Subscription commerce companies are struggling. Here’s how to fix them

Subscription commerce companies are struggling. Here’s how to fix them

BY TOM CAPORASO 
ON SEPTEMBER 2, 2013

You’d think the way the media has covered subscription commerce that it’s some brand-new innovative idea that ShoeDazzle, BirchBox, or Dollar Shave Club just invented. But subscription services have been around a long time. Think of your grandmother getting milk delivered to her front porch, the paperboy tossing the daily newspaper somewhere in the vicinity of your porch, or my favorite: the weekly Charles Chips delivery.Over the years, subscriptions grew to include gym memberships and Costco/Sam’s Club memberships. The Internet age has brought us ShoeDazzle and Birchbox, pre-paid shipping programs with companies such as Amazon Prime, eBay Now, Google Express, and media companies like Netflix, Spotify, Hulu and others.

These companies sell different “products,” but the core values of each business are (or should be) similar. While subscription can be a difficult business model, requiring deep-dive analytics, it can be, if done right, a rewarding enterprise.

Consider the ups and downs of ShoeDazzle, which has been in the news lately with its JustFab merger.  Founded in 2009 as one of the first companies to truly embrace the sub-comm craze, ShoeDazzle shot out of the gates with a killer combination of celebrity endorsement (Kim Kardashian) and subscription business model.

Kardashian’s celebrity personality brought a lot of free customers, allowing ShoeDazzle’s overall customer acquisition costs to remain low. As the company began to scale and mature, however, founder Brian Lee chose to step down and bring in a new CEO.

This is where things took a turn. Lee had built the business on the strength of its subscription model, but the new CEO immediately set about dismantling that model in favor of a traditional ecommerce approach. The business soon began to falter. If ShoeDazzle’s rise to fame was quick, its fall from the height of fashion was even quicker.

It didn’t take long for Lee to return, re-implement the subscription model (albeit with a different twist), and turn the company around. By all accounts, he did an exceptional job, but the damage was done; as the number two player in the space, ShoeDazzle ultimately decided to combine operationswith the number one player, Just Fab.

We’ll never really know whether ShoeDazzle could have stood on its own two feet if it had stayed committed to its subscription business model. However, there are six core principles that every business should keep in mind if it wants to implement a subscription model successfully:

Know your product. This is probably the one thing that many of these subscription products do well.  Whether it’s razors, health food, or underwear, understanding every aspect of your product is important — without your product, you have nothing. The more you understand your industry, the better your product is; the better the product, the longer a customer will use your service; the longer they use your service, the more profitable you become.

Customer service is paramount. Your customers will invariably have questions about your product, but you already know that, right? After all, you’ve been selling your product for years. Well, expect different questions once this service is implemented. In ecommerce, the transaction is typically one-and-done. With subscription, you’re providing an ongoing service, and things happen. Questions arise about the ongoing service.  Deliveries get missed. Customers who continue to pay for a service over months or years expect (and deserve) a higher level of service. When things “happen,” you need to be ready to deal with them quickly and effectively.

Adjust your Lifetime Value (LTV) metrics. LTV is a much different calculation at a subscription company.  Instead of measuring value according to individual transactions and building customer profiles based on that (where things can get a little muddy), you’ve now got a very clear understanding of whether or not your customers like your product — churn rate. The longer a customer stays with your product (essentially, the longer they pay the monthly subscription fee), the more successful your company will ultimately be. Understanding this LTV helps you to understand what type of margin you can achieve, which allows you to determine just how much you can pay for a customer. Speaking of which …

Learn to pinpoint your customer acquisition costs. No number is more important to growing your business than the amount you can pay for a customer. Acquisition costs can include any number of things, from working with a PR agency to finding a synergistic partner, from SEM to display, and so much more.  You need to find the acquisition-channel combination that works best for you. To do that, it’s critical that you understand the LTV of every member based on how they were acquired; different acquisition channels can offer very different LTVs.

Test. Analyze. Repeat (forever). You’ll be amazed by what a small tweak can do to your purchase funnel — some good, some bad, some extremely counterintuitive. You need to ensure you’re looking at the whole picture. For example, we’ve tested thousands of banners through the years. Often the one we roll out with is only the third-best banner in terms of clicks, but its final customer LTV is so high that we have no choice but to use that banner. Dig into your data; once you recognize your most critical subscription commerce metrics, your analytical focus can change very quickly.

Retain and optimize your customers. Customer acquisition is just your first step. From there, you have to identify all the factors that define your best (i.e., highest LTV) customers. How do they engage with your product? How often? How quickly? What’s their typical click-path through your website? You need to understand their behavior if you want to influence the behavior of your less profitable customers and get them onto the most profitable road.

Subscription is a highly rewarding and potentially lucrative business model, but it’s about as far from a “set it and forget it” approach as it gets. If you’re going to implement it, you must be prepared to stick with it, and you need to ensure that your organization is built to optimize all the key metrics and levers that drive a successful subscription company.