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How to manage churn in subscription retail

Subscription services such as Dollar Shave Club and HelloFresh have proliferated because of their ability to generate stable, and predictive revenues. But they also have a less appealing characteristic: they are prone to suffering high levels of churn. 

Although churn is defined rather simply as the number of customers lost during a quarter divided by the number of customers a company had at the start of that timeframe, the metric is prone to being massaged by retailers in order to paint a rosier picture of their customer acquisition and retention performances.

Anthony Fletcher, CEO of Graze, says: “Some companies measure it monthly or weekly and some also include won-back customers in that period, while others inflate the active-customer timeframe to say a six-month period.”

Although he highlights that companies at the start of their lives will invariably have a higher churn rate as they are growing at a rapid rate, he warns that if this persists then there will be trouble ahead: “They will probably not last once they have burnt through their addressable market.”

Rather worryingly Fletcher says most of the business subscription models in the market are high churn and their addressable markets are clearly finite. “They have to watch out because one day they will have a problem,” he says, adding that Graze itself had a high churn rate in its early days but it quickly settled down into having one-in-10 of its customers becoming very loyal. He found this to be a sustainable figure for the subscription model. 

The problem with subscriptions and churn has been apparent in the US where meal kit provider Plated has recently become an in-house food brand under its owner Albertson’s who bought it two years ago. The supermarket acquired it to tap into the high-growth subscription model but has migrated it away from this as customer interest has waned.

Managing churn and new customer offers

Laurent Guillemain, UK CEO of HelloFresh, certainly recognises the importance of managing churn rates and works hard to keep control over the inevitable discounts the company has to offer in order to lure in new customers.

“We offer discounts and a free box on referrals. An element of discount is normal but there are discount seekers and it’s to be expected. So we’ve got to be wary of not creating a market for discounts,” he explains, adding that another key element is to provide flexible subscriptions – weekly, fortnightly monthly and providing the ability to add and subtract meals.

Sally Scott, MD of UK at Birchbox, agrees this is necessary as people often like to drop out for some months before returning. To drive continued revenues from these customers – and others – it has pivoted its model to combine subscriptions with a regular online shop and pop-up physical stores.

“People go out of a subscription for say three to four months and hopefully they will return so we’re looking at moving them to the shop. It’s not just about subscription, it’s also about after-the-subscription,” she says. Birchbox has successfully linked these two strands recently with its Black Friday subscribers-only offer of £5 off well-known brands.

A move to bricks and mortar

Moving into traditional retail was also important to Graze as Fletcher says lapsed subscribers invariably drifted back to their regular preferred in-store snack brands: “When Graze was also on the shelves in these stores then they started buying it. And we also obviously have some customers who are multi-channel.”

The need to adapt the model has also been recognised by Stitch Fix. The rising cost of attracting and retaining customers – good old churn – to its personalised clothing proposition has led it to sensibly expand its model beyond just sending boxes of apparel and accessories to its subscribers. Among its latest developments is ‘Shop Your Looks’ that recommends additional items that complement the items Stitch Fix sends its customers in their boxes.

Such extensions are absolutely vital for subscription model businesses if they are to avoid being victims of onerous churn rates. This is particularly acute for those players with limited product offers. “There is only limited demand for something that’s delivered on a regular basis. There is only so many you want delivered compared with going to the shops,” suggests Fletcher.

It will also be the case that the subscription model is simply unsuitable for certain categories. Aron Gelbard, CEO of Bloom & Wild, recognised this very quickly with his subscription flowers business whose model he adapted sharpish.

“We thought there would be much more demand for regular self-purchases but it was ordered more as a one-off gift. People would cancel their subscriptions after the first delivery so we shifted the focus onto gifting. We were then less reliant on subscription stickiness and we increased prices to be above the super cheap prices expected with subscriptions,” he says.