Why more companies could benefit from a subscription-based model

As more consumers sign up for subscription services, companies have an opportunity to expand their sources of revenue

Subscription services, once thought to be the exclusive domain of software providers, have taken the retail world by storm over the past few years. Boosted by the popularity of streaming services such as Netflix and Spotify, subscriptions are fast becoming an essential tool for retailers of all stripes. In fact, over the past five years, the subscription market has grown by more than 100% each year, according to the consulting firm McKinsey.1

“We’re entering a whole new retail environment,” says Robin Reodica, product management executive director at Bank of America Merchant Services. He says today’s consumers care less about ownership and more about access; they want goods and services delivered to their door or phone, an experience curated specifically for them, and they don’t want to spend time thinking about how or when to pay. Subscriptions deliver on each of these fronts.

And they’re not just for software and media providers. Subscription services span all industries and markets, from pet food to airplane tickets to meal prep and shaving supplies. Now, companies that may have thought subscriptions wouldn’t fit their business model may want to reconsider.

“You would think a company that builds or installs garage doors couldn’t offer a subscription,” says Reodica. “But what if they offered an app at $9.99 per month that allowed customers to check if they left their garage door open? That’s a subscription that meets a need.” And meeting customer needs, Reodica says, is what subscription services are all about.

A win for both retailers and consumers

Subscription services benefit customers by making payments as frictionless as possible. Typically, subscribers set up a recurring payment — monthly is most popular — enter their payment information, and sit back as the goods or services are regularly delivered.

But what are the benefits for businesses? “The biggest benefit is increased engagement with customers,” says Emma Clark, chief of staff for Recurly, a subscription billing management company and Solution Partner for Bank of America Merchant Services.

Engagement drives two other, interrelated benefits, says Clark: increased customer loyalty, and more and better customer data. Loyalty is baked into the subscription model itself since subscription services are based on consistent customer engagement. And with regular engagement comes more data about customers, from how much time they spend on your app or website to what kinds of products or services they prefer.

A company that offers monthly apparel boxes, for example, can gather data on the style of clothes a customer prefers, and use that data to send increasingly more personalized boxes to the customer as time goes on. More personalized products and services can in turn inspire even greater customer loyalty, accelerating a cycle that benefits retailers and consumers alike.

Subscription services can also bring in regular, relatively predictable profits. Meanwhile, adding a subscription service to more traditional sales avenues can deliver a new revenue stream to a business.

Limiting churn

Subscription services do present some challenges for businesses, including retaining customers who intend to just “test” the service. Subscribers who leave often do so shortly after signing up for a service: more than a third of consumers who sign up for a subscription service cancel in less than three months, and over half cancel within six months.1

Some amount of churn is inevitable — about 5.5% of subscribers is typical, says Clark — but the most successful subscription companies have figured out strategies to limit the exodus of new customers.

One way is to avoid offering too-good-tobe- true enticements for new customers. If a new subscriber is lured by free trials or other extreme discounts, they may be quick to unsubscribe as soon as those introductory offers expire. “Many businesses new to the model get so caught up in winning new subscribers that they fail to develop a strategy to prevent customers from abandoning the subscription a month or two later,” says Clark.

Companies should start tackling this potential issue by distinguishing between voluntary and involuntary churn. Clark says about a third of all churn is involuntary — for instance, a subscriber drifts away after an expired credit card can’t be charged. If a customer needs to act to change payment methods, businesses should send out gentle reminders via email. The best emails, says Clark, serve not only as payment prompts but subtle reminders about what a particular customer might be missing out on, like a favorite product or a competitive price.

Voluntary churn means a customer isn’t finding enough value in the subscription — and it’s up to the business to figure out why. Price point and competition are two common factors, but the reasons differ from customer to customer. Businesses can reach out directly to customers who have stopped subscribing and collect data that may tell them, for example, that customers with plans at a particular price point are more likely to drop out.

Other considerations for businesses thinking about offering a subscription service:

Pricing. A big part of developing a subscription that delivers real value to customers is finding the right price point. Start by checking out competitors to see what consumers are paying for similar services, then set your prices accordingly.

Security. It’s critical that businesses ensure the customer data they collect is protected. Make sure to work with a payment provider that prioritizes securing personally identifiable information. That includes complying with privacy protection standards such as Payment Card Industry Data Security Standards (PCI DSS).

Integrated systems. Subscriptions differ from traditional models in that the customer journey is much more cyclical and fluid, says Clark. As a result, companies considering a subscription-based model may want to reconsider its internal structure. “It’s no longer viable to have your marketing department in one silo and your customer service department in another silo,” says Clark. “Everyone across all departments should have access to the same systems to really understand what’s going on with your subscribers.”

If your business is interested in offering subscriptions, the first step is to talk to your payment provider about initiating a new payment model. They will connect you to experts who can help develop a strategic subscription model that targets a true consumer need and provide guidance on how to integrate the new model to your payment environment.


“Subscription services can also bring in regular, relatively predictable profits.”
 


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