WHAT IS SUBSCRIPTION COMMERCE
In the last decade, one of the biggest developments in the commerce industry has been the rise of direct-to-consumer (DTC) brands which manufacture and deliver their products directly to consumers without relying on stores or other middlemen. This allows them to sell their products at lower costs, and to keep end-to-end control over production, marketing, and distribution.
DTC brands are competing with traditional brands by rethinking not just the product, but also the retail model. A popular distribution model for DTC brands is subscription, which offers consumers a convenient and personalized way to purchase products on a recurring basis, frequently through monthly boxes.
The poster boy of this renaissance has been Dollar Shave Club, a disruptive American company which delivers razors and personal grooming products through customized subscription plans. The rise of similar DTC brands, like Warby Parker, Casper, Glossier, Birch Box, Blue Apron, created a huge impact changing the way we buy our everyday products.
WHY IS THE SUBSCRIPTION MODEL INNOVATIVE?
Although subscription commerce has picked up momentum in the last decade, subscription as a method of payment has been around for a long time. People have always paid for some services in a subscription model, think for instance of memberships to news, cable tv, gym and clubs. However, until the rise of DTC brands, it was uncommon to purchase products through subscriptions.
Thanks to this innovative concept, users can conveniently receive their favorite products without the hassle of having to order them. DTC brands benefit from gathering first-hand customer data which enables them to offer personalized packages, variety in their offering and prices adapted to customer needs.
At the same time, DTC brands benefit from a regular income and a better control over their inventory. Reliance on digital marketing, especially platforms like Facebook and Google, also played a critical role in terms of ensuring their CAC (Customer Acquisition Cost) was favorable. Having visibility over first-hand customer data, they were able to effectively predict the scalability of their business.
These advantages, coupled with the innovation in marketing and processes, helped these brands to capture a share of the highly competitive market against some of the biggest companies in the world.
THE 3 MAIN CHALLENGES INVOLVED
The exponential rise of DTC brands encouraged other more traditional companies like P&G (Gillette on Demand), Sephora (Play!), and Walmart (Beauty Box) to sell products in a subscription format. There are however some challenges involved in subscription commerce, first of which is churn.
Acquiring users through customized offers is easy but consistently maintaining that curiosity is a difficult task. According to research by McKinsey, more than one third of consumers drop out of subscription plans in 3 months and more than half in 6 months. Second obstacle faced by DTC brands is credit card penetration which can be an issue in developing economies.
Last but not least, delivery infrastructure can also be a big challenge for underdeveloped markets as it ensures that products promptly reach customers. While receiving products on subscription might be convenient, it is fundamental for DTC brands to identify the tipping point for users between the convenience of receiving products on a recurring basis and the inconvenience of receiving too many unnecessary items.
SUBSCRIPTION COMMERCE IN APAC
Compared to EMEA and North America which were early adopters of the subscription model, Southeast Asia is picking up slowly. According to a recent study by Citi, the subscription economy in the region is expected to grow quickly over the next couple of years fostered by the booming internet penetration and the rapid growth of the ecommerce sector. Brands such as Grab, Nespresso, Style Theory, Flux, GoCar are all great examples of this growing space. Grab recently introduced subscription plans to purchase bubble tea and to avoid delivery fees. Nespresso gave users the possibility to receive capsules on a monthly basis and Style Theory to rent from an infinite wardrobe for a fixed monthly price. Recurring payments give brands the opportunity to maintain a customer relationship which eventually increases customer lifetime value.
HOW WILL COVID-19 AFFECT SUBSCRIPTION COMMERCE
The spread of Covid-19 has caused a growing number of cities to go into lockdown and millions of people to stay home. Due to the restriction of movement, customers are increasingly relying on technology for everyday tasks like shopping and even the less adventurous have welcomed the convenience of online buying. This has led to a growth of ecommerce and particularly of DTC brands which connecting directly to their consumers, can offer them customized offers in these uncertain times. Providing online subscriptions and personalized responses, DTC brands have an advantage over more traditional brands. While the rush to purchase goods during the spread of the new coronavirus has left most online and offline shelves empty, subscription commerce gives customers the assurance of receiving products avoiding unpredictability. This creates a huge opportunity for DTC brands to capture new audiences.
With many attractive components outweighing the downsides, the subscription economy is expected to see further growth over the next few years. To succeed in this space, it is important for brands to remember that data is key to understand customer behavior, deliver increased customization and finally improve the overall customer experience. In the end, what matters the most to customers is not the subscription itself but the experience – receiving value which is intrinsic.
Read piece published on Campaign Asia here.