We may not notice it, but we have to deal with subscription businesses in daily life. The newsletters delivered by paperboy to your doorstep, the mobile operator services, even movies which you have access to thanks to Netflix or any other OTT platform, - all these conveniences require recurring payments and represent a subscription model.
Undoubtedly, the subscription commerce market is accelerating. According to McKinsey & Company research, 15% of online buyers have signed up for one or more subscription services. That’s a really big number — considering the projected number of online shoppers as 2.14 billion by 2021.
Subscription business model is the business model when products and services are selling in return for a recurring fee. It is based on:
- Recurring billing;
- One or more subscription plans;
- Monthly or yearly charge;
- Automatic subscription renewal and activation.
But still, what are the reasons to implement subscriptions for eCommerce stores? And why do eCommerce giants offer subscriptions and memberships as an option to their customers?
In this article, we’ve collected the top 7 reasons for your Magento 2 store to offer subscriptions to your customers. But first, let’s decide which eCommerce businesses a subscription model suits to.
What eCommerce businesses should offer subscriptions?
The practice shows that subscriptions work well and bring a lot of benefits regardless of your company size and location. Among eCommerce businesses, subscriptions are popular in stores selling:
- consumer goods
- digital media
- sports equipment
- entertainment goods and services
- And more.
However, not only mentioned above but any ecommerce sphere can benefit from long-lasting relationships with customers using subscription based model. And, here are the 7 reasons why a lot of eCommerce businesses have moved to subscriptions.
The reasons to move your eCommerce business to subscription business model
1. Greater return on marketing investments
Due to its concept, the subscription model assumes a good return on marketing investments as it increases the chances that a newly acquired customer will repeat a purchase.
Almost every online store invests a lot of effort and money to attract new customers. Subscriptions make these investments more likely to be worthwhile. Why? Let’s look at an example.
The E-store sells a jar of dietary supplements for $50. The store buys it for $20 from the supplier and spends $20 more to acquire a new customer. So the net profit from one purchase is $10. And now imagine that a newly acquired customer makes the purchase of these dietary supplements on a regular basis. The marketing investments remain the same, so the profit is increased for recurring purchases. So, even if the customer cancels the subscription after two purchases, the return on marketing investments and the net profit will be equal to $40 for two transactions instead of $10 for one. And what if the customer will be subscribed for a year or more?
2. Increased customer LTV
Customer lifetime value (LTV) is the total worth to a business of a customer over the whole period of their relationships. It’s a crucial factor for making the decision of how much investments should be made to retain the customer and one of the major indicators for sales performance analysis.
Subscriptions increase customers' LTV and decrease the expenses on customers retention, because they assume repetitive purchases until the customers cancel their subscription.
Below you can see how the customer's LTV is calculated.
Let’s say, the average revenue from a customer is $50 from which $20 goes to manufacturing, shipping and packaging. Taking into consideration the gross margin of 60% (0,6) and the approximate period of time the customers subscription long, which is one year (12 purchases), we have an LTV of $360.
|$50 × 0,6 × 12 =$360|
In comparison, if it's a one-time purchase, the customer LTV can be equal to $30.
3. Better inventory management
Successful inventory management depends on your ability to oversee the approximate number of goods you will need the following month or year. Here subscriptions give you a clearer idea of the stock you have and the resources you will need. In this way, you can make more accurate financial forecasts, manage inventory and create a more reliable strategy on company growth. It will also decrease unforeseen expenses by reducing the risks of stock surplus and deficit.
For example, you sell cat food and have 100 subscribers to this product. You still have to predict the approximate number of new subscribers and those who will cancel their subscription, but you know that next month you will need not less than 100 packages of cat food. With this information you can calculate your expenses and plan further business extension.
Ecommerce businesses selling products one-time have to do complex mathematical calculations taking into consideration planned promotions, seasonal differences, sales history, even current trends. And still this won’t give them as accurate values as subscriptions will.
4. Payment automation
Subscription products in eCommerce are usually paid with credit or debit cards. The payment terms are different, but card systems require time to transfer money to your account, get necessary verifications, etc. However, with the subscriptions the businesses are able to get money the same day, which also gives more space for financial forecasts and reduces the risk of technical insolvency.
Payment automation has a positive impact not only on business but also on customers. Online stores make shoppers' lives easier, they don’t have to visit it to get the desired product, it can be delivered to your doorsteps. Subscriptions go further, customers don’t have to enter required data to fulfill the order every month or day, the required sum is debited automatically from the saved card, which is comfortable and handy in most cases. This way, subscriptions enhance customer satisfaction and benefit from it.
5. Customer loyalty
What supports customer retention and cultivates loyalty better than subscriptions? With the pre-paid subscriptions customers are unlikely to go to your competitors until they decide to cancel it. But it works not only on subscription products. The brand has more chances to encourage already subscribed customers to buy a product than to acquire a new one. The statistics show that the probability of selling a product to a new customer ranges between 5 and 20%, but to the existing customer it’s 70%.
Let’s see, as a customer who needs weights, would you likely buy from the store every week delivering you sports nutrition or from an unfamiliar store? The second option implies the necessity to create an account, understand the terms of service of the new store, it may provoke concern about the quality of the product, the website security, etc. Shoppers are ready to spend more but be sure that they’ll be provided with better service and good quality products.
6. Boosted sales
7. Low cost shipping
One of the main aspects of perfect customer service is shipping. When doing one-time purchases customers expect the goods to come in a few days, so brands do their best to arrange as fast shipping as possible.
However, it doesn’t relate to repetitive purchases. Subscriptions are scheduled for a specific day of month or week, so customers expect it to be delivered this particular day. It gives merchants more room for maneuver. They can choose relatively slow and inexpensive shipping methods. This way merchants save money on shipping while customers stay satisfied with subscription fulfillment.
Subscription and Recurring Payments extension for Magento 2
One of the best solutions on the Magento Marketplace to enable merchants to offer subscription is Advanced Subscription Products for Magento 2. It is a powerful solution to develop consistent revenue streams with recurring payments.
The module allows merchants to sell subscriptions together with one-time purchase products, create multiple subscription plans, offer different prices for different customer groups and enable free shipping for subscriptions. Besides, with the Advanced Subscription module you can set email notifications to remind shoppers to renew subscription, add one-off products to the nearest subscription and recalculate totals to offer best price for subscribers.
Install Advanced Subscription Products for Magento 2 to boost repeat purchases and manage subscriptions effortlessly on your Magento 2 store.