The Subscription Business Model: Where It’s Been and Where It’s Going

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Subscription-based purchases account for 18% of the $41 trillion in global credit charges, according to the Subscription Trade Association (SUBTA). Companies like Dollar Shave Club and Birchbox have used the subscription business model to grow revenue and retain customers. Large retailers such as Target and Sephora have caught on to the opportunities of a subscription model and are actively incorporating it into their business plans.

To learn more, check out the infographic below created by the Rider University Online Bachelor of Business Administration program.

How the subscription service model influences consumer shopping habits

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How Subscription Businesses Burst onto the Scene

As traditional retailers struggle to attract foot traffic, subscription services provide online shoppers with convenience, novelty, and greater personalization.

Measuring the Momentum of Subscription Startups

According to a 2019 Clutch survey of online shoppers, 54% of people pay for a subscription box service. The most popular categories are curation, replenishment and access. Curation services like Hello Fresh and Birchbox enable members to receive collections of new items to sample and use. Replenishment services like Ipsy, Backbox and Blue Apron enable members to receive replacements of the same products. Access services like JustFab and Nature Box enable members to receive access to perks and discounts.

According to a 2017 McKinsey Survey, 53% of consumers are aware of one of the top services, and 55% of consumers considering such a service decide to subscribe. Some of the most popular subscription services based on subscriptions include Amazon, Dollar Shave Club, Ipsy, Blue Apron and Bark Box

Subscription Success Stories

When Dollar Shave Club launched in 2011, its revenue was $4 million. In 2016, it ballooned to $250 million. Unilever bought the company that same year for $1 billion in cash. The company gained exposure through a viral video advertisement that promised customers high-quality, no-nonsense razors for $1 (plus shipping). Dollar Shave Club achieved success because it fulfilled a basic need for personal grooming products and didn’t require customers to visit a store.

Another successful subscription business, Ipsy, surpassed the $500 million revenue mark in 2019. That same year, they also boasted more than 25 million members in its online community, 3 million subscribers, over 160 million product reviews, and half a billion content views each month. Ipsy hit these benchmarks by providing personalized beauty products with the goal of giving consumers the right products at the right time and price. It also leverages its community to share consumer experience with the brand.

The Advantages of the Subscription Business Model

Both consumers and businesses benefit from the subscription business model; consumers receive novel products that delight and businesses receive guaranteed revenue.

The Driving Force Behind the Subscription Model

There are a few key elements that have driven the subscription model to success. The first element concerns the rise of e-commerce. In 2019, online sales surpassed in-store sales in total market share of retail sales. Another key element is increased social media use, as social media has allowed the growth of niche interest communities that can be served by subscription box services. Finally, there’s a growing consumer wiliness to invest in long-term services, as consumers trust subscription services to provide content that’s worth their investment.

There are several key reasons why consumers sign up for a subscription service, such as word-of-mouth recommendation, financial incentives and a strong need for the product. Consumers also approach this model with expectations pertaining to personalization, value and convenience.

There are several advantages to ascribing to a subscription business model. These include low startup costs, stable income from a long-term outlook and guaranteed revenue.

Tips for Building a Subscription-Based Business

It’s important for those interested in pursuing a subscription business model to decide on the type of subscription service to offer. It’s also crucial to pay attention to the basics of business-building, such as market and competition research, business plan creation and market need identification. It’s also important to include several brand-building elements, such as offering a no-obligation trial, transparent pricing and feedback requests.

The Future of Subscription Services

Though many brands have achieved success with subscription-based business models, there is ample room for newcomers.

Trends Shaping Subscription Services

The future of subscription services continues to be molded by ongoing and predicted trends. These trends include a growing selection of products, enhanced personalized experiences, a growing focus on customer data analysis and increased brand loyalty. There’s also an increase in existing brands exploring subscription services, such as Lyft, Target and Walgreens.

There is also room for subscription services to grow into other sectors. For instance, consumer services like HVAC services remain largely underdeveloped. Also, traditional retailers could leverage subscription formats to promote in-store engagement.

A New Take on Brand Loyalty

The future of retail may be in the hands of loyal subscribers. Traditional retailers and entrepreneurs should take advantage of this appetite for subscription services and consider exploring the opportunities.