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The keys to subscription success

TRENDS AND ANALYSIS

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More and more consumers are discovering the joy and convenience of subscription e-commerce and the business model is experiencing an unprecedented boom right now. But in order to succeed, subscription services need to deliver a near perfect experience, where payments play an important role.

For both retailers and service providers, the subscription business model offers a lot of benefits. Along with predictable and steady revenues from recurring payments, subscriptions also offer new marketing opportunities, more chances to collect customer data and a better chance of customer retention.

For the consumer, on the other hand, the allure of subscriptions can usually be boiled down to one benefit: convenience. Having the things you need delivered to your door automatically saves a lot of time and can also make it easier to try something new, be it a meal, a movie or a shirt.

Because of these benefits, subscription models have been used for a long time to deliver everything from milk to newspapers. With the rise of the internet, however, the subscription model has now entered a new phase and is disrupting more and more industries.

The subscription boom
According to a 2018 report from McKinsey, the US market for subscription e-commerce has grown by more than 100 percent per year for the past five years. The report also said that 15 percent of online shoppers had subscribed to an e-commerce service over the past year. What’s important to note is that this number only captures subscriptions for goods (i.e. services like Dollar Shave Club, BirchBox or Blue Apron); to this number you could also add the 46 percent of surveyed consumers who said that they subscribe to an online streaming-media service, like Netflix or Spotify.

But subscription companies are not only becoming more popular, they are also increasingly profitable. In fact, revenues for these companies have grown five times faster than both the revenues for S&P 500 companies and US retail sales between 2012 and 2018, according to Zuora’s Subscription Economy Index. The revenue growth is also more than twice as high for subscription companies in Europe than for those in the US.

Another interesting development is the increasing diversity in this market. Over the past few years we have seen how the subscription boom, which started out with subscriptions for things like music, video and groceries, has spread to all types of goods and services. In 2017, CBS reported that there were an estimated 2 000 different subscription box services in the US alone.

17 %

Of a firm’s user base, on average, can be lost each month to payment issues. (PYMNTS.com)

130€

Is the average that European households spend on subscription services per month. (ING)

2x

Faster is the revenue growth rate for European subscription companies compared to American companies. (Zoura)

Experience is the key
Subscription services are not only diverse in what they sell, but also in how they appeal to customers. When it comes to e-commerce subscriptions, McKinsey divides them into three broad types: replenishment, curation, and access subscriptions. Replenishment subscriptions are all about automating the purchase and delivery of commodity items, like diapers or razors. Curation subscriptions are instead focused on delivering new and exciting products, usually based on the personal preferences of the subscriber. Lastly, access subscriptions are based on customers paying a fee to gain access to lower prices or exclusive products and services.

These three models attract different customer types and fill different needs, but they’re all based on delivering a great, frictionless customer experience. According to McKinsey’s report, convenience and personalized experiences are two of the most important reasons why customers continue to use all three types of subscriptions. Failure to deliver a good experience, on the other hand, is one of the most common reasons why customers cancel their subscriptions.

One conclusion you can draw from this is that customers are willing to continue using subscription services as long as the experience is smooth. This is especially important since subscription services are based on steady and predictable revenues and need to reduce churn in order to be profitable.

The role of payments
To reduce churn, most subscription companies spend a lot of time identifying issues that lead to customers cancelling their subscriptions, known as intentional churn. Fighting unintentional churn, however, where the customer doesn’t actively cancel their subscription, is often harder.

Two of the most common reasons for unintentional churn is that the company is unable to withdraw money from the customer’s account or that the customer’s card information has expired. In fact, the site PYMNTS.com claims that “as much as 7 percent of a firm’s user base, on average, can be lost each month to payment issues”.

Because of this, subscription based companies need to choose a payment provider that not only makes recurring payments possible, but who also helps them minimize unintentional churn. At Bambora, we have identified this as one of the most important factors for success when it comes to recurring payments.

To help subscription based companies, Bambora makes it easy to collect and store customers’ card information safely and to make regular withdrawals. In addition, we can also notify the company if a withdrawal fails due to insufficient funds or expired card data. If the problem is insufficient funds we can help the company set up rules in their e-commerce platform for when to attempt new withdrawals instead of just cancelling the subscription. If the issue is expired card information, the company might instead set up their system to send out an automated reminder for the customer to update their card information.

Regardless of how a company chooses to deal with unintentional churn, the important thing with all recurring payments is that they’re supposed to be frictionless. In the best case scenario, the customer signs up and then happily receives his or her products without ever thinking about payments. At Bambora, we have created our recurring payment solutions to do just that and to help sustain the subscription boom.