, , , ,

Insight: The secret ingredient of subscription retail

WM Circle Logo

By: RickFerguson |

Posted on July 6, 2016

Over the past five years or so, subscription retail has become one of the few bright spots in the cratering retail industry. While traditional brick-and-mortar retailers shed profits, stores, and employees, membership in subscription retail offerings, in which consumers pay a monthly fee to receive a monthly box of meal kits, beauty products, or apparel, have demonstrated impressive growth – so much so that a few of these businesses have become acquisition targets for legacy retailers. Why have consumers responded so favorably to paying a monthly fee to access products, if not brands, that they can purchase elsewhere? Here’s the secret ingredient of subscription retail services: they’re actually fee-based loyalty programs.
By Rick Ferguson

PYMNTS.com has a rundown of key growth stats in the subscription “box” retail category, which includes companies such as BarkBox, Birchbox, Blue Apron, and StitchFix:

“In the month of April 2017 alone, subscription box company websites received 37 million visitors, which is said to be an 800 percent increase from 2014, according to Hitwise’s data. The top two subscription box categories that were visited were grocery box/food delivery (33 percent) and beauty (35 percent). Coming in third with just 16 percent of the share was apparel… In its first year alone, Blue Apron saw a 338 percent growth from $77.8 million to $340.8 million in net revenue. Last year, the company generated $795.4 million and has no plans on slowing down…In the United States alone, there are 5.7 million subscribers to the vast array of subscription boxes.”

The growth rate of subscription retail has become so impressive to the otherwise beleaguered retail industry that traditional retailers are getting in on the game: BarkBox has partnered with Target, and Birchbox is rumored to be an acquisition target for Walmart. Other retailers may decide to get in the game themselves; Amazon, for example, is rumored to be getting into the subscription meal service as a way to leverage its Whole Foods acquisition – a rumor which must certainly be giving Blue Apron the vapors.  We must also include in the discussion the 800-pound gorilla of subscription retail: Amazon Prime, which offers a host of hard and soft benefits in exchange for that hefty annual fee.

Many factors have influenced the growth of subscription retail; certainly, the ability to launch a brand swiftly via all-digital platforms, the consumer transition to valuing time and home delivery over cruising for a parking spot outside a mall, and the rise of mobile have all fueled the growth of subscription retail. But there are other psychological factors at work driving success, and these factors can serve as object lessons to any retailer wanting to build stronger customer relationships: subscription services are, in effect, fee-based loyalty programs.

Let’s examine some of the classic loyalty marketing techniques employed by subscription retailers that drive their success. First, simple classification may be helpful; subscription retail falls under three broad categories:

Fee for access: Pioneered by members-only retailers such as Costco and Sam’s Club, these retailers require an annual or monthly fee up front before you can shop. Hard benefits include lower prices made possible by buying items in bulk, as well as cash back for VIP members; soft benefits include in-store samples, ancillary services, and special VIP services.

Two-tiered pricing: Subscription pioneer TechStyle, which operates the Fabletics, ShoeDazzle, and JustFab brands, pioneered a two-tiered pricing model that presents one price for casual shoppers, and deep-discount prices for VIP members who let TechStyle hit their credit card once a month whether they purchase that month or not. Soft benefits include personalization elements and special services for VIP members. Amazon Prime, which began as a free shipping offer for paying members, also fits into this category.

Subscription boxes: Subscription box services charge a flat monthly fee in exchange for a monthly box shipment of goods: complete meals, beauty product samples, grooming products, apparel, pet supplies; you name the category of goods, and chances are someone is willing to ship you a box of those goods in exchange for a monthly fee. Soft benefits often include personalization elements, special pricing, and personalized service.

The most essential reward element of the subscription box model may be time – affluent consumers, in particular, tend to be dual-income or single households of busy professionals willing to pay a premium for those three Blue Apron meals a week because it offers them time back in the form of reduced meal prep and fewer trips to the grocery store. The fee for subscription services also harnesses an important psychological driver of loyalty: the sunk-costs effect, by which you become more committed to using the service after raising your hand by agreeing to pay a fee (the exception to this rule may be gym memberships, in which many people pay a monthly fee to avoid using the service).

Another critical component driving subscription retail success is data-driven personalization; in many cases, subscription retailers have lapped traditional retailers in their ability to leverage customer data to drive relationship growth. Money quote from Forbes:

“John Fetto of Hitwise, who presented at the recent Subscription Summit in Austin says, ‘Personalization is key. Don't be afraid to ask for information from your consumer to help you deliver a more curated experience.’ To be successful in a curated product business, you have to do something retailers have struggled to do for a long time — ask consumers what they want, listen to the answer and act on it. Consumers will give up personal information if they think they'll get a better experience for it. Successful subscription boxes are adapting and personalizing their boxes to each individual consumer. It's an example of what internet retail has been talking about for a long time: mass customization. If a company can make a subscription box with pleasant surprises, they will continue to sell through as long as the customer maintains an interest in discovering new products.”

That, my friends, is the key to strong customer relationships – and subscription retailers have adapted classic loyalty program models and techniques to deliver on the promise to their customers. Subscription retailers aren’t without flaws; as the Forbes article notes, many of these subscription box services are leaky boats, with members canceling their subscriptions after the novelty of receiving the retailers’ products wears off, which requires providers to continually chase new customers. The market for these services is also saturated, which means many of them won’t survive the inevitable marketplace culling.

Still, there’s a reason why Amazon, Target, and Walmart are interested in this game. The subscription retail model harnesses the power of classic fee-based loyalty programs to deliver reward, recognition, and personalization to consumers who dig their brand and products enough to pay for access. Not every retailer needs to get into the subscription game – but every retailer can leverage the power of loyalty marketing to build strong relationships with best customers.

Rick Ferguson is Editor in Chief of the Wise Marketer Group.