Consumer Goods Subscriptions

How to Win in Retail in the 21st Century

Severin Bischof, Thomas Rudolph

• Publisher: De Gruyter
• Year: 2021
• ISBN:
  9783110730265
• Edition: 1
• Topic: Commerce
• Subtopic: Marketing
• Index: Marketing

Digitalization has changed our economy and, with the imminent automation of consumption, is causing further major upheavals. Consumers are increasingly choosing subscriptions or season tickets to reduce the effort required to perform everyday activities such as buying clothes, preparing meals, listening to music, or city driving. This book focuses on subscriptions to consumer goods that consumers used to purchase in stationary retail stores.

Consumer Goods Subscriptions describes the types of subscriptions that play a role in today's world and identifies the industries in which subscriptions will become particularly popular in the future. The authors define and differentiate four subscription types in terms of surprise and personalization. The book provides a step-by-step concept for successfully implementing subscriptions and shows how to optimize subscription revenues and profits. It will help retail managers to seize the opportunities of this new revenue model and respond to changing customer behavior with appropriate subscription services.

1 Introduction

When was the last time that you bought a song as an MP3 file? This probably seems as obsolete as buying a CD, let alone a vinyl record. Mind you … the latter are currently experiencing a small renaissance. But let us not digress. The fact is that you are probably using one of the more common streaming services (e.g., Spotify, Apple Music, or Deezer) to listen to your favorite music. Presumably, you will not even notice that you are no longer paying to listen to (i.e., consume) a single song; that, to be sure, is a thing of the past. Paying monthly flat rates has probably become so burdensome that you consider regular charges such as your Netflix streaming subscription to be perfectly normal. The point is that exactly this subscription mechanism is spreading rapidly in today’s consumer society – and there is no end in sight.

“Subscriptioning” is spreading like wildfire. For example, Porsche enables consumers to drive a wide range of Porsche sports cars in selected US cities if they take out a monthly “Porsche Drive” subscription starting at $2,100 (Porsche, 2021). Depending on whether consumers need a convertible (for a beach trip) or a sport utility vehicle (SUV) (for a skiing holiday), the Porsche subscription offers the same flexibility. Compared to the approximately $1,000 needed to lease a Porsche Cayenne, the subscription provider charges handsomely for this flexibility – the subscription requires neither a minimum term nor a 20 percent deposit on the vehicle price. This raises a ticklish question: Do subscriptions pay off for companies at all?

Subscriptions can be very profitable. IKEA is currently testing various forms of furniture subscriptions (Guentert, 2019). In Switzerland, consumers can subscribe to full-scale office furnishing packages – based on what we call “Easy In, Hard Out.” From the customer’s point of view, paying IKEA smaller monthly subscription fees is more attractive than large one-off payments. Subscriptions reduce initial investment and create a cost-effective entry point: “Easy In.” IKEA enables subscription customers to buy furniture as their own property at any time at the full price. A discount is offered depending on the period of use. However, as the subscription period increases, and with payments effected, it is no longer worth buying the furniture. This is the case, for example, if subscription payments exceed the value of the furniture after one or two years. After two years, only continuing the subscription makes sense: “Hard Out.” Its subscription model could therefore prove to be extremely profitable for IKEA, depending on the duration and intensity of use.

Subscriptions can also be used as complementary services – to add value to assortments or products. One example is Amazon Prime, which 82 percent of all US households with an income of more than $112,000 have already subscribed to (Molla, 2017). The revenue that Amazon generates with this subscription for additional services such as express delivery or media offers is estimated at up to $20 billion for 2020 (Berg and Knights, 2019, p. 39). The New York-based company Peloton not only sells exercise bikes; it also operates a streaming service that allows fitness courses led by professional athletes to be played on the bike’s screen (Peloton, 2019). Obviously, the monthly $39 fee for the streaming service is added to the already impressive c. $2,000 to purchase the bike. You, too, may have discovered one or the other offer that could also make your life a little easier.

But do not stop just yet. Subscriptions are now spreading to – and beginning to conquer – the last bastion of consumer society: retail. Do not many of us sometimes dream of forgoing everyday chores – the weekly shopping or buying clothes – to have more time for our families or to enjoy the weekend without extra burdens? This thought has probably frequently crossed your mind – as it has ours. Zalon, Zalando’s curated shopping service, allows us to outsource searching for new outfits entirely to our personal stylist and to regularly receive fashion tailored to our needs.

Now if you believe that subscriptions are merely a panacea for simplifying shopping and therefore little else than a modern bellhop for unloved activities, you may wish to note – with all due respect – that you are mistaken. Subscriptions are at times even a source of inspiration, especially if they contain a surprise mechanism. For instance, the GLOSSYBOX cosmetics subscription regularly supplies the latest products and information about the latest trends. With regard to the consequences of Covid-19 we expect a boosting demand for subscriptions; consumers will shop and consume more often at home and will favor subscription services mostly because of convenience and health-related reasons.

What follows examines the phenomenon of subscriptions in our economy. We show the ways in which subscriptions to physical consumer goods differ from digital subscriptions. Since physical consumer goods are not digital, easily scalable products, different services need different orchestration to make subscriptions profitable. We show how best to use subscriptions to expand your client-facing service offering and to make your customer relationships even more exciting.

1.1 Relevance of subscriptions in retail

For some time, more subscription providers (e.g., OUTFITTERY or HelloFresh) have been sending their customers not only recurring deliveries of consumer goods but also at regular intervals.

The subscription model is a new business model that is gaining popularity among consumers and investors alike. Subscriptions are agreements between companies and consumers on recurring deliveries of products and services (Grewal, Roggeveen, and Nordfält, 2017; Reinartz, 2016). When Dollar Shave Club, a razor blade subscription provider, was acquired by consumer goods giant Unilever for $1 billion in 2016, this was widely seen as confirmation of the relevance of subscriptions. This development marks another milestone in the technology-induced transformation of the retail industry – from the physical dimension to the digital world (Grewal, Roggeveen, Compeau, and Levy, 2012; Kumar and Reinartz, 2016; Shankar and Yadav, 2011).

However, subscriptions are suited to purchasing not only consumer goods (e.g., razor blades or socks), but also hedonic goods (e.g., cosmetics, jewelry, and fashion). A McKinsey study identified an annual market growth of more than 100 percent for subscriptions (Chen, Fenyo, Yang, and Zhang, 2018). Consumer goods subscriptions in the United States already generated sales worth approximately $2.6 billion in 2016 (Chen, Fenyo, Yang, and Zhang, 2018). A small number of only 57 consumer goods subscription providers had received a total of $1.4 billion in venture capital by 2016 (CB Insights, 2016). The number of subscription providers is steadily increasing in various categories (e.g., cosmetics, fashion, food, beverages, as well as decorations and home furnishings). Cratejoy, a marketplace for different subscription providers in the US, features more than 2,700 subscription boxes (Cratejoy, 2018). These numerous examples attest to the increasing attractiveness of consumer goods subscriptions, not least because they promise higher profits. A survey of 293 US, UK, and Australian executives (conducted by the market research organization The Economist Intelligence Unit) found that 40 percent of companies were working on introducing subscriptions and subscription models as early as 2013 (The Economist 2013). In this study, subscriptions thus outperformed rental or leasing models, which were used by only 27 percent and 17 percent of managers, respectively (see Figure 1.1). Despite this very optimistic assessment, let us maintain some critical distance. We do not see subscriptions as a panacea for sales problems in today’s economy. Under certain circumstances, however, companies can offer consumers better solutions – ones that are not only economically viable but also stimulate how we might tackle today’s pressing climate and environmental issues.

Source: The Economist (2013)

Figure 1.1: The importance of new consumption models.

Subscriptions look back on a long history and are certainly not a completely new phenomenon (Baxter 2015; Janzer, 2015; Warrilow, 2015). Remember, for example, the milkman or milkwoman, still popular in the last century, who regularly delivered milk to the front door. Long before that, in the Middle Ages, subscriptions were offered for geographical maps recording the constant changing of borders due to feuds and wars.

In modern times, Blacksocks was one of the first companies to introduce the subscription model to the Swiss market. Blacksocks has been supplying its subscribers with socks selected by customers or chosen by the company themselves since 1990. But it was not until the beginning of the second decade of the 21st century that this revenue model became increasingly established in the area of physical consumer goods (see Figure 1.2). Subscriptions have since developed into an interesting alternative to the so-called “one-off purchase” of goods and services.

Source: Rudolph, Bischof, Boettger, and Weiler (2017)

Figure 1.2: Development of subscriptions.

The emergence of subscriptions is driven by a fundamental change in consumer behavior: Today, consumers expect ever greater convenience, which subscriptions can offer due to their automatisms. Consumers also seek ever greater inspiration, which subscriptions can provide via surprise mechanisms. Many consumers have meanwhile encountered the various benefits of subscriptions. Our 2018 representative customer survey showed that 30 percent of all German-speaking Swiss had already purchased a product subscription at some point. A total of 18 percent had an active subscription at the time of survey (Rudolph, Bischof, and Schürch, 2019). This figure is on par with the US, where roughly 15 percent of consumers bought a product subscription in 2017.

Subscribers belong to the “Early Market” (so-called “Innovators” and “Early Adopters”), that is, consumers who like to try out new offers. In addition, the risk propensity of subscribers is significantly higher than that of non-subscribers. Subscribers tend to be younger and have a higher gross household income. They see themselves as market and product experts, tend to be more risk-averse, and consider shopping to be more of an adventure. Men tend to be more interested in self-determined automated purchasing (e.g., razor blade subscriptions), while hedonic subscriptions with a surprise factor (e.g., cosmetics surprise boxes) are increasingly bought by women.

Although most subscriptions are offered by start-ups and small businesses, various providers are already achieving a high level of awareness. In 2018, just under half of our German Swiss respondents had heard of the 10 largest subscription providers. Individual providers such as Mondovino (69 percent) or OUTFITTERY (80 percent) achieve above-average awareness levels. The remaining providers also achieve considerable awareness levels, which average about 35 percent for the top 10 subscription providers.

But the subscription business is not easy. Many providers suffer from high churn (i.e., attrition) rates. Blue Apron, an American subscription provider that sends weekly food and recipe packages, is expected to lose 50 percent of its subscribers after the second delivery (Kessler, 2016). Although this figure has not been confirmed by the company, the high churn rate, in addition to customer acquisition, is a major problem. Other sources estimate the churn rate of food subscriptions at approximately 10 percent, and those of digital subscriptions such as Netflix and Spotify at only 1 percent and 5 percent, respectively (The Economist, 2018). But customer acquisition also raises many unresolved questions. Subscription providers invest large sums of money by offering high discounts on orders, which reduces profitability. Discount and advertising costs hardly allow making profits at present.

It is therefore hardly surprising that many subscription providers were unable to meet their investors’ economic expectations. A total of 13 percent of all subscription providers that emerged in recent years have already filed for bankruptcy (Segran, 2018). HelloFresh, a supplier of food boxes, had to defer its Initial Public Offering (IPO) in 2015 to 2017 at a value of $2.6 billion. In 2020 HelloFresh became profitable based on heavy back wind from Covid-19. A more recent victim is the Swiss market, where Lidl announced the end of its Lidl Menübox in February 2019. Similar to HelloFresh, Lidl offered its subscribers weekly changing recipes, created by a celebrity chef, together with the necessary ingredients. Presumably, interest in buying was too low. After all, as our study shows, half of Swiss-German respondents knew about the Lidl menu box, but only 2 percent decided to buy it. The purchase completion rate was far too low in relation to advertising expenditure.

The lessons learned from many failed attempts can be summarized in three points. First, subscriptions must meet a relevant need. Demand must exist on the customer side. Only if this is the case, companies should consider introducing subscriptions. Second, launching and operating subscriptions takes much perseverance. Companies should be prepared to optimize their offering and plan for the long term. Third, exi...