Ever since the success of Dollar Shave Club, which sold to Unilever for $1 billion, the subscription marketing model is viewed as the path to fame and fortune. With its promise to grow business with a loyal consumer base and steady stream of repeat business, rumor has it that The Gap, Under Armour, Target, Walmart, P&G and Sephora are testing the concept.
Prospects look bright with a new study from McKinsey & Company reporting that subscription ecommerce has grown by over 100 percent a year over the past five years, reaching $2.6+ billion in sales in 2016. New subscription programs are popping up every day in categories as diverse as beer and wine, child and baby, meal kits, pet foods, vitamins, fashion and underwear and replenishment services for basics like contact lenses, cosmetics, women’s feminine products, and even dental floss. Cocofloss has a plan to keep an ongoing supply of luxury flavored dental floss coming to your door, 64 yards worth every four months for $14.
As tempting as subscription marketing is, there are painful realities that companies can easily over look. It’s hard to acquire new customers and it’s even harder to keep current customers. The McKinsey study, based upon a survey among 5,000+ U.S. consumers, finds only about 15 percent of online shoppers have taken the plunge into the subscription lifestyle for consumer goods.
While awareness of subscription offerings is fairly high at 53 percent, the percentage of converting those who are aware is incredibly low, with only 13 percent saying they’ve subscribed at one time and just 8 percent currently subscribing. In terms of subscribers, the replenishment-style of subscription plans (e.g. Dollar Shave Club, Amazon Subscribe & Save) have higher rates of conversion than do curation-style programs (e.g. Birchbox, Blue Apron, Stitch Fix).
As hard as it is to get new customers, it is even harder to keep them. The McKinsey survey found that nearly 40 percent of subscribers cancel out of their subscriptions, with one-third cancelling after only three months trial and over half only sticking around for six months. In particular, meal-kit programs have the highest falloff rate, with 60-70 percent of subscribers pulling the plug after six months.
Those realities haven’t changed since modern ecommerce-fueled marketing replaced the old direct-mail continuity and club plans of the past, explains Georg Richter, a 30-year veteran in subscription marketing. “My whole career has been in subscription. I’ve done Book-of-the-Month Club, Doubleday Books, Columbia House Records, Scholastic. I’ve been CEO or president of these companies,” Richter shares. “That led me to Guthy Renker, one of the premier direct marketing companies that has subscriptions at its core.”
Two years ago, Guthy Renker spun off a separate company called OceanX https://oceanx.com/with Richter as CEO. His job, and the new company’s mission, is to guide companies into the brave new world of subscription marketing. “We help other companies get into the subscription channel. We have 12 clients right now, and many more contracts in the works with large CPG companies and retailers. It is a very hot business these days,” he says.
Given Richter’s longevity in subscription marketing, he has a wealth of advice to share. Here’s his recipe for success in subscription marketing:
- Belonging and Being Known
Two persistent problems with subscription marketing which haven’t changed in the evolution from the old to the new model is the need to find new customers and keep them once you have them. In the old world subscriptions were largely transactional businesses that were maintained with “hard relationships,” Richter explains, “where customers were captured through ‘crazy’ promotional offers, like get 12 vinyl records for 1¢.” Companies made it difficult for customers to cancel.
Today, he says, subscription programs must have a much softer relationship with customers. It depends on the marketer understanding each and every customer and meeting their individual needs. “A subscription can’t be a burden. It must be a great experience,” Richter says.
Essential to creating and maintaining that softer relationship is making subscribers feel they are part of something special – that they belong. “Subscriptions today are about relationships, not transactions,” Richter says.
“This is a type of marketing that puts the person at its core, true one-on-one marketing. Too many manufacturers, CPG companies and retailers think about the product and its specs, not about the person. With subscription plans, the customer has a deeper relationship than just buying more stuff. They want to become part of something special and belong.”
- Anticipation and Surprise
Every time a customer opens a subscription package he or she must feel like opening a gift, not just finding another box tossed on the doorstep. Each package needs to include something interesting and even more engaging than the last shipment to inspire and delight.
Subscription packages must also include a cliffhanger that makes them hungry to get the next delivery. “It’s about inspiration, not a transaction. It’s about storytelling and feeding that customer with relationships that will result with people staying for a long time,” Richter advises.
He points to the beauty box brand Ipsy as having nailed the anticipation and surprise element. To make the unboxing experience something to anticipate, it sends members a new, stylish bag with each delivery. This makes each package so special that some loyal subscribers post their experiences opening boxes on YouTube, Facebook and Instagram.
- Curation, Exclusivity and Discovery
People today are overwhelmed by an abundance of choice. One of the essential values in subscription services is its ability to curate the experience with product selection based on the specific needs and interests of the customer. “There is too much product out there. It’s the paradox of choice,” he says. A subscription plan can be a convenient way for customers to discover wonderful things that make their lives more interesting, more fun and more fulfilling.
Curating the subscription experience is further enhanced when exclusive products are included that are only available to members. Adding in the element of discovery or finding a new product that solves a need or gives a delightful surprise and also enhances the feeling of satisfaction.
“A well-designed subscription doesn’t just give us what we expect, but it also inspires us to try new things,” Richter explains, as he calls out celebrity stylist Rachel Zoe’s Box of Style program where she personally curates a selection of fashion, accessories and home goods for quarterly deliveries to members. Thanks to her stylist’s eye, she ensures that members of her tribe are exposed to new products they might not otherwise encounter.
- Portioning and Cadence
Providing products in the right proportions and at the right time is important for all subscription plans, but even moreso in consumables like vitamins and many beauty and skincare products. Getting the combination of correctly portioned products in the right cadence — that is, timing between shipments — is essential for ideal results. For example, Care/Of offers a monthly program to provide personalized daily packets of vitamin and nutritional supplements customized to the individual’s needs — based on a personal online quiz.
Each subscription program has different demands that create the optimum cadence. A shaving club where a new blade is needed weekly offers a monthly delivery of four blades. Such a cadence might be too frequent for fashion packages, which will do better on a bi-monthly or quarterly schedule.
- Value, Convenience and Replenishment
Finally, subscription programs must deliver value beyond discounts. Successful programs combine convenience with the confidence of a ready supply of products to replenish what has been consumed. A box of products, including a surprise, purchased for a fair price arriving at your doorstep just when you need it is the ultimate convenience.
That explains the explosive growth of Amazon’s Subscribe and Save service, Richter notes. While the program lacks curation and surprise, it makes up with value, convenience, and replenishment for household essentials, like paper towels, diapers, and similar products. “Products that need to be replenished on a set frequency are ideal for subscriptions,” Richter says.
As a final note, Richter says that one thing that hasn’t changed from the old to new subscription model is the cost of acquisition. One-third of revenue must be set aside for new customer acquisition and that represents the single biggest category of spending. “You constantly have to acquire new customers. It’s just part of the model,” he says.
By structuring a subscription program following his recipe, marketers will entice members with Belonging, Being Known, Curation, Exclusivity, Discovery, Portioning, Cadence, Value, Convenience and Cadence. Each program should include some or all of these factors, although they can vary in intensity depending on the products and customer need.
The goal must be to create forever members.” The key is to think beyond the transaction to create a relationship that goes deeper. We have to work toward forever memberships,” Richter concludes. ”We have to think about why they quit, then add elements to the program that gives them more reasons to stay on than to get off.”
To learn more about subscription marketing, Richter has written a whitepaper, “The Psychology of Physical Subscriptions,” that shares his secrets from 30+ years in the business.