The subscription-based model is a reliable way to increase revenue and create a loyal customer base. According to a study from the Subscription Trade Association, the subscription commerce economy will experience an annual growth rate of 17% until 2023. This means that DTCs and marketers looking to increase sales can rely on the subscription model and add it as an alternative to their existing pricing plans.
In this blog post, we'll explore the benefits of using a subscription-based DTC model and explain five ways to reduce subscription churn while noting the subscription metrics any DTC should know.
Evolution of subscription-based businesses
The subscription-based model has been around for centuries. The earliest known example is the 17th century first publications that allowed the reading crowds to pay a monthly sum for newspapers and magazines.
In the late 19th century, milk delivery services became popular after the first glass milk bottle was patented in 1878. This permitted easier delivery and established a standard of the requested milk quantity. Until the growth in popularity of the refrigerator, milk subscriptions flourished in the UK and US.
However, it was not until the 21st century that the subscription-based model became popular among businesses. This is likely due to a number of factors, including the rise of the internet and e-commerce, which made it easier for businesses to sell subscriptions online; the growth of the sharing economy, which made people more comfortable with subscribing to services; and the Great Recession, which made people more value-conscious and less likely to make one-time purchases endeavoring benefits like better prices.
Today, the subscription-based model is more popular than ever before. Businesses of all sizes and industries are finding success with subscriptions, from small startups to large corporations. Especially in the software industry, subscription-based pricing plans are the norm and account for more than 80% of all sold plans. Thus, understanding how to reduce subscription churn is critical.
Types of subscription-based models
Depending on the eCommerce business, today, three different subscription-based models are most used:
Curation usually refers to a box or similar in which retailers or merchants put together a collection of products and ship them to the end customers. The curation model sometimes has a surprise element and comes with various commercial partnerships between the merchant and niche brands. This is a great opportunity for newer brands to gather market share and spread the word about their products.
Replenishment is another form of the subscription-based model and is implemented for products, or services, that are used regularly. It refers to the same product delivered with a cadence it usually takes to run out. Detergents and other similar products fall into this category but can also refer to other types of subscriptions like personal care products. This offer is appealing to end customers, especially when a buy-in-bulk discount is offered.
Access subscriptions are usually popular among software products and include memberships, presales, or early access to various services. Sometimes, this model applies to products sold for group members or subscribers only and capitalizes on the feeling of community belonging of end customers.
Benefits of subscription-based DTC models
A subscription-based DTC model can be a great way to assure recurring revenue, a steady cash flow, predictability, a higher customer lifetime value, as well as more control over the quality of goods and services offered. All these benefits of subscription-based businesses can help grow sales and succeed in a very crowded market.
Predictable cash flow and inventory management
A key benefit of subscriptions is that they can provide predictability in terms of income. This is especially useful for businesses that may have irregular sales patterns. For example, if a merchant runs a seasonal business, a subscription model can help to even out the income so that the business is not reliant on big spikes during busy periods.
Increased customer lifetime value
Subscriptions also usually lead to increased customer lifetime value (CLV). This is because customers who subscribe to a service are usually more engaged with the product or service than those who don't. This means they're less likely to churn and more likely to continue using the service for longer. In turn, this leads to a higher CLV for those customers.
Control over the quality of goods and services offered
Perhaps the most obvious benefit is that subscriptions can offer more control over the quality of goods and services. This is because businesses are not reliant on one-off sales, where customers may be unhappy with the product or service they receive. Instead, merchants can focus on providing a consistently high-quality service that meets subscribers' needs and keeps them paying.
Increased loyalty among subscribers
Finally, subscriptions can help to increase sales and ensure a positive cash flow. This is because customers who subscribe to a service are generally more likely to continue using it than those who don't. In other words, subscriptions can help to create a loyal customer base who are less likely to switch to another provider.
Metrics any DTC marketer must know when selling subscription
There are several key metrics that any DTC business must track to grow its subscriber base. Also, in addition to tracking subscriptions and recurring orders, with Admetrics, marketers, and DTCs can optimize ads toward driving more subscribers.
The metrics below will enable any DTC that offers a subscription to scale ads with a high subscription rate instead of optimizing for overall orders or cost of acquisition. This represents an efficient strategy to increase recurring revenue while reducing advertising costs.
DTC brands can access the following metrics at traffic source, campaign, ad set, and ad level in the Admetrics Subscription Dashboard:
Orders that include at least one line item that is connected to a subscription/selling plan.
Percentage of orders that include at least one line item that is connected to a subscription/selling plan.
Percentage of visits that resulted in orders that include at least one line item that is connected to a subscription/selling plan.
Subscription cancellation rate
Percentage of subscribers who cancel their subscriptions.
Cost per subscription
Cost per order that includes at least one line item that is connected to a subscription/selling plan.
Refer to orders that are connected to a subscription contract/selling plan.
Recurring revenue generated through subscriptions.
Screenshot: Admetrics Subscription Dashboard
How to reduce subscription churn
While subscription services have peaked in the past decade, subscription churn is now beginning to be a hotter topic, especially given the inflation rates across the US and Europe forcing consumers to cut unnecessary expenses. In October 2022, a National Research Group survey showed that 66% of respondents are likely to make further cutbacks to their regular spending. Also, among the subscription types consumers are considering canceling are dating apps - 76%, personal efficiency apps - 66%, beauty subscription boxes - 61%, fashion subscription boxes - 60%, and alcohol subscription boxes - 57%.
Until recently, the median churn rate across B2C businesses was 5.7%. When discussing churn, it's important to note the two types, voluntary and involuntary. The intentional churn can be addressed with high-quality goods and services, a variety of subscription plans, trust, and ease of use. Involuntary churn, on the other side, must be avoided by any means, especially because most issues can pass unnoticeably.
5 Best practices to reduce subscription churn
1. High quality of goods and services
To keep people subscribed, merchants need to give them a reason to stay. This could be in the form of new content, exclusive access to deals or discounts, or anything else that would make their life better. Also, offered products should be of high quality, eliminating any reason to churn and opt for the competition, especially knowing that 56% of buyers appreciate most the value they get from teh product.
2. Variety of subscription plans and the possibility to pause
Some individuals may only want to subscribe for a month, while others might be interested in a longer-term commitment. By offering different plans, DTCs can cater to a wider range of customers and increase the chances that they will stick with the subscription. Also, offering the possibility to pause a subscription can become a revenue driver and have a positive impact. B2C offerings saw an increase of almost 5% of the total payment value after giving customers the opportunity to pause their subscription.
4. Easy to cancel or change plans
Subscription services grew by more than double between 2013 and 2018, and users are now accustomed to these offerings. If someone wants to cancel their subscription, merchants shouldn't make it difficult for them. The same goes for changing plans - a process as straightforward as possible will encourage subscribers to continue their plans.
5. Recurrent payments
Opting for a payment processor that allows recurring payments is crucial. According to data, 54% of subscribers churn because of failed transactions. Most of these cases revolve around involuntary churn. Also, merchants should know that credit and debit cards decline due to about 2000 reasons. Thus transaction success is a core part of any subscription-based business model.
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