Is the subscription model the future of e-commerce?
Subscriptions are usually associated with services offering easy access to digital products or content. Yet, an increasing number of companies (like Philips and Volvo) are offering subscriptions for physical products. Why? And what does this have to do with e-commerce?
For Netflix, Spotify, Microsoft 365, Adobe Creative Cloud, and numerous other services, replacing traditional one-time sales with subscriptions has been central to their success. Subscription-based services – where users pay a monthly/quarterly/yearly fee for access to selected services or products – have succeeded because they allow people who cannot afford a big one-time purchase to become customers.
A subscription model typically operates on a steady fee, where the user pays a predefined amount at regular intervals and obtains access to a service, software package, content library, etc.
It might seem that the corresponding solution for physical products is the hire purchase (or instalment payments). However, despite some seemingly obvious similarities, it is actually the differences between credit and subscription options that have made the latter so popular.
Why do customers prefer to subscribe to a product rather than buy it in instalments?
The prospect of running up a long-term debt can seriously outweigh any product benefits. The subscription model can completely reverse this situation by allowing the user to discontinue their subscription when they choose. Thus, this approach offers a significantly higher degree of safety compared to hire purchase.
The subscription model is also increasingly chosen by people who can easily finance the complete purchase upfront but prefer not to splash out on a single large buy. In short, it frees up cash or credit for their other needs.
For other subscribers, the simplicity and convenience of the subscription process is the most appealing factor; economic motivations are of secondary importance. These customers seek solutions in which the producer will be responsible for keeping the subscription object always fit for purpose. Their key expectation is for the subscription price to include all costs, from the supply of spare parts to maintenance work. Many clients are prepared to pay a little more if they are guaranteed the ultimate comfort of using products without effort and with no risk of hidden costs.
For a monthly fee, Care by Volvo users not only enjoy access to a new car but can also get the cost of regular car maintenance, consumables, or insurance covered.
How can producers benefit from the subscription model?
Does offering the customer such great flexibility benefit the company to the same extent? The answer largely depends on the quality of the product and its customer service. If both are held to high standards, the subscription model may offer many measurable benefits to the company. For example:
- Subscriptions can grow the prospective customer base, attracting clients who otherwise would not be interested.
- To users, the consequences of a missed subscription choice are much less severe than those of making the wrong traditional purchase or incurring a hire purchase debt. Thus, customers are more inclined to consider the company's subscription offer.
- The ultimate amount subscribers pay for a secondhand product is often much higher than its purchase price.
- Subscription models, with their predictable levels of regular revenue, allow the company to operate in a more financially stable situation.
- Subscription clients often become loyal users who build a strong bond with the brand.
- Some subscribers may become brand ambassadors, thus helping to bring down the costs of winning new business.
- It’s more expensive to win new customers than keep existing ones – and loyal clients are of greater value to the company.
Moreover, a subscription may become the first step in the customer's journey towards a subsequent product purchase. This is particularly important for expensive goods, where customers are afraid of making an impulse buy.
Philips is reaping the benefits of subscription-augmented product offers. For example, it has been hiring out air purifiers since 2018. The subscription price includes new filters, and clients can use a dedicated configurator to select their preferred model before they start their subscription.
In 2019, Philips employed the same method with some of its other products. The subscription model provides support for more traditional sales channels; it allows the company to target different groups of new customers who have been using various subscriptions for years and are eager to take their habits into other areas of their lives.
The subscription model can also boost sales in other channels. All subscription products are available in the traditional sales model, so customers may decide to purchase the product once they have tested it – or persuade other people in their circle, e.g. parents, to buy one.
It’s all beautiful. So, where's the catch?
Accommodating a wholly new structure of revenue, one which is spread out over time, is the biggest challenge in implementing the subscription model. On top of that, subscriptions succeed only when a company is very confident that most users will be satisfied with the proposed solutions. Once customers feel their needs are not being met, they will quit the subscription as quickly as they signed up for it.
Despite the long-term benefits, the subscription model is a bit of a revolution. When conducted too abruptly, it may send shock waves across the company. That is why a 'small steps' approach is reasonable, allowing for subsequent groups of product subscriptions to be released at fixed intervals.
The company will also have to face the challenge of designing a pricing policy that accounts for real product life cycles as well as the cost of spare parts and maintenance work. At this stage, it makes sense to run a detailed analysis of existing and prospective customers; the success of the subscription model largely depends on a properly-balanced price. On one hand, the price should make the undertaking profitable; on the other, it should be acceptable to a wide group of customers.
The further life of returned products also needs to be considered. For some companies, this may be an opportunity to get on board with another popular trend, i.e. offering used products that have been fully refurbished by the manufacturer. Products that cannot be refurbished may become a source of spare parts and recycling material. Apart from other business gains, such actions are particularly valuable for brand image and will build credibility with customers, who increasingly expect companies to be environmentally conscious and to demonstrate a 'zero waste' attitude.
Subscription management software: Obligatory for efficient sales
The subscription model also requires a company to implement ways to manage various subscription plans, payment methods, communication methods, and the flow of customer data. A dedicated category of subscription management software has been created to address these needs. They provide a number of functions that can facilitate product offerings and management based on a steady subscription. Such solutions should provide:
- Convenient configuration for particular subscription elements, including payment methods and dates.
- Automated payment settlement operations.
- Automated system(s) for charging recurring fees.
- Differentiated offers for different customer classifications, e.g. offering a free trial to new customers.
- Access to user billing histories.
- Customer statistics (i.e. for customer profiling and segmentation) to support marketing activity and price policy management.
- Ways to up-sell or cross-sell based on customer profiles.
- Enabling easy user management of subscription settings, including changing, cancelling, or resuming their subscription plan.
The subscription model and the future of e-commerce
The popularity of the subscription model has been on the rise for several years, drawing the attention of companies in many industries. Although its implementation poses many challenges, it’s impossible to ignore the potential benefits – even more so because the model is probably only at the starting point of its upward trend.
Subscription products are strongly preferred by Millennial and Gen Z consumers, who now constitute a large chunk of the customer base. So, this seems to be the right time for many companies to consider adding subscriptions to their offerings, which may provide additional security for their businesses’ future.