Controversial

Are Subscriptions The Secret To Customer Loyalty?

Discounts are a surefire way to attract a customer – a fact that the millions nationwide who still hit the stores before the break of dawn on Black Friday can attest to. Everyone loves a good deal – which goes a long way to explaining the emergence and rapid rise of “daily deal” or “flash sale sites.” Buyers got better bargains, and merchants got a platform to acquire buyers from the wide digital world.

Flash forward almost a decade and the outcome has not been quite as predicted — Groupon and LivingSocial have both undergone significant pivots toward more traditional eCommerce, as has Gilt, which is also moving into physical retail and personal shopping services. Fab was valued at a $1 billion in 2013 – only to fire 80 percent of its workforce a year later and be offloaded in a fire sale for $15 million earlier this year. Zulily was valued at around $1 billion in 2012 and it IPOed at $39 a share. Today its stock price has declined around 60 percent to $13 a share (but Alibaba swooped in to buy a big chunk of it over the weekend!).

The problem with the flashy discount is that the customer it best attracts is a discounted shopper, looking for a bargain. And that customer is not as likely to be loyal because they were shopping for a bargain, more than they were a particular good, and certainly not to establish a loyal and lasting relationship with a retail partner.

“There were a lot of variations on Flash Sales,” Retention Science’s CEO Jerry Jao told PYMNTS in an interview last week. “I think the one thing that held the Flash Sales businesses together was selling products that were designed to trigger impulse buying. At the end of the day the [items] might be cool or a great deal, but they were not meeting customer needs. This means there is no repeat buy built into the business proposition – it’s just a nice to have item that [a customer] bought because it was cheap.”

Which, Jao noted, means that win-win wasn’t so much there for the merchants. Customers were getting goods on the cheap – and merchants were investing in marketing tactics that were successfully drawing customers in at low prices – but not keeping them around long enough to become full price paying customers.

“Business, especially small businesses, are starting realize that tapping into the impulse needs of customers  doesn’t get consumers into the habit of shopping.”

Or more appropriately, shopping at their stores.

Retention Science is a data analytics firm that is specifically concerned with helping their e-tailing merchant customer partners better know their customers so they can keep them coming back.

“We’re a data science platform – so we help business understand their customers so that they can offer them the right type of content, and the right types of product,” Jao explained. “It’s about really assessing the customer needs and then helping business do that better.”

And better, in this case, involves talking merchants away from the “discount them in the door” method that has gained so much public notice, then guiding them toward subscription models, which have also begun to emerge as a tool in the digital merchant’s box over the last decade or so.

“Most businesses spend most of their marketing budget on acquisition, and need to spend a lot more time thinking about what keeps a customer coming back month after month,” Jao noted. “[Subscription models] from a business perspective fill a lot of needs – especially for smaller firms. It is guaranteed traffic –  which makes it much, much easier to be able to forecast their money on a monthly basis. But I think more broadly, the whole notion is that a business can really focus on making sure they are building a great customer experience instead of having to solve bringing customers into the door each day.”

Subscription services have a lot to offer – and lots of smaller startups a la the Dollar Shave Club are emerging. As great as they may sound from a revenue perspective, subscription models are not without risks and are certainly not a guarantee of success.

First and foremost, a subscription has to fulfill something that is a legitimate need – not transient want – of the customer base.

“You’ll see a lot of subscription models that are built around ‘well that looks good or sounds good’ but if it isn’t actually targeted to what a customer actually needs – it is going to fail,” Jao said. “You need to find a necessary product. As a partner to many businesses, and we work with fashion e- tailers, shaving clubs, a custom hair dye company and a vitamin supplement firm — it doesn’t matter what it is — when we are trying to help them create a subscription service, the No. 1 thing they have to understand is their customer’s need.”

However, even tapping into that need is not enough – businesses also need to think about their customers and their habits and who they are trying to reach with that model. Some customers, Jao noted, are always going to want to go to a store, or have the option of changing up all their consumer goods.

What a business can do – and needs to do – is figure out who is looking to drop the real world experience for the online experience.

“I think a lot of businesses are still trying to figure out that exact demographic – I think there are the obvious answers like working parents who are looking for any way to save time on buying diapers, for example. But there is also a need to understand consumers on a deeper level – for example, those consumers who love eCommerce but want to buy their deodorant in store because they want to choose their scent options.”

The good news, Jao notes, is merchants often have all of the data they need to build out the right model already at their fingertips – they just don’t know they have it or don’t know quite how to use it. That’s where Jao and his firm steps in.

The hardest part, Jao says, is that even though the business model is a subscription model, brands need to resist the temptation to take that sale for granted – since even when a customer becomes a subscriber, they are still looking for product innovation.

“This is about what can you put out there for the customer that will make the customer want to buy – but not just one product – but instead develop an ongoing relationship. Even though we are offering a uniform product within a subscription model, we really need to also give people options because customers can get bored.”

There are no easy answers – and no out of the box solutions for customer retention. But, says Jao, that’s actually good news, because merchants actually have a better option than that’s available to them – developing pitches not with a wide net based on catching (but likely losing) a mass of customers – but instead working on creating a customer who can be counted on to spend often and regularly.

Retention Science thinks that, dollar for a dollar, a subscription platform is the best way to turn a daily deal into a long term customer.

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