How to start a subscription based business? The first thing you should do is read this guide. Subscription e-commerce is a fast-growing new form of shopping online. Pioneered by content streaming services like Netflix and Amazon Prime; it now seems like you can sign up for a subscription for anything. Healthy meal and recipe kits, beauty boxes, personal styling and health supplements.
According to a recent consumer survey conducted by the global market and industry research firm McKinsey & Company; 15% of online consumers have joined up for one or more subscriptions to get products on a regular basis, most commonly in the form of monthly boxes. So, this is our ultimate guide; how to start a subscription-based business that goes the distance.
How do subscription-based companies make money?
These e-commerce subscription services provide these customers—often younger, wealthier city dwellers—with a handy, tailored, and frequently lower-cost option to purchase what they want and need. However, consumers can also easily cancel services that do not provide great end-to-end experiences. Hence, churn rates are high. So successful e-commerce subscription services that retain customers are doing something right.
Over the last five years, the subscription e-commerce market has grown exponentially by 100% year on year. In 2016, the most prominent e-commerce businesses made $2.6 billion in sales. Evidently, this is a steep rise from $57.0 million in 2011.
New start-ups have targeted a variety of commercial sectors. These include premium beer and wine supplies, contact lenses, child and infant supplies, cosmetics, meal kits, pet food, feminine products, razors, underwear, fashion for both genders, video games, and even vitamins.
How do subscription based companies make money? Easy. Many of these businesses run on huge venture capital investments which helps when you’re asking how to start a subscription based business.
Are subscription-based models the future?
In fact, the subscription e-commerce market is expected to grow to $473 billion by 2025, up from $15 billion in 2019—making it a lucrative potential for both present and aspiring entrepreneurs.
This is the post for you if you want to add subscription services to your Lumipay store or establish a subscription e-commerce business from scratch. I’ll go through the advantages of recurring revenue, the various subscription business models, and how to get started using Lumipay for your business in the sections below.
What are the benefits of starting a subscription business?
Subscription e-commerce firms, in a nutshell, provide online buyers with a convenient, tailored, and cost-effective option to buy what they want and need on a regular basis. Therefore, this means new businesses generate a regular monthly recurring revenue (MRR), helping them to grow.
Let’s take a look at the advantages of a subscription-based business model:
- Consistent revenue: An accurate projection of how much money comes in per month is worth its weight in gold. From sales forecasting to inventory planning, it makes everything easier. It also means you now have an accurate picture about how much you can invest in your company’s growth.
- Money upfront: Many subscription services require full payment up front in exchange for a discount. This buffer can give entrepreneurs much-needed peace of mind in addition to helping with cash flow.
- A repeat customer is gold: Subscriptions’ recurring nature creates a virtuous cycle: recurrent purchases provide greater insights into your customers’ behaviour. This allows you to continuously improve the personalised experience you provide and, as a result, keep customers coming back. Businesses that run on subscriptions, when done right, create incredibly loyal, repeat consumers, who spend 67 percent more than new customers. Customer lifetime value is based on this assumption, and it is one of the most critical aspects in determining a company’s success.
- Spend less on customer acquisition: A pay-per-product pricing model business must invest in marketing and customer acquisition on a regular basis. This is vital to attract new consumers and boost revenue. A major cause of start-up failure is rising client acquisition costs. Consumers pay you on a regular basis using a subscription-based model. So, you don’t have to invest as much in new customers to keep your business going.
- Upselling made easy: You’re in a unique position to gain additional money from existing consumers if you use a subscription model. A trustworthy, communicative relationship already exists between you and your customer. Therefore, you can capitalise on that! Because customers already know you provide a useful service, it’s easier to sell them additional products or services. If done correctly, starting a subscription business can be incredibly profitable. The first step is to choose whether the subscription model is suitable for your company.
What are the challenges?
There are real advantages to a subscription-based business model, however, subscription e-commerce has certain possible downsides or issues. One such downside is that acquiring new customers can be difficult. Customers are being asked to commit rather than make a one-time purchase, which might make it more difficult to sell.
Many subscription companies strive to make it as simple as possible to sign up by combining good UX (ensuring that product selection and checkout are both simple and straightforward), free trials, and explicit onboarding. Maintaining client interest might be difficult as well.
Some clients may become bored with the products, or there may be difficulties determining the number of products that will work for a variety of buyers. The greatest subscription businesses will put their products to the test and learn from their customers’ comments, as well as work hard to keep things new and engaging for their clients.
In some respects, it’s a good concept because it makes signing up for the boxes feel less of a commitment in the first place. Customers are also less inclined to return things once they have them in their hands. It’s a convincing model. If you’re thinking about starting your own subscription airline, there are a few things to think about.
How do I start a subscription model business?
The very first thing we advise you to do is work out if the product or service you are offering suits a subscription based business model. How to start a subscription based business is one of our most commonly asked questions. This is hardly surprising given how attractive regular subscriptions are to any business. Yet, really working out whether you can offer your consumers a regular and consistent value proposition is the fundamental question here.
Is your business suitable?
Do your items lend themselves to a subscription-based model? It’s critical to consider how frequently clients will need to acquire the things you sell, as well as if they’re a good fit. Examine your data. Also, examine some product purchasing trends to see if there are any items that clients buy on a frequent basis.
Customers should expect savings on subscriptions when compared to purchasing items on a one-time basis. When initiating a subscription, remember to account for this. If you can’t offer a sweetener, then what’s the value proposition for your regular customer?
Make retention strategies a top priority
In order to get sales in the early phases, you must prioritise acquisition. However, after you’ve gotten things going, it’s time to shift gears and focus on customer retention strategies. It’s a common maxim in the business world; acquiring a customer is more expensive than keeping one. You will glean way more value from a loyal customer base. Most subscription businesses focus all of their efforts on obtaining new customers, but this isn’t the most efficient approach to expand.
Diversify your marketing methods
To attract new customers and engage existing members, subscription business models employ a variety of media. Influencer marketing is big in the subscription business. It can help you establish social clout especially if you’re just getting started. Email remains a key tool for all business types. However, subscription-based organisations really rely on frequent and meaningful client connection. It’s important to remember that each subscription business model has its own “marketing match.” Affiliate marketing, for example, is the most effective acquisition channel for the curation model. The built-in marketing surface of recurring packages allows you to engage with those customers.
Constantly audit your churn rate
It goes without saying that in order to improve your service, you should track and analyse voluntary churn (customers who terminate their membership). What about involuntary churn, though? Over the course of a subscription customer’s life-cycle, expired, lost, or stolen payment cards, address changes, and network problems all contribute to involuntary churn.
Other subscription models
If your products don’t fit the subscription box or replenishment model, you might look at other subscription options, such as access models. This is one way you get to access e-commerce subscriptions if you don’t think your product or service lends itself to regular curation. Take a look at some of our access models below.
Other subscription access models
Of course, Amazon Prime is an example, but other shops have followed suit and introduced comparable services. With their Premier Delivery service, ASOS is one prime example. The British online retail giant has gone from strength to strength since its inception in 2000. They constantly pivot and adjust their strategy to stay ahead of the game. Customers now can obtain free and unlimited next-day Asos delivery for just £9.95 per year. It brings in consistent revenue for ASOS, but its greatest worth may be as a client retention strategy. Customers have a strong incentive to select ASOS over competitors once they have paid for a year’s worth of deliveries. If this type of offer is successful, the additional sales generated by subscribers should cover any shipping costs.
Selecting the most appropriate subscription business model
Subscriptions are divided into three categories: curation, replenishment, and access. They all have advantages and disadvantages, so figuring out which is best for you will depend on the types of physical and digital things you offer, your capacity, and your particular business ideas and ambitions. Choosing the correct model is vital in answering the question; how to start a subscription based business.
Curation: These are things like subscription boxes, meal kits, personalised vitamin plan boxes. Fashion and beauty products are incredibly suitable for this type of subscription. Food and wine too. These are high value products with constantly changing trends.
Replenishment: Replenishment subscriptions let customers automate the purchasing of critical, often-used supplies. This model usually offers a discount to those who subscribe rather than make one-time purchases. Most products don’t need to be restocked on a regular basis, so the types of products you sell are crucial in this company strategy. Razors, diapers, and pet food are ideal examples of commodities that work well with this model. Hairstory is a brand with a special no foam, all natural shampoo, they only have a small selection of products but customers constantly need to replenish the products they use.
Access: Access-only subscribers pay a regular subscription fee in exchange for discounted rates or exclusive benefits. JustFab, NatureBox, and Thrive Market are examples of access subscription businesses, and their main value proposition is to provide customers with exclusivity.
Subscription e-commerce is a compelling business model that offers significant advantages in terms of client retention and predictable and consistent revenue. In addition to all the other advantages discussed in this ‘How to Start a Subscription Based Business’ guide.
Many of the most successful subscription businesses are able to focus on a small number of items, and the best of them will use the data and feedback they collect to constantly refine and improve their offering. This may be less acceptable or simple for shops with broad product ranges. It’s also more difficult to pivot once you’ve established yourself as an internet merchant. Offering new models to clients can be hampered by technology and outdated systems.
Whether you’re adding a subscription option to an existing business or starting from scratch, Lumipay makes it simple to start a subscription business. There are two options: integrate Lumipay payment gateway into your existing store or create your own unique, custom-built Lumipay solution.