. It’ll be just like picking a cell phone plan: pick your model online, choose between a 24 or 36-month plan, select your upgrades, then walk into a dealership to pick up your vehicle. No price haggling, no loans, no back office pitches.

In the product economy, cars have been one of the major purchases that almost everyone makes. If people en masse stop making those purchases outright, then that is a significant shift in the financial landscape. What’s more, it will be a disaster for car sales companies unless they can adapt to this new business model.

So, if people want ‘outcomes, not ownership’, businesses need to adjust their strategy. It's no longer about selling a person a fish; it's about building a relationship with that person, so they trust you to meet their fish needs, for the foreseeable future.

To quote Zuora again:

In the old world (let’s call it the Product Economy) it was all about things. Acquiring new customers, shipping commodities, billing for one-time transactions. But in this new era, it’s all about relationships. More and more customers are becoming subscribers because subscription experiences built around services meet consumers’ needs better than the static offerings or a single product.

In essence, this means that your old business model is out of date. If you’re still working in the product economy, you run the risk of alienating or even losing customers.

The trend is undeniable: consumers are becoming subscribers. If you don’t meet their demand for subscription offers, they’ll become someone else’s subscribers – and you’ll be left out in the cold.

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Ticking the subscription box

Subscription box services like Bark Box, Graze or Loot Crate, as well as services like The French Cellar, present one form of the subscription economy. For customers, these boxes provide customers with the same product they could buy from retail stores.

According to a 2016 study conducted by Shorr Packaging, there were over 2,000 subscription box services in operation in the US last year. The study also found that visits to the leading website in this field have increased 3,000-fold since 2013. What's more, boxes are available across a wide range of sectors, including:

  • Cosmetics and beauty products
  • Food and drink
  • Fitness products
  • Clothing and accessories
  • Pet products
  • Shaving equipment
  • And more

These services represent a significant challenge to retailers in those fields. Subscription box services can provide your customers with the same types of products you sell, without them ever having to visit your store. What’s more, they can also provide a positive customer experience.
For example, another TradeGecko customer Honest Brew offer a subscription beer service. One of the company's founders told us:

There’s a really good experience that you get when you go to a craft beer bar or a bottle shop, where you rely on them to give you some guidance on discovering new beers. We thought - we can do the same online and deliver to people’s homes, so that customers still get that good experience.

This means that Honest Brew’s customers can get the “craft beer bar” experience in their own homes. Honest Brew provides them with quality beers, sourced from a range of suppliers and they can provide expert guidance and help match customers with the beers that they will like.

In the past, this has been one of the advantages that brick-and-mortar retail sites have had. If you wanted to get help choosing the right beer, you needed to physically walk into a bottle shop and discuss your needs with a member of staff who knew more about the products than you did.

Services like Honest Brew replace this advantage. Retailers can still compete on that level, of course. If you have a particularly knowledgeable team, that will always be an advantage; however, it is not as big of a head start as it used to be as customers are now researching items online before they make a purchase.

Honest Brew Staples

The personal touch

The tailored and personalized nature of subscription box services presents a particular challenge to rival retailers. After all, if your customers can get expert recommendations on the products you sell in their own home, why should they visit your store?

This is why many retailers are moving into the subscription economy. The difficulty is that it is not a simple case of bundling up your products, offering them at a cheap rate and calling it a day. To provide a genuine subscription service, you need to take that personal touch with your customers.

Take Dollar Shave Club, for example. At its heart, their business model is simple:

We’ll give you a reusable handle and ship you replacement razor cartridges for a ridiculously affordable price.

All of the key elements of the subscription economy are there. Customers can expect financial savings, the convenience of regular deliveries, and quality products. However, there is much more to what Dollar Shave Club offers than this.

Customers can choose how many razor blades are delivered to them. They can also choose how often they are delivered. This is an example of the flexible nature of many such subscription services: you can upscale or downscale your membership at any time. You only pay for what you need, thereby personalising the user’s experience.

Whether you’re receiving razorblades in the mail or software-as-a-service online, most providers will allow you to scale your subscription. This is, nothing new: think of the traditional milkman, delivering one pint or two depending on the needs of their customers.

How can retailers apply this model?

Suppose you operate a razor shop and want to offer your customers a subscription service similar to Dollar Shave Club. To thrive, you'll need to unlearn almost everything you know about business, because success in the product economy looks radically different to success in the subscription economy.

Chuck Longanecker explains in Entrepreneur that, “the subscription model is also not about getting a project done and then moving on to the next client”. For retailers, this means that the job is no longer to sell a product to a customer and move onto the next one – it’s about building and maintaining relationships.

As Tien Tzuo told Kimberly Whitler in Forbes:

What constitutes a Subscription Experience? First of all, it’s a relationship -- it takes place over time. It’s not static, it’s fluid. As a subscriber, I’m looking to personalize my product, to make it mine, the way we set up our own Spotify accounts. I also want it to improve itself over time -- look at the way Tesla owners wake up to all sorts of cool new car features! As a subscriber, I want outcomes, not asset management. And if I don’t find them, I will drop you.

In the old-fashioned product economy, once a customer had paid for their product, you had their money, and only had to worry about retention in regards to repeat purchases. The subscription economy requires you to know, and to please, your customers on an ongoing basis.

A truly customer-centric model

Tzuo stresses again and again that a customer relationship in the subscription economy is just that – a relationship. In his Forbes interview, he tells a cautionary tale of the time that Netflix “almost killed itself”:

"It lost 800,000 customers, its stock price tanked almost eighty percent, and their management team got turned into a Saturday Night Live sketch (remember Qwikster?). What happened? The short story is that Reed Hastings split up his $10 all-in-one package into two $8-plans, effectively dropping a 60 percent price increase on his customer base in the midst of a massive recession."

Netflix violated the number-one rule of subscription businesses: It’s all about the relationship. And when Netflix made a unilateral decision to change the relationship, without consulting the other side, it got burned badly.

Obviously, Netflix learned from this disaster, and so can you. As a retailer, you’re probably used to focusing on products. In the product economy, after all, it is all about moving units and maintaining the bottom line.

Netflix Subscription - Product Economy

In the subscription economy, however, it’s not about moving product. It’s about making your customers happy. Just as your customers are looking for “outcomes, not ownership”, you should be looking for satisfaction, not sales.

How do you achieve that? Well, that depends on your products and your customers. Crucially, the subscription economy is all about providing your customers with the products that suit them. Not necessarily the best, the cheapest, the newest, or the most expensive, but the ones that fit their needs.

To do that, you need to understand your customers better than you ever did in the product economy. You need to know who uses your services, and why. You need to know what they want, need and expect from you, and you need to do your best to give it to them. If you don’t, someone else will, and you’ll lose their business.

TradeGecko can help retailers transform their business model online and provide customers with the products they need. Our innovative, state-of-the-art inventory, order management and B2B ecommerce software makes it easy to manage your customer and inventory data online.

So, if you’re taking your first steps into the world of the subscription economy, find out how TradeGecko can help you today! 

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See also:

The French Cellar - bringing the wine subscription model to Asia

Honest Brew is a craft beer retailer and subscription service based in the UK

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