It is no secret that the continued expansion of digital and the proliferation of data has fundamentally changed what it takes to compete in retail. In response, retailers have been actively investigating ways to transform their business model, and the COVID-19 crisis has amplified that need. Indeed, winning companies are investing time and resources into reimagining their business models to unlock the power of consumer-centric, data-driven growth—which our analysis suggests is a $1.7 trillion to $3 trillion opportunity across industries.
Subscription businesses—in which consumers periodically pay a predetermined amount for a service or set of goods—have emerged as one way to use data to reimagine retail businesses. Collectively, they grew more than 300 percent from 2012 to 2018, about five times faster than revenues of S&P 500 companies.1 According to data gathered by subscriptions-logistics provider CaaStle, one apparel player reported that their rental subscribers spent on average 2.5 times more than their traditional brand (non-subscription) consumers. Not only can the subscription model drive greater average spend, launch a virtuous cycle of using data to better serve consumer needs, and inspire loyalty, it provides value to consumers who appreciate the convenience, novelty, and curated experiences. Indeed, the average US consumer now has four subscriptions. “I like that I know exactly what I’m getting, how much I’m paying, and it’s convenient since it’s all on autopay,” said one consumer. Another highlighted the novelty: “It saves me time and also encourages me to try new things.”
However, most traditional retailers have yet to achieve meaningful success with subscription businesses of their own. Part of the struggle for incumbents is the difficulty of launching a new line of business in an unfamiliar channel and at times failing to nourish their subscription businesses—running it as a niche offering or an experiment. Indeed, failed attempts at building subscription businesses in food, beauty, and retail have been well documented. Such failures often destroy value and—worse—risk creating reputational damage. While simply experimenting with subscription as a business and engagement model can feel safer, a more committed approach is required for new subscription businesses to win—and retain— subscription consumers: (See sidebar, “Subscription businesses are resilient”).
Four imperatives along the consumer journey for sustainable subscription businesses
Our research suggests four imperatives for a successful subscription model:
1. Avoid the ‘add-on’ approach
The key to success is to start with an assessment of customers’ unmet needs and the right offerings to meet the needs of customers. Retailers should refrain from adding subscriptions onto existing products or services simply because it is a trend. Instead, decision makers must ensure that a new subscription business is a sustainable model based on a value proposition and business case tied to an unmet consumer need, and that it supports the retailer’s overall strategy. Retailers should consider identifying pain points in the consumer journey, conducting bespoke customer research, and testing their subscription concept with consumers to confirm that it will address an unmet need.
Equally important, retailers should empower a team to build subscription features in an agile, consumer-centric way. Indeed, we’ve observed that successful and resilient subscription businesses focus on the details of the experiences their customers prefer. They push past high-level analysis to understand at a granular level what motivates consumers to buy, using a mix of customer research and machine learning to identify purchase predictors and optimize the customer experience at each node of the buying journey. Any retailer exploring a subscription business should ground its approach in the facts and tailor its offerings and marketing accordingly.
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2. Win new consumers by providing value
The strongest magnet for new subscribers, cited by 62 percent of survey respondents (Exhibit 1), is good perceived value: the right combination of offerings and pricing.
Consumers define “good value for the price” in several different ways. Meal-kit providers, for example, effectively attract subscribers by emphasizing the freshness and sometimes the source of their ingredients. Discounts and subsidies at sign-up—ranging from a free month of media streaming to subsidized financing for fitness equipment—are common value options. One consumer in our survey was explicit about the cost-benefit analysis: “It was very low cost to sign up in comparison to the benefits I’d receive.” These initial discounts, while part of the general cost of consumer acquisition, also create added value for the business by bringing consumers into an ecosystem, which gives them greater access to differentiated consumer experiences, introduces them to other useful or interesting products, and generates a stable source of recurring revenue.
However, as consumers become accustomed to promotions, brands should actively reevaluate their pricing strategy to make sure that their promotions—if they use them—are worthwhile. Insights from consumer research and predictive modeling of factors such as churn rates and transaction history can help retailers set and refine price structures and target offers to optimize consumer acquisition and value.
Pricing alone is unlikely to convince consumers that a subscription is a good value. “High quality” and “good variety of items or experiences” were both top three factors in subscription sign-ups—one customer said that one reason for staying with a streaming service was because “there was a good variety.” Another way to signal value is to partner with brands that consumers already associate with quality. This approach is most frequently used by beauty and apparel subscription services and can help newer businesses establish their brand value by association. Finally, because our survey respondents indicated that personal recommendations powerfully convey quality and are more trusted than advertising, retailers should identify and cultivate brand evangelists to raise awareness of their offerings.
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3. Retain consumers with a variety of great experiences
Good value remains the key retention driver for established subscribers, but experiential elements such as consistent high quality, a varied assortment, and the originality of services keep them engaged. Indeed, the second-highest-ranked reason subscription consumers remain is high quality (Exhibit 2).
To be sure, consumers’ definition of quality can be challenging to pin down with specificity. For this reason, the most successful subscription businesses collect and analyze data on what consumers see as their offerings’ distinctive attributes. The data identify the elements retailers must deliver, which they can then communicate through consistent content and messaging in their marketing. A subscriber to a travel-pass program said that “access to VIP lounges, a snazzy app, and the ability to add another individual (often at no cost) are all great benefits. They add a lot of comfort to travel.” A beauty-box subscription service that knows consumers are drawn to its exclusive brand partnerships may tout those partnerships to attract consumers who value that trait.
Customer testimonials are another way to gather data about customers’ experiences. As one delighted customer confessed about their subscription: “I wasn’t sure if it was worth it, but I decided to try the free trial, and from there I’ve always been on it because the benefits are becoming great for me!” Another customer cited the “good variety” offered by a streaming service as a reason for staying with it.
The data also can help identify potential gaps where the brand is not meeting consumer expectations. Our research indicates that consumers have little tolerance for retailers that fall short on variety and excitement; 30 percent of consumers say that a lack of fun or new experiences is a factor in their decisions to cancel. Subscription businesses can use feedback mechanisms, artificial intelligence (AI), and machine learning to tailor product recommendations and even develop new offerings to meet consumers’ desire for new and varied experiences. For instance, streaming services use viewers’ habits and ratings history to recommend other programs. One media-streaming consumer noted, “My favorite thing is that they have a ‘suggested for you’ feature based on what you’ve watched.” Done right, a subscription service’s ability to deliver a quality assortment of fresh experiences will be more engaging and enjoyable for customers—and lower the likelihood that they will cancel or switch.
4. Maintain relationships and reduce churn with flexible pricing
To manage churn, subscription retailers should be alert to the top three reasons for subscriber cancellations: a perceived lack of value for the price, a dearth of new or fun products or experiences, and a lack of options within subscriptions or pricing (Exhibit 3).
All of these factors point to flaws in the subscription’s value proposition, which will take time and resources to investigate, redesign, deliver, and refresh. Fortunately, these issues can be more readily addressed with flexible pricing structures.
Pricing flexibility comes in many forms but is most commonly offered as tiered pricing. Some successful subscription services will prompt consumers to periodically reset their subscriptions to a higher- or lower-cost plan. The key is to give subscribers enough flexibility in how they use the service to motivate them to stay with it. Survey respondents said that they liked the flexibility of tiered pricing and praised the services that offer it for their ability to accommodate changes in subscribers’ lives. “I am a big fan of tiered pricing because it puts me in charge of choosing the plan that best fits my family’s specific needs,” said one survey respondent. Another cited fluctuating household budgets as a reason for moving between pricing tiers: “There are definitely times where I might not be able to afford a lot, so maybe I will go with the cheaper structure. But maybe during the holidays I want to treat myself and get a higher tier. I think it allows you to appeal to a wider audience.”
Another flexible pricing approach is a model that combines a consistent membership fee with usage-based fees. This fee structure tends to work best when consumption is intense during some periods and light or negligible during other times. For example, some vacation clubs charge a fixed annual fee, usually based on membership tiers, and charge usage-based fees for each trip a consumer takes. The basic fees guarantee predictability for both consumers and retailers, while the usage-based fees reflect the value the consumer derives from the offerings.
Finding the right price and offerings at each price tier is critical for balancing flexibility for consumers, lowering churn, and raising ROI. However, the execution is relatively straightforward: a consumer research and econometric model using consumer data can help retailers develop effective price tiers.
As subscription volumes continue to grow, we expect competition between digital-native brands and traditional brands to intensify. The winners will be brands and retailers that use a customer-centric approach to offer the right combination of value, flexibility, product options, and novelty to create customer devotion and business resilience. Those companies will successfully delight customers, reimagine their businesses, and help shape the future of retail.
