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The subscription model has proven to be ideal for our digital, customer-centric economy. It offers sustainable recurring revenue and customer loyalty, plus a wealth of data to enable data-driven insights.
There are a number of trends driving the subscription space, says Ken Fenyo, consumer markets lead at Fuel, a McKinsey Company.
On the consumer side, particularly for younger consumers, it’s a convenient way to buy with a wider range of options. Instead of being bound by one cable package, or having to buy an entire album to get a single song, you can now cherry pick the things that are most appealing to you. And you can get those items in a way that allows you to get what you want on a regular basis, without having to go to a physical store or overthink your purchase.
“We do see this as part of a broader trend, where people are looking for different ways to get what they want,” Fenyo says. “We see a lot of consumers responding well to the variety that’s out there in terms of the products launching.”
And the interest in subscriptions is pretty broad-based across demographic groups, he adds. There’s a slight skew toward younger millennials who live in cities. Not surprisingly, they’re a little more quick to adopt subscriptions, as well as a range of other products. But while it’s a space that’s still growing and relatively new, it’s not just appealing to one demographic.
Across all demographics there’s been a rise of interest in the paid loyalty program, Fenyo says — things like Amazon Prime or CVS Care Pass and a range of other programs in both retail as well as entertainment and hospitality. Paid loyalty or subscription loyalty programs offer extra benefits and services, whether that’s free shipping or exclusive access to sales and more.
“What we’ve found is that in our recent research, 62% of online customers have subscribed to at least one of these programs,” he adds. “It’s significantly higher than what we’ve found for the subscription box research we did about a year and a half ago now, which found that around 15% of the online shoppers had subscribed to at least one subscription box company.”
Within the subscription box space, there are a couple of different flavors that are gaining in popularity, Fenyo says. The two most important ones are first, replenishment subscriptions — things like razor blades or other personal care items, where the consumer is buying the same thing over and over again, but the subscription delivers them in the cadence that they use the product, making it effortless to get what they need and when.
The second is the so-called curation products, which include products a buyer doesn’t necessarily use every day. The consumer is surprised every month with a selection of items chosen by the vendor and tailored to the buyer’s personal tastes — for example, the Ipsy beauty box, the Stitch Fix clothing service, or the pet-focused BarkBox.
The ultimate goal of these subscription services, whether they’re a subscription box or a paid loyalty program, is gaining a deeper relationship with the customer over time. On the product side, however, there’s a tradeoff. On the one hand, it can be harder to sign up someone to a subscription because of the commitment required. But once they sign up, it kicks off a longer-term relationship, providing significant return on the initial acquisition cost.
It also allows for much further personalization and product customization because of that deeper, longer relationship with your consumer. It allows you to learn more about them and use that to drive the business, whether that’s to deliver very personalized items, or just gaining a sense of what kind of items might be broadly interesting.
On the paid loyalty side, the goal is to deliver attractive, loyalty-garnering benefits that might be too expensive to offer free. For instance, for a lot of companies free shipping is far too expensive under a specific order threshold. But there are consumers who are willing to subscribe to get free shipping, and and the value derived from that loyalty adds dividends far beyond the shipping cost.
“It’s a win-win on both sides,” Fenyo says. “The consumer gets a service that’s more tailored to what they want, and the brand is able to provide it in a way where they can make the numbers work to continue to grow their business.”
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- How forward-looking businesses are using subscriptions to gain a competitive edge, including real-world case studies
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- Emma Clark, Chief of Staff, Recurly
- Ken Fenyo, Consumer Markets Lead, Fuel, a McKinsey Company
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