How do you start a subscription business? Our guide explains the different types of subscription commerce and what you need to consider when starting one.
Subscription commerce is picking up speed around the world. With their subscription boxes, providers make shopping easier for their customers and save valuable time. And the principle is very simple: customers order a box of their choice and have it delivered to their home on certain dates.
In this post, we explain what subscription commerce means. And if you want to offer such a subscription to your customers, we will show you what you need to consider to start a subscription business.
What exactly does subscription commerce mean?
For some years now, online shoppers have not only been able to buy goods individually and once through subscription commerce offers (also known as subscription commerce), but can also subscribe to certain goods or groups of goods at specific delivery times (usually monthly or weekly).
Subscription commerce works very simply: the subscriber pays the agreed price each month and receives the desired goods for the agreed date. And there are enough examples of successful subscription commerce companies. But: even if subscription commerce was considered a hot trend in the start-up scene some time ago, not all providers survived.
The key to success is that the business relationship between you as a dealer and your customer must be significantly longer than with alternative online shop models. And the real challenge is to keep this relationship going and keep the churn rate low. More on that later.
Different types of subscription commerce
First, let’s look at the different types of subscription commerce models. There are basically three types of subscription commerce :
- Replenishment : Products that are in constant need of the customer are always delivered here.
- Surprise boxes: In these boxes, products in a category are constantly being put together again.
- Club membership : This allows customers access to cheaper offers.
The advantage of subscription commerce for retailers and customers
Even if some startups have already failed, subscription commerce can be a good alternative to the “normal” business model of an online shop. With Subscription Commerce, you can build a long-term relationship with your customers and plan your own purchase or production of your goods more easily.
Your customer usually loves one thing in particular with this business model: convenience. Whether vegetable crate, diaper box or cosmetics: Deliveries are made on the desired day and the box is parked where it was agreed. Payment is made either via a service provider or simply via a debit order.
What needs to be considered to start a subscription business?
Basically, the concept of subscription commerce is quite simple: You are a dealer and you have customers who not only order a product once, but have it delivered regularly. The first problem here is that customers often only stay for a relatively short period of time. A big success factor of your subscription business is to be 100% clear about your so-called Customer Lifetime Value (CLV) .
Customers may subscribe to your products forever, but in most cases only for a while. You always have to win new customers – and that usually costs money that you have to earn again with the sale of the products. Whether you are successful when you start a subscription business depends largely on the business model and the exact tracking of online marketing key figures.
However, one thing applies to everyone: Your customers must love the product you deliver and want to have it again and again. This is the only way to create a regular need and recurring turnover for your startup. This need must be met in the agreed delivery intervals, but not so much can be delivered that the customer subsequently has too much of it.
Always need to be winning new customers
Even if some customers stay with a provider for a long time, you cannot be sure that they will do the same with your products. Most customers leave after a time. Whether you are successful when you start a subscription business depends on whether you can continuously win new customers. This phenomenon can be observed with many providers.
Sometimes, even after a while, customers have had enough of the products and are somewhat saturated. If you only offer a single product, the demand will soon be met or even exceeded. If the customers do not get a choice of another product then you hardly have any set screw on which you can increase your sales – unless you always find new customers or your business model has enough potential to reduce the customer loss through additional sales to catch up.
These subscription commerce providers are successful
Whether a product is actually suitable for subscription commerce depends on it itself and the habits of the customers. If a product has to be bought at regular intervals, it is generally suitable for a subscription model. This applies to coffee, tea, food, vegetables, cosmetics, diapers, razor blades, toilet paper, but also office items such as ink and toner cartridges. Cups, dolls, DVDs, works of art and other collectibles have also been used for subscription models.
Tips to start a subscription business
- Search for one – or even better – several suitable products. If you already have an online shop, the products should go with it.
- Even if customers appreciate their convenience, you should enable them to cancel their subscription at any time. If your products are good, you just have to trust that your customers will be satisfied with them and your service.
- Subscription commerce ensures regular sales and binds customers to your shop. You should also offer your customers an advantage. This can either be a waiver of shipping costs or a good discount.
- Pay attention to the costs: You know beforehand how much product, packaging and other things are involved. This makes it easier for you to optimize costs. You can also negotiate discounts with your suppliers and purchase packaging material in large quantities and therefore cheaper.
- Check whether your online shop is suitable for subscription commerce. Not every shop software simply allows the implementation and management of subscription commerce. You should also include these costs in your calculation.
An alternative: curated shopping
If your products in the online shop are only suitable for subscription commerce to a limited extent, you can offer your customers curated shopping as an alternative. Your customers will also regularly receive products here. However, you choose these for them.
When it comes to tea, spices or chocolate, you could send your customers a selection of teas or treats once a month. Spices, delicacies or accessories for clothing could also be sent in this way. You see: Subscription commerce can be integrated for almost all products. However, you have to be aware that you really have to reliably supply your customers with their products.
It depends on the technical infrastructure
If you want to offer your customers a subscription, your online shop, your merchandise management, your logistics and the payment options must be coordinated. You should make sure that your customers’ payments are automated.
There are providers of payment systems that automatically monitor and process your payments. You do not have to worry about it, but can concentrate fully on your subscription commerce business as well as customer acquisition and retention.
Subscription or soft subscription, that is the question
While the customer is bound to the retailer with a classic subscription with fixed terms, a soft subscription leaves more scope. The customer can change delivery intervals, term and notice period more easily. The billing modalities can also be different.
The price is either fixed or dependent on consumption. In addition, a monthly basic fee can be combined with a price depending on consumption. There is also the option of a trial subscription for a limited time or the so-called freemium model , in which a basic service is free of charge and this can be expanded with other – then paid – services.
Select the right provider for payment transactions
Which provider is the right one for your specific subscription commerce model depends on your products and the subscription model you have chosen. If monthly fixed amounts are due, a payment service provider is sufficient.
However, if you offer a fixed monthly fee (like SaaS software) and want to offer additional products, you should choose a recurring billing provider.
There you can manage your subscriptions, create and send invoices and send reminders. Some payment providers only pay for downloads, while others also process payments for physical products.
Examples of successful (and failed) subscription business startups
Black socks: The Swiss online shop blacksocks.com is one of the first to establish a subscription model for black socks. Or as you call it: a SOCKSCRIPTION ™ business. However, since many of the subscribers now have enough black socks, the operators of Blacksocks have expanded their range to include underwear and white shirts.
Cooking box with recipe: HelloFresh sends out cooking boxes. These not only contain food, but also the right recipes that customers can use to cook. Each box is sufficient for several meals and has been successfully on the market for some time.
Cook fresh every week – even without shopping. That is HelloFresh’s credo.
Cosmetic in trial size : Glossybox is primarily subscribed to by women and contains cosmetics as well as beauty products, always in trial size . Initially launched in 17 countries, Glossybox had to limit its exposure to ten countries.
First test, then buy: Glossybox appeals to its target group primarily through the small cosmetic trial sizes.
Game and craft box: Tollabox is one of the examples of how difficult and complex subscription commerce can be. The box contained pedagogically high-quality play and handicraft materials for children. Although the customers were very satisfied and the startup had a successful crowdfunding campaign, Tollabox had to file for bankruptcy. Here the costs for acquiring new customers were very high and the subscription times for customers too low.
The customers were satisfied, but in the end it was not enough: Tollabox mainly failed due to the lack of customer loyalty.
Conclusion: subscription commerce is complex
The whole topic of subscription commerce is complex. It is not just a question of choosing the right products and niches for your customers. It is also important that you build the necessary infrastructure for your online shop and use online marketing tactics to ensure a steady stream of paying customers.
If you offer SaaS applications or digital content, you need different tariffs and payment methods than for physical goods. There is a corresponding provider for each option. Many of the common online shop systems already offer subscription commerce infrastructures. But there are also highly specialized providers for special solutions.
In general, it always makes sense if you first determine which goods your customers want to subscribe to on a regular basis. And if you have found a good product category, you should start immediately. Because if you don’t dare, you don’t win.