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How Subscription Services Work & Why You Should Use Them

how to use subscription based model

Subscription services are one of the best things you can do for your ecommerce site.

Think about it – one of the most challenging parts of running any business is getting monthly recurring revenue (MRR). Monthly subscription services break through that barrier.

In fact, John Warrillow, founder of Built to Sell, said this about subscription services:

“It’s the perfect business model because it provides the greatest value to both the entrepreneur and the customer.”

As such, this post will teach you why subscriptions are important, how to get subscribers, and how to grow your subscription based business.

And businesses have taken note. The subscription based business model has exploded by over 350% since 2012, growing 5 times faster than S&P 500 company revenues and U.S. retail sales.

As a business owner, you might want to do the same.

This post will teach you how to do it. From why subscriptions are important, how to get subscribers, to how to grow your subscription based business, I’ll walk you through the entire process. By the end, you’ll be ready to open up a whole new revenue stream with a subscription based model for your business.

Let’s do it.

What is Subscription Marketing?

Subscription marketing is a type of business model that generates recurring revenue through a subscription pricing model. Existing customers opt to receive the goods or services on a recurring basis for a monthly or annual fee. The goal of a subscription offering is to increase customer retention and lower customer acquisition cost.

Netflix is a good example of a successful subscription based business model, as is any other SaaS company. For companies not offering SaaS (software as a service), a subscription offering usually involves a monthly shipment of goods such as a subscription box.

Why Are Subscription Services so Popular?

Convenience is the main reason why the subscription based model for goods and services is popular among consumers. The ‘set it and forget it’ mentality that a subscription company offers its customers fits well with the fast-paced information overload culture of the 21st century.

The Dollar Shave Club is perhaps the most notorious business to find multi-million dollar success with the subscription based model. It was acquired by Unilever in 2016 for a cool $1 billion. As it turns out, people really liked having their razors automatically sent to them.

And Unilever really liked the subscription economy.

But businesses don’t need to turn convert to a subscription company in order to get in on the action. Amazon, though a multi-billion dollar company in itself, uses the subscription pricing model on household items sold through the online marketplace.

Customers can select a subscription option when ordering high-use items like toilet paper, toothpaste, or dish soap. Capitalizing on the convenience that subscription payments can offer consumers, Amazon has used the subscription based pricing model to further cement its multi-billion dollar status.

Needless to say, consumers really like convenience, and a subscription based pricing model is the easiest way to address that.

7 Reasons Your eCommerce Business Should Use Subscription Services

If you’re still not sure whether or not the subscription business model is right for your business, then read through this list of reasons to jump into subscription mode. Your customers and your accountant will thank you.

Time to learn!

#1: Your customers want subscription services… and they want flexible choices

According to a recent study, more than half of U.S. adults pay regularly for online services. But guess what?

They’d do so more often if the businesses offering those services introduced more features and premiums.

Consumers want greater subscription flexibility, and more options in general, when it comes to functionality.

Don’t take my word for it. Here’s what Dan Oleson, founder of the monthly subscription box Ankle Swagger, has to say:

“The thing that I’ve come to find, and something we can improve on, even now, is providing the customer options when it comes to what level of service they’d like to subscribe to.

Real people in the trenches want subscription services and they want flexible options. Here’s how to deliver:

  • Offer three different levels of subscription packages. This will provide flexibility in choice, as well as making it easy for customers to choose the middle ground.
  • Allow users to customize their subscription. Letting your customers choose what they get every month and how often they get it will appease their desire for control.

formilla-subscription-services

If you’re a Shopify store user, you can offer product customization options with this app.

#2: Subscriptions are convenient for you and your customers

Think about this: All of your customers are now on monthly subscription services. Every month, all you have to do is make sure the right product is shipped to the right person at the right time.

No more one-off orders. No more confusion as to which products need to be sent. Sounds convenient, right?

Well, it’s convenient for your customers, too.

People don’t want to remember to reorder a product every month. We’re busy – that’s just another annoying thing on our to-do list that we might forget.

To help solidify my point, check out this comparison chart Trunk Club created between subscription box services and shopping at the mall:

trunk-club-subscription-services

They may be exaggerating a bit on the $5-a-gallon gas, but they have great points. Subscriptions are really friggin’ convenient!

In fact, here are a few ways to make your own subscription services as convenient as possible:

  • Allow for a free trial. Notice how Trunk Club offers 10 days to try everything on and decide what you want.
  • Offer free shipping. People hate paying for shipping. In fact, it’s the single biggest reason for abandoned carts.
  • Provide excellent customer support. Trunk Club gives you a “personal stylist”. That’s really just a customer support person who really digs fashion. Try to offer a service of your own to add to the value of your subscriptions.

By the way, Shopify store owners can easily add subscription services to their store with this app.

#3: You can build loyalty with customer referrals

Customer referrals are the single most powerful advertising tactics your company has at its disposal. Referrals are often the highest paying and longest lasting customers – and they come for free! No paying per click and no showing them a banner ad.

Referrals are so effective that they influence 81% of people’s buying decisions, compared to the next highest influencer, TV ads, which account for only 65%.

deloitte-buying-decision-influence-graph

You’re probably wondering: What do referrals have to do with subscription signups?

Referrals are easier to gather when you offer subscription services.

Let me explain…

As I said above, subscribers to your products/services are often longer-lasting and higher-paying.

The longer a customer is with you, the more they trust you and the more you become top-of-mind. The more they trust and think about you, the more they talk about you – thus bringing in more referrals, who are longer-lasting and higher-paying and go through the same process! It’s an upward spiral.

Subscriptions -> Loyalty -> Referrals -> More Subscriptions

#4: Subscriptions create recurring payment

Remember that MRR we talked about in the opening paragraph? You want that!

Not only do they create a recurring payment, but subscriptions also increase your customer lifetime value.

subscription-service-customer-lifetime-value
Source

The graph above shows “the ratio of subscription customers’ LTV (customer lifetime value) to transactional customers’ LTV among online merchants who work with the two models.

A value above the green line indicates that these businesses’ subscription models have a higher LTV (a measure of profitability) than their transactional counterparts.

Merchants working with an average transaction value below $25 have customer lifetime values 1.78X higher for subscriptions than for non-subscription customers (LTV ratio).”

In other words, you’ll create consistently higher income with subscription services if your products are under $75.

Case Study: Death Wish Coffee

Death Wish Coffee used to sell ground and full bean coffee by the bag.

After seeing the same customers order from them consistently, they eventually decided to create subscription packages ranging from $14.39 to $71.99 per month – right in the sweet spot, according to the LTV chart above.

subscription-services-case-study-death-wish

According to their founder, Mike, their success in adopting subscription services and driving customer loyalty was “honestly, by adopting Bold”. He’s talking about the BoldCommerce Recurring Orders app for Shopify.

#5: Subscriptions have low customer acquisition costs and increase customer retention

As I’m sure you’ve heard, the cost of acquiring a new customer is 6-7 times higher than retaining an old customer. Subscription services lie in the latter – old customers becoming even more loyal (and at a very low cost).

Easy peasy. But what about customer retention?

  • A 2% increase in Customer Retention has the same effect as decreasing costs by 10% – Leading on the edge of chaos, Emmet Murphy and Mark Murphy.
  • A 5% increase in Customer Retention increases profits up to 125% – Bain & Company.

Talk about the 80/20 rule! Such a small increase in customer retention leads to major business success.

It’s simple: Recurring customers are more loyal and stick around longer.

#6: It’s stupid simple for your customers

Setting up a subscription service is (or at least, should be) stupid simple. You choose your package, enter your payment and shipping information, and get a package to your door every month.

The simpler you can make this process, the higher your conversions will be and the more customers you’ll get (and keep). Why? Cognitive load.

Cognitive load is the psychological term for how much our working memory can handle at any one time. Essentially, it refers to the amount of “stuff” (i.e. navigation bars, offers, images, options) you can work on at one time.

When your cognitive load becomes too high, you experience cognitive overload – a feeling of being overwhelmed and confused.

Offering too many options or making your offers too complex causes your customers to experience cognitive overload and leave.

Subscriptions, when done right, keep this from happening and make it stupid simple for your customers to buy from you.

For example, look how Dollar Shave Club advertises its services:

subscription-services-dollar-shave-ad

#7: You create emotional connections with your customers

People are emotional creatures. Just ask my girlfriend! (Kidding, of course!)

In all seriousness, famous copywriter Joe Sugarman once said:

“You sell on emotion, but you justify a purchase with logic.”

Guess what? He’s backed by science! Let’s dive into the psychology behind how emotions influence what we buy:

  • fMRI neuro-imagery shows that when evaluating brands, consumers primarily use emotions (personal feelings and experiences) rather than information (brand attributes, features, and facts).
  • Advertising research reveals that emotional response to an ad has far greater influence on a consumer’s reported intent to buy a product than does the ad’s content – by a factor of 3-to-1 for television commercials and 2-to-1 for print ads.
  • Research conducted by the Advertising Research Foundation concluded that the emotion of “likeability” is the measure most predictive of whether an advertisement will increase a brand’s sales.
  • Studies show that positive emotions toward a brand have far greater influence on consumer loyalty than trust and other judgments which are based on a brand’s attributes.

I think I’ve hammered it into your head by now – emotional connections are important.

Subscription services are ripe for creating this emotional bond between you and your customers.

Why? Think about it…

  • Subscription services are often very personal – even more so if they’re customized.
  • People use theses products every month, sometimes even every day. Repeated use and exposure to something (especially when you characterize that something as “yours”) causes an emotional connection to form.
  • People tend to subscribe to a business they like. The longer they’re subscribed, the more they like that business. Upward spirals, baby!

Just look at this adorable puppy pop-up (doesn’t that have a nice ring to it?) by BarkBox:

subscription-services-barkbox-popup

They have it easy because people are so in love with their pets, but you can see how something like this would create an emotional connection.

How to get subscribers

And so we’ve arrived – after some thorough convincing, you’re ready to grow your subscription based business.

Whether you already offer a subscription box service or you haven’t broken into the subscription economy, this section is sure to offer great insights.

Let’s start with…

#1: Reach out to influencers

Influencer marketing is easily one of the top digital marketing methods to date. It’s free, effective, and built on relationships rather than money.

Want proof?

Little LIFE Box, a subscription box service offering healthy snacks, skincare, and lifestyle products, used influencer marketing to grow their business to over 1,500 subscribers.

subscription-services-little-life-box

Joseph, the founder of Little LIFE Box, said this about their influencer marketing program:

Part of what we focus on in our advertising strategy is searching for bloggers and looking for people who will talk about the box and review it. We want to get it into the hands of people who will enjoy it. If do they like it or want to talk about it, maybe they even have a significant following. For them, we always offer them to be an affiliate, because it makes the most sense and we will get the most referrals.”

They also gave a little gold nugget of knowledge: offer an affiliate program to influencers. An affiliate program means giving the influencers a small profit for every sale they send your way.

It’s really a win-win; They get paid to enjoy and spread a good product and you make more sales.

So, how do you find the right influencers?

  • Use tools like BuzzSumo, Whalar Labs, or Social Mention to find influencers in your niche.
  • Find them manually by searching for them on social media, using #yourindustry. For example, to find influencers in the healthy lifestyle niche, I would search #fitlife or #healthylifestyle.
  • See who your customers follow on social media. Chances are, they follow the influencers you’ll want to target.

For more tips on influencer marketing, check out this full guide by Shopify.

#2: Create a referral program

Referral programs are the bread and butter of online subscription sales. They’re basically free money.

Speaking of butter, Magic Butter, an online store for Cannabis products, was able to gain an extra 105 referral purchases in a single month by adding a referral program!

subscription-services-referral-program

Setting up a referral program isn’t difficult, either. In fact, ReferralCandy’s referral program comes built in with BoldCommerce’s recurring orders app for Shopify – so you get a subscription program AND a referral program, for the price of one!

For more information, check out this guide on how to promote your referral program.

#3: Advertise with popups

Popups have a love-hate relationship. Everyone hates them, but they work so damn well.

Shopify performed a few tests for this theory, “In one test, popups drove 1,375% more email captures vs. a sidebar opt-in form.

In another test, a website was receiving only 10 to 15 subscribers per day despite getting over 44,000 unique visitors each day. After implementing a popup with a 60 second delay, they began receiving 100-150 emails per day.

referralcandy-post-purchase-popup

There is a way to capitalize on the results while avoiding the hate. The answer lies in making your popups as not annoying as possible.

How, you ask?

  • Only use on-scroll or exit-intent popups. On-scroll popups only appear after the user has scrolled so far down your page – indicating an interest in your site. Exit-intent popups appear when the user’s mouse leaves the browser – indicating they’re going to leave your site.
  • Allow the user to close the popup. Forcing them to refresh the page or find a hidden “x” button is just bad morals. Please don’t do it.
  • Make your popups beautiful. There’s nothing worse than an ugly popup. Make ‘em look good! Bonus points if they’re funny.

Look: Popups can boost your referral program and grow your subscription base. You should at least try them to see how well they perform. You can get a free 14-day trial of Pixelpop if you’re ready to start.

#4: Engage with your customers

This is by far the most fun (and arguably the most effective) way of getting more subscribers.

You see, people love to feel important. They want to know that the businesses they buy from actually care about them. The easiest way to show that is through engagement.

Take Pley, for example. They’re a subscription-based service for children’s toys. Today, Pley offers subscriptions to LEGO collections and kits. If you’ve ever seen the excitement of a kid getting legos, you know how awesome this service is.

excited
via GIPHY

Pley created an online community called PleyWorld, where its most loyal customers can submit their own designs for LEGO kits. The community members vote on the designs, and the winning designs become part of the Pley subscription service.

subscription-services-pleyworld

This kind of customer engagement takes subscriptions, customer loyalty, and referrals to a whole new level. It makes the customers feel like they have an impact on the brands they buy from, which keeps them coming back.

5 Subscription Business Model Examples

There are literally hundreds, if not thousands, of subscription brands to study, and I’ll include 5 of them here.

1. Tesla Will Offer A Subscription Based Service for Full Self-Driving Package

tesla full self-driving package

Tesla plans to offer a pay-as-you-go service for its full self-driving package toward the end of 2020. The package is expected to cost only about $100 per month, allowing users to enjoy the benefits of driving a low-impact Tesla vehicle without having to purchase one flat out.

Considering that a car spends 90 percent of its lifetime parked and climate change is drastically changing the way we experience life on this planet, this subscription service seems to address a few issues all at once.

2. Dollar Flight Club Offers Major Discounts on Flights For A Monthly Fee

subscription service for airline industry

Dollar Flight Club has made a subscription service out of low-cost travel. Customers who sign up for their premium membership will receive regular alerts about extreme price drops and airfare mistakes so that they can get major discounts on airfare without having to monitor the prices.

3. OnlyFans Allows Content Creators to Offer a Subscription Model For Exclusive Content

subscription based pricing model of onlyfans

OnlyFans was built for content creators who, until 2020, have mostly provided content for free on the internet. Social media has prompted this trend for free content by capitalizing on engagement at the expense of content creators and their livelihoods.

Now, content creators can create a monthly subscription for their fans and share exclusive content with paying members.

4. PlayStation Now Has Subscription Option That Includes Free Monthly Downloads

subscription model of paystation now

PlayStation has turned into a multi-billion dollar empire by capitalizing on Game Theory and addiction pathways in unsuspecting teenage brains. These lifelong addictions fueled millions of dollars worth of game purchases over the last few decades, limited only by the hefty price tag on the games.

PlayStation decided to create a subscription service to remove that limitation and now provides free games, major discounts, and multiplayer functionality to users who opt-in to their monthly or annual subscription.

5. Adobe Creative Cloud Gives Access to Adobe Products Through a Monthly Subscription Option

subscription based business model example

Adobe products were once available through annual licensing, which often cost upwards of hundreds of dollars. Once Canva and other easy-to-use design services entered the market, though, Adobe decided to make their products available as a cloud service for an affordable monthly fee. Now, Creative Cloud by Adobe is one of the most popular SaaS companies on the market.

Conclusion

Let’s face it: Subscription services are here to stay.

Recurring payment means great things for your business. It increases your customer lifetime value, thereby increasing your profits and decreasing your costs.

Starting a subscription service on your site is as simple as installing the Recurring Orders app on your Shopify store, creating a few packages, and advertising it to your customers.

It’s so simple that anyone can do it. But, few people do because it seems like extra work. Don’t let a little extra elbow grease hold you back from making massive sales. Create a subscription service today!

Marquis Matson

Marquis Matson

Marquis Matson is an SEO analyst, content marketer, and writer. She specializes in search engine optimization for ecommerce sites in the yoga and wellness niche. She lives as a digital nomad, spending time in Ecuador, California, Thailand, India, Australia, and more. You can find her on LinkedIn, Twitter, at marquismatson.com, or contact her directly at marquis@anafore.com.

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