Subscription-based businesses like Birchbox, Dollar Shave Club, StitchFix and HelloFresh, have all proven that there’s consumer demand for having products delivered directly to their doorsteps each week or month.
Although a recurring stream of prepaid orders can reduce some of the uncertainty that comes with running a small business, there may be more complexity to running a subscription-based business than meets the eye. Here’s a look at the pros and cons that subscription models entail, to help you consider if it’s the right approach for your business.
Predictability. Will you meet your monthly revenue goals, hold too much or too little inventory, or have enough cash on hand to pay your bills? These are just some of the unknowns small business owners encounter monthly. A subscription-based model can eliminate some of the uncertainty when it comes to forecasting financials, and operational demands, but the experts at Cratejoy say the most successful subscription-models have a well-defined niche in terms of purpose, contents of the shipment itself, and target audience before they launch. Consider those details before you decide to dive into the subscriber model.
Market research that pays. When you have a subscription-based model you define what you sell, to whom, and why. In turn, you gain some control over the products subscribers try. Because you know exactly who receives your subscription, you can leverage the business model to conduct market research about the products you send and apply those findings to your overall business strategy, including new product launches. When you market your subscription business in different channels, you can also experiment with pricing models and promotional offers to optimize customer response and your desired profitability.
Upsell opportunities. A subscription-based business allows you to put product lines into your customers' hands and use themes and marketing copy strategically to guide their experience with your brand for maximum perceived value. You can also use subscription businesses to improve gift sales, offering customers a unique way to send handmade items to their friends, co-workers, and family for shorter-term subscriptions that span no more than a few months.
Operational demand. Running a subscription-based business doesn’t stop at acquiring subscribers, and shipping items as agreed. To keep customers happy in a subscription-based model, all processes related to the business have to be optimized from start to finish—a task that can be difficult even for large organizations. A subscription business must also gather customer feedback initiated by phone, email, online and in social media constantly—and be equipped to act on their questions, concerns and requests to cancel quickly. Though you can outsource some aspects of fulfillment, your business must still have a plan to scale for growth, and react swiftly to challenges in sourcing product, picking, packing and shipping that are the reality of a recurring fulfillment model.
Constant measurement is required. A subscription business requires that your business monitor its key performance indicators (KPIs) to predict trends in product or quality issues, and prepare for unexpected churn (how many subscribers cancel compared to new business acquires on a given day, week or month). The experts at SubscriptionSchool.com recommend that a subscription business monitor, at minimum, these KPIs: churn rate, customer acquisition costs, average revenue per user and the lifetime value of a given subscriber. You cannot proactively address issues that may indicate subscriber attrition or manage quality issues unless you can invest the time and energy into monitoring KPI’s, and analyzing what they may mean to your strategy.
Your brand identity could be at risk. Subscription-based businesses are on trend, but their popularity has raised the bar for best practices. For example, in light of a high volume of customer complaints regarding the billing practices of the popular Fabletics line, the state of California’s District Attorneys set up a task force to investigate how subscription-based companies handle customer payments and requests for subscription cancellations. Regardless of how overt your business may be about billing cycles, return policies or the merchandise your subscription service will include, customers have high expectations—and they have many public platforms they can turn to express their dissatisfaction. If you make customers unhappy, your brand and product name could suffer more damage than you gain from a subscription model.