How Does an E-commerce Subscription Model Work?

Intro

With the popularity of ecommerce and the changing consumer trends, many businesses are adopting subscription business models for their ecommerce brands. Research predicts an Ecommerce CAGR increase to 68% by 2025.

Source: UnivDators

Research shows that the e-commerce subscription model is projected to reach over $450 billion by the year 2025. However, some ecommerce brands have not adopted the subscription model. and others don’t even know how it works to effectively drive more sales and growth for their business.

The article shines light on how the ecommerce subscription model works, the different subscription models you can try, metrics to track, and best practices in your subscription model to use.

What is an E-commerce Subscription Model?

This is a business model where ecommerce customers can subscribe to a brand and keep buying products from the ecommerce store repeatedly. The customer can choose the payment schedules that they’re okay with and within their budget and plan. How you manage this will depend on the merchant service provider you choose, so take your time and ensure you thoroughly understand their capabilities and fees. Here is what the whole recurring process and payment look like.

Source: ScienceSoft

Why Use an E-commerce Subscription Model

• Consistent Flow of Revenue. Customers will be ordering products consistently from the ecommerce stores. This will ensure the business keeps making a continuous income from the sale of those products. For example, a report from Statista shows the subscription model has been making over 38 billion dollars in sales in the US over the years.

Source: Statista

• Easy to Manage Inventory. Keeping inventory can be challenging. However, since the business knows the customer preferences and when they expect to receive the products, they can plan their inventory and make the purchase and delivery process easy.
• Cut The Costs to Acquire New Customers. The consumers will be making purchases regularly and ecommerce store owners don't need to look for new customers. Consistency in sales will reduce the costs to acquire new customers as the current customers keep making purchases repeatedly.
• Build a Loyal Customer Base. As customers keep using ecommerce products from a brand, they become loyal customers and can even become advocates of the brand to other prospective customers. Partnering with an e-commerce development agency can help optimize your online store, ensuring a seamless and engaging shopping experience that encourages repeat business and customer loyalty.
• Increase Customer LTV. As customers keep making repeat purchases from the ecommerce store, the LTV increases. Their relationship with your brand, and how they enjoy and use your products keeps growing and the revenue each customer brings to your business increases with each purchase. Here is how to calculate the customer's lifetime value.

For example, suppose a customer has a lifespan of a year(12 months) buying from a store, has a purchase frequency of 8, and has an average purchase value of $120, here is his LTV.

• Give a Personalized Shopping Experience. Since your customers are ordering products consistently, you can personalize the customer shopping experience for your customers and send them the best products according to their preferences.

Types of E-commerce Subscription Models

• Access Subscription Model. In this subscription model, the ecommerce customers pay monthly or yearly fees to access exclusive ecommerce products from a brand. With this subscription, users can get special discounts on the products, or access new products earlier than other users. From the freedom to choose, the customers can order the products they want and the times they want them delivered Here is an example of such a subscription.

Source: BarkBox

Here is another example where you can choose a subscription for either monthly, two months, or six months.

Source: Gillette

This model promotes loyalty and helps ecommerce brands retain customers for a long. They can refer other users to your brand to enjoy the same offers.

• Curation Subscription Model. This model offers customers personalized products of their choice. The major consumer categories that use this subscription model include beauty products, meals, and flowers. The customers get products specialized to their taste. You surprise the users with new products of their choice. The store owners send assorted products to their users at predetermined times. It is essential to ask your customers their preferences and choices to always deliver the right products that they need. This ecommerce model best suits products like chocolate, liquor, books, wine, cheese, and toys. For businesses operating on Shopify and looking into adopting a curation subscription model, finding the right tools is crucial. To navigate this, examining Shopify's finest subscription apps can provide valuable insights into selecting apps that offer personalized products and services tailored to consumer tastes, enhancing the overall customer experience. Here is an example of such brands.

Source: BirchBox

As a business owner, you can do an a/b test of your new products by including them in the curated boxes and asking the customers to give their feedback about those products.

• Replenishment Subscription Model. The model works best for products customers use regularly like groceries and health supplements. As a store owner, you sell products to customers repeatedly without them having to order the products. Here is an example of Amazon's safe and subscribe model.

Source: Amazon

The customers give the store owner their schedule when they will need them to send the products. The customers will then receive their product of choice at their desired time on a recurrent and consistent basis. This model is best for customers who need products consistently as they can get great deals, discounts, and offers from the business owners.

• Premium Membership Subscription Model. In this offer, the customer pays a certain amount to use your products. However, you can charge them more money to access your store's better premium and quality content. e.g. Amazon Prime.

Source: [Amazon](https://www.amazon.com/amazonprime)

It gives members access to exclusive shopping and entertaining products. You can try out the premium membership then once the trial is over choose the price package you want. Here are the different prices.

Source: [Amazon ](https://www.amazon.com/amazonprime)

• Fixed Ecommerce Subscription. With this model, customers pay a given amount and are given access to certain products or goods for a certain time.

Best Practices to Use for E-commerce Subscription Models

• Choose The Model That Matches What You Offer. You know the products you offer better than any other person and how your customers consume the products. As you work on starting a subscription model for your ecommerce, choose the model that suits your business and target customers. Moreover, choosing a reliable SAP Subscription billing solution will help streamline your subscription management processes and ensure smooth operations.
• 100% Focus on Customer Experience. One bad experience for your customers and you lose them. As you run your subscription model, ensure you prioritize your customer experience. You can send out surveys and ask the customers what they like or their feedback on their experience with your brand and their recommendations to improve those customer experiences.
• Have Clear Business Goals. What business goals do you want to achieve once you start your subscription model? That’s a big question you must ask yourself and have a clear answer before your venture. It will help you know the subscription model to choose and plan for it effectively.
• Make it Easy to Subscribe to The Models. You could have great products that customers need. However, if the process of subscribing so they can make purchases from your store is hard, they will leave and look for your competitors. To streamline this, consider integrating payment and accounting solutions like PayPal Quickbooks. This will not only simplify the subscription process but also provide an easier way for you to manage your finances. Ensure you have other tool integration with your ecommerce to make the process faster. Here is what the integration process looks like.

Source: ScienceSoft

• Test Your Subscription Pricing Strategy. As you personalize the models to deliver the best experience to customers, you can test price strategy to ensure you get the best ROI while offering the best products customers love.
• Have Different Marketing Strategies For Your Models. Many of your target customers may not know you have introduced a subscription model in your store. You have to find a way to reach out to those target audiences, let them know about your business's new subscription model, and engage with it.
• Exceptional Customer Service. Your customers will have challenges and concerns they need help with as they use your products on retainer terms. As an ecommerce store, you need an awesome customer support team to handle those challenges anytime they come up. If your customers have a challenge and you can’t help them, they will try out other businesses and you end up losing lots of revenue and trust from those customers.
• Choose The Right Ecommerce Platform. For your business to work effectively, you need to host it on a platform with the right features. Features like ease of use, integrations with other tools, security, and mobile friendliness. For example, here are some security seals to look out for.

Subscription Model KPI to Track

• Monthly Recurring Revenue. (MRR) This is the monthly sale and revenue you get from your ecommerce store. This is the total revenue from all your business subscribers for the various products they brought from your store within a month.
• Customer Retention Rate. Not all the customers you sign up and use your business products for a long time. This metric measures the number of customers who stay with your business and use your products for a given period. It’s given in a percentage relative to the total number of customers. Here is how to calculate the metric.

• Customer Acquisition Cost. This accounts for the resources you use in turning a lead into a customer for your ecommerce products. The expenses you incur to nurture the lead through the buyer journey and get them to convert to customers. This is how you can calculate your customer acquisition cost metric.

• Average Revenue Per Customer. If you’re offering products with different price tiers, it can be difficult to know exact purchases from the customer. To find these metrics, divide the MRR/ no.of customers.
• Annual Recurring Revenue. This gives the revenue your brand got after one year from the sales of your products. With this metric, you can forecast the market consumption of your products and then adjust to ensure a continuous increase in revenue. For this metric you divide the total revenue by the number of years the customer has consistently been using the business products.

Want to Drive More Revenue For Your Ecommerce Brand?

In the ever-changing landscape of the e-commerce business, brands need to be flexible and adopt the new and latest trends to serve customers well and drive more business revenue. If you have not started a subscription model for your e-commerce, it’s essential to start one.

Choose the best subscription model, run and test it, and monitor the key metrics mentioned in this article. Remember customer satisfaction is your primary goal and give the best experience to your customers, build a loyal customer base, and retain the customers for a long time while making recurrent income.