Should retailers set up subscription services?

There has been a boom in the subscription market over the last few years, with companies including Birchbox, Graze and Dollar Shave Club making headlines for their intuitive business models. These companies have experienced incredible growth because they have identified a consumer need for repetitive purchases, effectively taking the hard work out of shopping.

Around 89% of the UK population (58 million Brits) are already subscribed to a service, according to recent statistics from subscription software provider Zuora and YouGov, and the subscription economy has seen an 11% increase in adoption from UK adults since last year.

Meanwhile, the average monthly spend on subscription services has tripled in the last year from £18.49 in 2016 to £56 in 2017.

Around 1.7 million UK shoppers now opt for subscription grocery services, while 600,000 consumers are eating their meals from meal-kit deliveries rather than buying ingredients from the shops.

Gousto is one such meal-kit subscription business and is one of the UK’s fastest growing companies.

But Gousto’s CEO and founder, Timo Boldt, is quick to point out his meal-box business, which has raised over £28 million in funding and reported over 100% growth, is not the only company to capitalise on this new consumer trend for repetitive deliveries.

“Consumers are turning to subscription services which offer maximum convenience in all areas of their lives, from news and magazine subscriptions to video streaming services and beauty boxes,” he says. “We’ll only see more and more subscription services appear in the next few years – across all sectors.”

One such service is Cheese Posties, which is (unsurprisingly) the world’s first subscription grilled cheese sandwich service. CEO and founder, Dave Rotheroe says acquiring new customers isn’t an issue for his business, because sending cheese toasties through the post is such an unusual product, people are keen to try out the service.

“You need to speak to customers and find out what they want,” says Rotheroe. “They won’t directly tell you if you give them leading questions, so speak to people and talk to them about their lives.”

Retaining customers

But subscription isn’t as easy as coming up with a convenient or quirky idea and sending parcels out to customers on a set date every month.

Rotheroe, who also founded a subscription hot sauce company before he turned his hand to cheese toasties, says once the business has locked onto an individual idea, the focus needs to be on making the product better. “Customers getting rid of what they don’t want has the biggest impact on retention.”

Chris Lambert, owner of the monthly art supplies subscription box, ScrawlrBox, suffers from a similar problem.

“The big challenge is retention,” he explains. “We try and make sure there’s a surprise element and excitement in the box every month. The churn rate is the amount of people who cancel compared to new people who subscribe every month, which we try and keep below 10% – the lower you can keep that the better.”

Lambert adds: “But the subscription economic model can be applied to anyone’s business. You need to find out what people want and solve that problem, like printer ink, you know when they’re running out and every month – you find that problem and solve it for your customer.”

Amazon identified this need to replenish household items back in 2015 with the launch of its adhesive Dash Buttons which can be pressed when customers are low on brands such as Ariel, Andrex, Gillette and Nescafe. The buttons are Wi-Fi enabled and tell Amazon to re-order the product.

But where this technology gets really interesting is when the physical button disappears. Last year, Amazon launched a set of APIs which can be used by white goods and household appliance manufacturers to connect their products to the Amazon ecosystem. This means we could soon be using washing machines with this technology already embedded, allowing the machine to automatically reorder detergent without the customer even having to think about it.

Should retailers capitalise on this trend?

Amazon’s clever APIs and rock-solid relationships with manufacturers aside, is the repetitive subscription model something retailers should consider as a new channel to attract and retain customers? 

Dixons Carphone certainly seems to think so. At the beginning of this year, CEO, Seb James, declared his vision to create a monthly subscription service for technology and white goods in response to changing consumer behaviours. 

Speaking at Shoptalk Europe earlier this week, he said: “Nobody wants to own a washing machine, it’s the world’s most boring object, what we want is clean clothes.”

A Dixons spokesperson told Essential Retail it is seeing a pattern of users moving towards a ‘usership model’ which makes big-ticket products like smartphones and computers more affordable.

This seems to be the long-term goal for the retailer. Dixons said: “We are excited to develop our response to these changing consumer behaviours and see a great opportunity to build more longitudinal relationships with our customers”.

Gousto’s Boldt advises retailers to start with a customer obsession. “Ask yourself: do you solve a problem? Do you add value? Do you make lives easier by being subscription? If not then don’t be a subscription service. We know from listening to our customers, that each one is different. We offer transactional boxes too: once you’re a customer you can opt in and opt out whenever you want. It’s not a one size fits all approach – it’s about customising your business with options which work for everyone."

Alan Gunner, business development director at Adjuno, says if retailers choose to enter the subscription market they need to make sure their supply chain can handle the delivery deadlines promised to the customer.

“They need to be achievable and sustainable because the backbone of providing a subscription retail service lies in the supply chain,” he explains. “To create a successful model retailers need to have full visibility of their critical path and ensure that all of their suppliers are on-board.”

Customer transparency

But Dollar Shave Club isn’t convinced retailers should jump on the subscription bandwagon.

“Subscription is such a rare construct and we get asked a lot: ‘should I build one, should I not build one?’”

But according to Michael Dubin, founder and CEO of Dollar Shave Club, subscription was never the purpose of the business.

“A lot of people do it because they love the concept of a monthly revenue which looks great on a spreadsheet,” says Dubin, who sold his business to Unilever in 2016 for a whopping $1 billion. “But the only reason to develop a subscription model for your business is if it enhances the experience for the customer.”

He added: “Most guys milk razors longer than is comfortable, but we condition them when the box turns up to change their razor, which feels really good.”

Dubin explained on stage at Shoptalk that in order to be a successful subscription business, companies must be transparent with customers and give them tools to easily change their relationship with the brand, such as skip a month, pause a subscription and cancel.

But the most important part of a subscription business lies in the data.

“What you’ll see in the next 6-12 months is an overhaul of our digital product platform to allow for more flexibility. And to get that right you really have to kill it in the CRM game,” explains Dubin.

“The name of the game with a direct to consumer business is learning as much as possible as you can about the customer. If you have that great degree of trust, and they trust you, they’ll answer [your questions] and you can use that information – you have to have that trust and I believe we do.”