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Is a subscription model right for your business?

One subject that comes up a lot in Supper Club discussions, especially (but not exclusively) among members running consumer-facing businesses, is whether or not to switch to a subscription model. It will be the core focus of a discussion event we're hosting on the 19th May.

Given how addicted we have all become to subscriptions, it's hardly a surprise the topic is so popular. Subscription business models (SBMs) are everywhere. From shaving products to dog food, at-home fitness equipment to pizza, from beer to wine, gin to chocolate, flour to flowers, from your evening meal to the TV shows you watch while eating them, and on to even some major items, such as cars and holidays, there is a subscription service for everything.

Subscription businesses

Research by McKinsey has estimated that what it describes as “consumer-centric, data-driven” business models (that’s SBMs to you and me) represent a potential $3trn opportunity across all industries. In the US, consumers have an average of four subscriptions each. And research by analytics platform Kuora found that companies in its Subscription Economy Index (SEI) outgrew the S&P 500 by almost five times since 2012. The SEI was also less affected by lockdowns and bounced back more quickly when economies re-opened than the S&P 500.

For business owners, SBMs offer the predictability of recurring revenue (also something that investors are keen on) and improved customer insight. So, if you haven’t already taken the plunge, is now the time to embrace the trend? And if so, what do you need to know to make it a success?

Subscription businesses fall into one of three camps. There are subscription natives, traditional retailers playing catch-up, and some hybrid challengers, lying between the two, taking a well-educated punt on an SBM.

Subscription natives are disruptors who launch specifically with a subs model in mind. The founders spot a potentially lucrative niche for an existing category to be delivered differently. There has been plenty of innovation in this space, along with the usual copycat brands that have found relatively easy success from simply adding "direct to your door, every week” to a regular product. Home delivery of flowers is far from new, but a regular delivery on subscription is a simple twist that has been well executed on by both Freddie's Flowers and Bloom and Wild.

Traditional retailers were caught a little cold by the boom. Worst hit have been those without a decent online offering, little experience of home delivery and not much customer data. Some have started to play catch-up. Once they get the 3Ds sorted - digital, delivery and data - they can leverage brand heritage and strong customer loyalty to the mix. The tautologically named Pets at Home has done well with its flea and worming treatments via subscription, while it also offers a regular repeat purchase of pet food.

Hybrid challengers are digital-first retailers, mostly launched as direct-to-home delivery businesses, although several have since moved from "clicks to bricks". Biscuiteers (founded by Supper Club member Harriet Hastings) is a great example. Always data-driven and agile, it saw the power of a gifted subscription and quickly started to offer it. Global coffee slinger Nespresso is another example of a business that flipped into SBM, and now offers £500 machines for £1, with a minimum two-year contract. Like many of these challengers, Nespresso was built on strong digital, data and delivery. It’s traditional retail outlets (a chain of cafes and stores laden with clever, automated service systems) were always marketing.

So how do you get it right?

Moving an established business, with customers used to a relationship built around supplying what they want on an “as and when” basis to any kind of SBM is tough, but not impossible (see Nespresso, above). The adoption of subscription models – from established firms pivoting and new entrants - shows SBMs can be applied almost anywhere.

Beyond the basics of getting delivery, data and There are some things to consider, based on the lessons from those that have got this right and those who have failed:

  1. Check your customers really want it Start with the basics and assess objectives and motivations. Are customers keen for the SBM version of your existing relationship? Are you losing customers to new subscription-based entrants? Be wary of doing it just because it’s on-trend. If you are close to exit and think this might boost valuation, take care and remember investors will want hard data and evidence it is working. You'll need to get the SBM up and running in advance of going to market for investment. Talk to your closest customers about what they value in what you do now and how much they’d like to join a subscription club. The evidence suggests you have one shot at getting this right; McKinsey says a consumer who unsubscribes from a service has only 11% chance of returning.

  2. Get the price right One of the big appeals of subscription models (for the business and the customer) is the fixed-price. It helps budgeting all round. McKinsey research confirms that the perception of "good value" from a subscription is one of the biggest drivers of recruitment, while meeting such anticipated promises is key to retention. Pricing subs is complex. What will you deliver for free? Is there a hardware cost to factor? Will there be a joining fee? Will there be different tiers of membership and who will get what as a result? Some of these decisions will be determined by standard industry models, although this is also a chance to offer something different.

  3. Watch out for new entrants and old challengers A booming market will attract lots of new rivals and may also attract a shift in your supply chain. Taking out one of the hardest parts of retail (the physical shops) means that some suppliers may try and disintermediate altogether and go direct-to-consumer themselves. Many pet food businesses now sell this way and (like James Wellbeloved) have built their own subs businesses.

  4. Deliver, on-time every time It's an inevitable irony that just when we shop more online and there are more parcel deliveries than ever (Statistica reported 4.2 billion parcels were sent in the 2020/2021 fiscal year, an increase of over 1.3 billion parcels relative to the previous year), reliability has slumped. Even as the delivery window shrinks, and in-app tracking keeps consumers better informed, it can still be something of a lottery when (or indeed whether) a parcel will arrive. Naturally, this can backfire. It goes without saying that investing the time to find the best possible logistics partner is crucial.

  5. Offer flexibility Multiple tier pricing is liked by subscribers, not least as it gives them a sense of control and the feeling that that, should they not use you much or should they fall on hard times, they can downsize their membership (even for a short period). As any gym owner will confirm, the beauty is that many consumers are too lazy to act on this ability. But such flexibility comes with additional administrative work and extra costs. Make sure the benefits of the flexibility also accrue to the business and not just the consumer.

  6. Test and pilot It makes sense to take steps to assess and measure the appetite for the new service, but don't communicate this fact. Consumers want longevity and they need to know you are fully committed to the new service. At the same time, especially where you have a strong existing brand, consider carefully the damage to your reputation if it goes wrong. Don't incinerate your brand heritage on a pyre of an ill-considered SBM.