How to start a subscription business: A brief guide

love convenience. My groceries should be delivered every week to my home and my dog food automatically replenished every month. Even better, I want my favorite brands surprise me with new products at least once a year. For obvious reasons, I prefer to avoid shopping in stores these days. Ecommerce subscriptions appeal to me on many levels.

I’m not the only one. McKinsey estimates that 15% of Americans have signed up to one or more subscriptions in order to receive products on an ongoing basis. The subscription ecommerce market will reach $473 billion by 2025 from $15 billion in 2019, which is a huge opportunity for both existing and future business owners.

Subscription ecommerce is expected to grow to $473 billion by 2025.

This post is for those who are interested in starting a subscription ecommerce store, or adding subscription services to their Shopify store. Below I will outline the benefits of recurring income, the different subscription business models and how to get started with Shopify.

Why not start a subscription company?

Subscription ecommerce offers online shoppers an easy, personal, and less-expensive way to purchase what they need and want on a regular basis. Companies can also scale their businesses with predictable monthly recurring revenues (MRR).

Let’s look at the advantages of a subscription-based business model.

1. Predictable revenue

It is a great way to streamline everything, from sales forecasting and inventory planning, by knowing how much money comes in each month. This also allows you to know how much money you can reinvest in your business’ growth.

2. 2. More cash in your pocket

Subscription businesses often require full payment upfront at a reduced price. This buffer is great for cash flow and can give startups much-needed security.

3. To acquire customers, spend less

Pay-per-product pricing models require businesses to invest in marketing and sales to increase their revenue and attract new customers. Startup failures are often caused by rising customer acquisition costs. Subscription-based models allow customers to pay you regularly so that you don’t need to invest in new customers.

It can be 5-10 times more expensive to acquire a new customer than it is to retain an existing customer.

4. Loyalty and loyalty are the best.

Subscriptions are recurring, creating a vicious cycle. Regular purchases give you deeper insight into customers’ behaviour, which allows for you to improve your personalized service and keep customers coming back.

Subscription businesses can create loyal customers who spend 67% more than new customers if they are done right. This is the essence of customer life value and it is one of the most important factors that determine a company’s success.

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5. It makes upselling and cross-selling much easier

A subscription model allows you to generate more revenue from your existing customers. You build trust with customers by being in constant contact with them. Because they know that you offer a valuable service, it makes it easier to market additional products and services to them.

If done correctly, launching a subscription business can prove to be very lucrative. First, choose the right subscription model for your business.

Selecting the right subscription model

There are three main types of subscriptions: replenishment, curation, and access. Each one has its perks and drawbacks. Choosing the right subscription for you will depend on the type of physical and electronic products that you are selling, your ability, and your unique goals and business ideas.

Model for curating (i.e. subscription boxes)

This subscription model is most popular and has been adopted by Blue Apron, Birchbox, and Stitch Fix. These are your subscription boxes that aim to delight and surprise customers with unique items and personalized experiences.

These businesses typically sell products in the fashion, beauty, or food categories. However, the model is applicable to a broad range of products and is growing every year.

Benefits

  • High profit potential. Subscription box subscriptions can be very lucrative. In fact, a handful of curator brands are responsible for the growth and share in the subscription market. Subscription boxes are considered a “splurge” and can cost between $15 and $100 per month. They also promote discovery of new products. This profit model is more profitable than other food-business ideas.

There are risks

  • High churn. These businesses are characterized by novelty, which drives customer enthusiasm. This model is more likely to experience high rates of customer turnover. These subscription boxes are often niche products that are not essential, so they are able to thrive in a boom economy, but fall apart during recessions.
  • Operational complexity. These businesses are more costly than the subscription box market, but they also have significantly higher operating costs. This includes packaging and regular shipping.

Model for Replenishment

This model is all about convenience, cost savings, and ease of use. Subscribers to replenishment subscriptions can automate the purchase essential items, often at a discounted price.

Many products do not need to be replenished often, so it is important to consider the products you are selling when deciding on a business model. The replenishment model is a good fit for commodities and convenience items such as razors, diapers and vitamins.

Benefits

  • Higher conversion rates. More customers consider replenishment services than the other models (65%).
  • Higher retention rates. Due to the nature and products of these businesses, replenishment models have particularly high long-term subscription rates. 45% of members have opted for at least one calendar year.

Long-term subscription rates for replenishment services are particularly high: 45% of subscribers have been with us at least one year.

Fresh Patch delivers hydroponically grown grass patches to pet owners. With over 80% of total revenue attributed to subscriptions, recurring revenue is the backbone of the company’s business model. Fresh Patch

There are risks

  • Low margins. This business model often requires companies to offer discounts and compete on price. Businesses must keep costs low and work at scale to make profits.

Access business model

Access subscribers pay a monthly subscription fee to receive lower prices and members-only perks. Access subscriptions include JustFab, NatureBox and Thrive Market. Their primary benefit is providing exclusivity to customers.

Benefits

  • Customer satisfaction is enhanced. Customers pay for exclusive access to perks. This gives you the opportunity to offer personalized offers to deepen your customer relationship. This value can be extended by creating a community where members can interact via forums or Facebook groups.
  • Bundling possibilities. Customers have the opportunity to get a variety of products and non-tangibles, such as discounts for future purchases, in one membership.

There are risks

  • Greater time investment. Access does not require you to add a product or service to checkout. However, you need to ensure that your membership offer is strong enough and maintained consistently to provide value for your customers.

Bonus: Subscriber business model

This is not a business model. However, it is a hybrid approach that allows for subscription services to be added to existing businesses. This revenue model is becoming more popular as companies shift to it. It allows you to explore the subscription ecosystem without having to commit or pivot your business.

Here are some tips to make the subscription model work for your business

Subscription businesses face the greatest risk from churn, according to all reports. Subscription customers can be very sticky once they find the right service. These are some ways to reduce churn and make a subscription business profitable.

1. 1. Evaluate the viability of your product

Evaluating your product/market fit is the first step to any business. Particularly in the subscription market, certain product categories are highly saturated, making it much more difficult to enter the market.

The meal-kit category, for example, has high cancellation rates within six months. This is due to the competitive pricing and the similarities among the top players. Make sure you do your research and monitor your competitors.

2. 2. Be clear about your business goals

What is your goal? Is it revenue, customer acquisition, or sales volume? Whatever your business goals are, you need to keep them top-of-mind–especially when choosing your business model.

3. Pricing at the beginning should be conservative

Subscription customers who are prolific at churning do so quickly. You shouldn’t invest in free trials or large discounts unless you have a clear return on your investment. Pricing should be constantly tested and adapted as your company grows.

4. 4.Invest in personalization

Customers expect personalized subscriptions to be more customized over time, regardless of business model. 28% of curation subscribers stated that a personal experience is the main reason they continue to subscribe.

Are you able to scale personalization efforts with your own data expertise? Do you have the funds to invest?

5. Prioritize retention strategies

You must prioritize acquisition during the initial stages of your business in order to make sales. Once you have the ball rolling, it is time to change tactics and concentrate on customer loyalty strategies.

Keep in mind that it costs more to acquire customers than to keep them, and that loyal customers can provide more value. Subscription companies tend to focus all their efforts on acquiring new customers. However, this is not the best way to grow your business.

6. Diversify your marketing channels and tactics

Subscription businesses use different channels to engage existing subscribers and attract new customers. Influencer marketing is a great way to gain social influence if you are just starting out.

Subscription-based businesses rely on customers engaging regularly and meaningfully, email is an essential tool for all models of business. Remember that every subscription model has its own “marketing match.” For the curation model, affiliate Marketing is the best acquisition channel. These recurring packages offer customers a marketing platform that allows them to interact with them.

7. 7.

You should monitor and analyze voluntary churn (customers quitting their subscriptions) in order to continuously improve your service.

8. 8.

Involuntary churn can be caused by credit card expiry, loss, or theft, address changes, and network errors.

Profitwell states that involuntary or unintentional churn accounts for 20-40% of total churn. This means that being proactive about addressing these issues can have a significant impact on your bottom line.

How to set up a subscription company on Shopify

Shopify makes it easy to launch a subscription company. You have two options: either add Shopify apps to your store, or create your own solution.

Apps to consider

Installing any one of these subscription management apps can make it easy to create a subscription offer:

  1. Recurring Payments . Manage, create, and sell subscriptions using our native platform.
  2. Bold Subscribers. Designed for enterprise companies, Bold allows you to customize, manage and scale a subscription company.
  3. Subscribe to Shopify by ReCharge. Manage and quickly launch subscriptions.
  4. Ordergroove. Only for Shopify Plus businesses, Ordergroove facilitates recurring relationships with customers.

Shopify offers more options. To find the right app for your business, visit Shopify’s subscription apps collection .

Create your custom solution

We recently launched APIs along with tooling that will allow partners and developers to create new subscription experiences within Shopify Checkout. Shopify Checkout now allows developers to build, so merchants don’t have to choose whether they want to sell subscription products or use Shopify’s checkout.

Shopify makes it easy for merchants to decide between selling subscription products or using Shopify’s checkout.

You don’t need to manage multiple checkouts. Your customers will enjoy the same seamless checkout experience regardless of whether they are purchasing a one-off or recurring product.

These resources are available for you right now:

This is the first step towards improving checkout extensibility. Developers can customize our checkout to better meet merchant needs. Keep an eye out for a wider extension in 2021, as well as the release of the first subscription and upsell partner apps, which will be available in time for the holiday season.