- On May 28, 2019
In Part 1 of our subscription economy blog series, Why consumers love subscriptions, we considered how the age-old fear of signing up to a subscription is being overcome as more and more consumers are taking part. Subscriptions are providing consumers with a new value-added experience which is built around services to meet the consumers' needs centred around a greater personalised approach, therefore enhancing the overall consumer experience - a far more rewarding experience than the traditional one-off 'ownership' purchase.
Part 2 – What makes the subscription shift difficult
This second part of our blog series will touch on the various types of subscriptions, how churn rates can dramatically undermine predictable revenue growth, and then briefly look at the specific KPIs a true business leader must follow to achieve success.
A complex world – types of subscriptions
Part 1 of our blog series discussed how businesses must tick many more boxes for a subscription offering in order to deliver a great experience for customers and thus win their monthly subscription payments. It's not as simple as a traditional product sale.
And, the complexity doesn’t end there. Businesses must decide what type of subscription model they want to, and are able to offer. In a recent Study, McKinsey categorised subscription models as such:
- Replenishment Subscription – The Business offers the same or similar items on a regular basis. Examples: Amazon Subscribe & Save, Dollar Shave Club.
- Curation Subscription – The Business offers a curated selection of different items, with varying levels of consumer decision making required. Examples: Ipsy, Birchbox, Stitch Fix, Blue Apron
- Access Subscription – The Business offers access to libraries of music, films, gaming, media streaming and software. Examples: Netflix, Spotify, EA Access, Google's forthcoming Stadia platform.
Mastering the subscription model
Vying for consumer's attention is the ultimate difficulty, as the McKinsey study highlights, with only 53% of consumers being aware of just one of the top subscription services mentioned in the report. The percentage doesn't improve much for conversion, with only 55% of those who consider a service ultimately subscribing, and this probably relates to our human culture of reluctance to sign-up for long-term commitment.
However, the bigger challenge facing subscription eCommerce companies, as McKinsey points out, is churn, nearly 40% of eCommerce subscribers have cancelled their subscriptions at a given point. "Businesses depend on their long-term relationships to provide predictable revenue growth and deep insights into customer behavior to personalize the experience. Churn can dramatically undermine their viability, since the cost of replacing lost subscribers could not only make it difficult to meet their growth objectives but also quickly drain their cash reserves."
The equation to solve in the subscription economy - what are the new KPIs
As we are all aware, the subscription eCommerce market continues to grow quickly. Business managers must concentrate on developing great experiences, not just great subscriptions, if they are to avoid churn rates and accelerate business growth and profitability. New software tools are essential to create, manage and track subscription performance. But, what are the specific KPIs a true business leader must follow to achieve success? Based on the advice of Tien Tzuo, CEO & Co-Founder of Zuora and the person who coined the term 'The Subscription Economy', the following metrics must be tracked:
- Subscriber Health (growth and change)
- Business Velocity (annual contract value vs. total contract value)
- Subscriber Engagement (payments and declines)
- Subscription Finance (monthly and annual recurring revenue)
- Relationship Retention (renewals, upsells and churn)
It is clear that moving to a subscription model is not an easy task, a few tweaks to the product offering will not suffice, this is a 'do (properly) or die' market and, when done well, the rewards are plentiful. Making the subscription shift requires careful planning and an innovative strategy to enhance the consumer experience so as to minimise churn rates and increase revenue flows.
In our third and final part of this blog series, we'll discover how managers can turn their subscription shift fears into opportunities by adopting the subscription mindset.
This article was created and written by Luigi Matrone - CEO & Founder of the eBusiness Institute.
At the eBusiness Institute, we have extensive experience of working with numerous brands on their digital transformation. We understand the importance of an optimised consumer experience to drive your brand’s sales online and offline. Contact us to learn more about how we can help you.