A subscription business model can be a lucrative way to increase your revenue. However, if you don't know how to structure it correctly, you may completely tank your business.
Subscription businesses provide companies with predictable revenue. With a steady revenue stream, business owners need to focus on customer retention, churn rates, and how to continue steadily growing the business and hit your desired metrics.
After building an 8-figure subscription business, where it accounted for 50% of revenues, there are a few insights I picked up that I wanted to share with you all.
The perfect business
When I think about the perfect business, this is what I think about:
- High AOV, low frequency of purchase
- Low AOV, high frequency of purchase
- Ships fairly cheap
- High margins in the product
- Consumption of the product to encourage re-purchase/refill (aka subscription)
- Easy ability to create new variants for exclusives & drops
When you put many of these traits together, you get a great opportunity to build a subscription business. There are so many types of subscriptions with monthly fees that you can offer. Many business verticals excel with a subscription pricing structure.
Successful subscription businesses often involve the following products: beverages, foods/snacks, cosmetics, CBD, protein powders, or anything that fits into a routine.
In order to operate your business with a subscription revenue model, you need to laser focus on customer churn. This refers to when customers cancel your service due to any reason ranging from a lack of usage, too high of a monthly fee, or a shift in preference or behavior.
To lower your churn rate, you need to listen to your customers and improve your relationship management to ensure customer success.
Subscription model tech stack
Before we talk through the benefits for the brands and the consumers, let's talk through the technology that enables you to offer subscription boxes and subscription services.
I'm going to guess that you're likely on Shopify, so we'll direct this to be Shopify-focused subscriptions. There are two main apps: Smartrr & ReCharge Subscriptions.
Smartrr just recently launched but has been taking the industry by storm with clients like Misfits Markets, Shutterstock, Behave Candy, and others. They put a strong emphasis on the backend subscription management portion. This is the part where ReCharge fell short leading to high churn and misleading analytics.
ReCharge is a long-time player in this space and hasn't innovated much on their capabilities simply because they didn't need to do that since they were the only player in the market. I've built most brands using ReCharge which has made Smartrr even more enticing. The one thing ReCharge has is ElectricSMS, an SMS platform to help consumers manage their subscriptions.
DTC brand subscription strategy
As a brand, you have to make sure that you are creating something of value.
At the end of the day, you can't expect a customer to purchase or subscribe to anything that doesn't feel like it's bringing them value. The trade-off to creating such value is that you have (almost) guaranteed monthly recurring revenue (MRR) and as a business, a much higher valuation. In addition, you own the subscribers and will not have to pay "rent" on ad platforms to acquire that order. This will lower your customer acquisition costs (CAC) in the long term.
In exchange, you must:
- Create a reason/offer/discount to turn people onto subscribing
- Have reasons for people to subscribe who fit the sub-genre of "Superfans"
Superfans are passionate customers who live and breathe your brand and products. They are your ambassadors who buy into your mission and help share it with the world.
You want to identify Superfans in your customer base and do everything you can to convert new customers to reach that level of fandom. This requires successfully managing the customer relationship, courting potential customers, and doing what you can to meet their needs.
You can attract Superfans by offering unique subscriber adoption tactics such as:
- Exclusive drops
- Exclusive flavors/scents/colors/variants/materials
- Priority access to new flavors/scents/colors/variants
- Discounts/Better pricing (10-20%)
- Free shipping (a given)
- Access to people/events through the brand
- Access to a closed community (Groups, IG Close Friends, etc)
These Superfans will share your popularity with their followings on social media and influence other customers' behavior. Superfans also have a high customer lifetime value (LTV) since they are so passionate about your product and are not one-time purchasers.
Giving customers what they want
There are tons of great ways to make a subscription great. At the end of the day, though, if your product isn't something people want on a subscription, there is no amount of discounts, perks, free trials, or premium offerings that will turn it into a thriving subscription business.
To a consumer, you have to remember that your subscription is one of many. If you're not fitting something into a routine and your subscription serves as a convenience, you're fighting an uphill battle from the beginning.