Are You Having the Wrong Conversation About Subscription Business?

Published 15 April 2019 by Richard Townsend

The thought is slowly dawning on retailers and consumer packaged goods companies alike that they might be having the wrong conversation about subscription models and direct to consumer (D2C) services.

The current narrative; that all businesses will soon be subscription businesses according to Stanford; that you must foresee a route to a subscription business model in your future or else (Forbes magazine), is not helpful.

That such a narrative exists at all is understandable. It’s been led by a string of seemingly shrewd acquisitions by Unilever and enhanced with news elsewhere.

Fashion retailer American Eagle Outfitters recently launched a new rental subscription service. The apparel giant will allow customers to rent three items at a time and exchange them as often as they like for a subscription fee of US$49.95.

McKinsey tells us that the subscription e-commerce market grew by more than 100 per cent every year since 2013. Wherever you care to look, you’ll find talking heads spouting visions of a subscription-based future, coupled with warnings for the laggards.

“Everything you purchase — from transportation to entertainment to groceries — will soon come with a monthly plan,” wrote Zuora CEO Tien Tzuo last August. “If you’re not shifting to this business model now,” said the former Salesforce CMO, “chances are that in a few years you might not have any business left to shift.”

The appeal that’s driving excitement around subscription-based businesses is clear. As consumers get more interested in shaping their retail and brand experiences, the opportunity for those brands to give their customers premium, personalised service, increase loyalty and lock down recurring revenue, is deliciously tempting.

 

Beware of the wrong conversation

But if this is the wrong conversation to be having, what is the right one?

For a clue, take a look at American Eagle Outfitters’ social media pages where the subscription service, named AE Style Drop, is receiving mixed reviews.

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Launching a subscription service tomorrow is not by any means straightforward or easy. There’s a far wider engagement strategy required to achieve this end goal. To switch the way you do business so entirely and radically takes years of careful learning.

If Unilever is the poster-boy for switching to subscription services then we should hold its process up to the light and learn from it. Unilever’s £150m purchase of global healthy food delivery company Graze will boost the CPG company’s revenues - D2C accounts for 5% of Unilever’s revenues, but this could easily double according to Ronan Stafford, research director at data and analytics firm GlobalData.

What will also be boosted however is Unilever’s learning, knowledge and capability as it gets close access to Graze’s operations. This will be added everything it has learned since its $1bn grab of subscription razor business Dollar Shave Club in 2016.

That Kellogg and PepsiCo were said to have expressed interest in Graze according to Just-Food.com is no surprise. What the global CPG businesses understand is that they can’t become overnight subscription businesses that serve customers directly. Instead they appreciate the need to educate themselves.

Unilever in particular has long committed to educating its teams across sales and marketing. That commitment to its staff has in no way been voluntary or considered a mere perk for Unilever employees. Improving digital capability through Circus Street's training and learning modules has been a deliberate strategy to move with trends and retain relationships with a consumer that doesn’t stand still.

 

‘Must-Have’ Attitude Can Spell Danger

Now others are starting to follow suit and news of ‘an imminent subscription model launch’ is becoming ‘must-have’ for hungry boardrooms. Besides the Graze and American Eagle moves, Citymapper launched a subscription travel card in London to rival TfL’s Oyster card, and IKEA started trialling a new subscription-based furniture leasing model. But assuming success as a given whilst lacking proper research into whether a subscription model is appropriate for your business and at what price customers need to and will pay in order to fund your growth has created a graveyard of subscription failures.

Talking about the appeal of subscription services, Dollar Shave Club founder Michael Dubin said it’s “not always sustainable if you’re selling something that people want and don’t need.”

 

One thing remains the same: retail is detail

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A successful subscription service requires an incredible amount of attention to detail. It’s not just a product or service, it’s the entire experience from first contact, through the purchase story to sale and receipt.

High-end meal-delivery service Sprig which had raised $56.7 million to cook and deliver its own meals, closed its doors in 2017. On collapsing its executives cited “the complexity of owning meal production through delivery at scale.” It was a business making something customers wanted, but without looking at the entire customer journey and ensuring every point in that journey was attended to, it fell short of delivering what it promised.

The ‘tech revolution’ is making it much easier for companies to manage the supply chain as well as owning every customer touch point. Monitoring those interactions and delivering value can only be done with the skills to service each subscriber as an individual across every need, online or offline.

 

Start over with pricing

Digital Marketing Strategy-Part 1

While it may seem an obvious consideration, many companies fail to calculate how much their product or service needs to charge subscribers to generate the revenue to survive.

Watch subscription service Eleven James is a prime example, with ambition outweighing revenue. Without external funding, the business collapsed and vanished.

Delivery startup Doorman closed because it hadn’t planned to become successful as quickly as it did and therefore put a price tag on the service that didn’t cover the costs. Hiking up the costs seemingly sent consumers running for the hills.

 

Our ‘Netflix existence’ has skewed expectations

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In a world where people demand convenience, but also crave repetition and certainty, the subscription model can deliver what consumers want but it must be backed up with a strong digital presence and understanding.

What looks like smooth and speedy customer experience for the best subscription and D2C businesses is delivered only thanks to a large back-end operation and sophisticated digital competency.

Subscription models probably are the future, that much is true. Beware though of becoming seduced by the wrong conversation without considering the right one. Ask yourself: “how do we do it? What’s our plan? What needs to happen for us to succeed?”

You don’t have to be ‘new’ to succeed as a subscription business, you just need to take it steadily and upgrade your capability while upgrading your business model.

Because ultimately, if you think a subscription business will be an easy win to bring in tomorrow’s cash, the only thing you’ve subscribed to is failure.

To find out how we can help you plan the next steps to your future business model and provide your team with the skills to get you there, simply get in touch

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