Subscription Commerce

How Subscriptions Are Changing What Consumers Buy (To Own)

“Click to subscribe!”

The rally cry of YouTube personalities has now been appropriated by, well, pretty much everybody. In fact, subscription commerce seems to be the new “it” thing.

It started with digital goods: Netflix, Adobe, Pay-Per-View. Then it moved into physical goods and real-world experiences: Stitch Fix, MoviePass and box-of-the-month clubs (for books, records, pet goods, you name it). Even the smartphone carriers have gotten into it, giving customers the option to either buy their phones upfront or pay a monthly subscription fee (on top of their service bills) to lease them.

Now, you can even subscribe to a Porsche. It’s sort of like leasing any other car, except with way less commitment. Drive that dream car around for a few days, weeks or months. Fall in love with it. Then, when the subscription period is up, find a way to justify and finance a purchase — likely with a special offer by Porsche to help incentivize the buy.

Dan Burkhart, CEO and co-founder of subscription and recurring billing platform Recurly, unpacks the philosophy behind the iconic automaker’s move.

“They want to engender loyalty to the brand for aspirational customers to get their trial and, hopefully, drive adoption in the form of ownership,” Burkhart said. “The subscription lowers the bar for aspirational customers to get in the seat of a Porsche and to get hooked.”

This, he said, is likely a ploy to appeal to younger demographics who are not thinking about car ownership, let alone Porsche ownership. Millennials and recent college graduates often don’t even have a credit card, Burkhart said, so the thought of purchasing a car fills them with trepidation.

“For the Uber generation coming out of college, this is an interesting entry path that aligns with the way they’ve been groomed to purchase,” he explained.

If that philosophy is correct, then subscription commerce will only continue to grow as more and more industries try to hook the next generation of buyers. With that comes the risk of subscription commerce fatigue, though. What’s going to separate the wheat from the chaff?

As the latest Subscription Commerce Conversion Index™ — a collaboration by PYMNTS and Recurly — shows, not every subscription service is winning business for hopeful merchants. Why not? Burkhart parsed it out in a recent discussion with Karen Webster.

Why Subscription?

It’s not just about reaching millennials, said Burkhart. Different industries are trying subscription services for a variety of reasons. In many cases, they wish to remove friction: the impediment of phone calls, expense of a high-commission salesperson, cognitive load of a sales decision and economic friction of following through — the dance between the buyer and the salesperson.

If web technology can help them do those things better, Burkhart said, then they will find a way to try out subscription commerce. He believes the growing sophistication of subscription commerce will soon be applied across industries, where the largest companies have the most marketing muscle to bring to bear — just as collaborative filtering and lifecycle marketing gained traction as they matured.

Free Trials: Take Them Or Leave Them

The Index showed not all of the top players offered free trials, and it seems the success of this element depends on the product or service to which they are being applied. Burkhart said it comes down to whether the business is selling to consumers (B2C) or to other businesses (B2B).

In a B2C environment, viral word-of-mouth may be beneficial to the business even if the free trial users don’t convert to permanent subscribers. A positive experience can generate brand traction as customers share it with their social networks.

But with B2B, not only is the viral element lacking — so the investment in free trials could return a big, fat nothing if the user doesn’t convert — the goods and services are also generally more expensive, so the trial costs more to offer.

Plus, said Burkhart, it can take businesses a long time to commit, since approval is often needed from multiple departments before such a strategy can be implemented. By comparison, a consumer weighing the decision to sign up for, say, subscription-based movie ticketing service MoviePass, can make that decision and act on it nearly instantly.

Every day that a free trial user doesn’t convert to a paid subscriber is lost revenue for a business. When calculating a customer’s lifetime value, that lost revenue must also be considered. How much did it cost to win over the customer, and was it worth the return he will generate over time? If the answer is “no” more often than “yes,” free trials may not be the right strategy, Burkhart said.

Choices: The Not-So-Secret Ingredient To Success

The Index showed stark differences between the top 20 and bottom 20 merchants who are trying out subscription commerce. While the lower end of the spectrum seemed to be doing almost everything wrong, those at the top had a few key elements in common, suggesting the recipe for success does, in fact, have some non-negotiable ingredients, even if every company does it a bit differently.

For example, the top players offer plan options, not just a singular subscription package. To Webster, giving the consumer choices seems like a no-brainer.

Burkhart agreed, but said there are reasons some merchants don’t (or can’t) offer them. Younger companies and industries, he explained, have difficulty creating a branded experience in which features can align with different levels of service to create different options. Developing those options takes more research and development than they’re able to invest.

Companies that had the resources and capital to invest in more sophisticated experiences will continue to have the same resources and capital, said Burkhart, and will likely remain at the forefront of the subscription commerce transformation.

The IoT Lag

The Internet of Things, or IoT, fared especially badly in the Index, and Burkhart thinks his theory has something to do with it. IoT is still a very young industry, he said — not to mention one that comes from a device- and product-driven marketing background — which changes how they tune their checkout flows.

IoT has potential, though. The whole point of it is to remove friction, a goal it shares with subscription commerce. The ability to quickly cross-sell or upsell to an adjacent digital service — data monitoring, video recording, home automation or security, for example — aligns well with the benefits offered by a subscription service business model.

Done correctly, an IoT subscription could be completely frictionless, unencumbered with potential pathways for the customer to wander off to do more research or inform themselves, he said.

The manufacturing time for IoT devices can take several quarters or even years. Because developing features takes so long, it makes sense that there are not as many plan options being presented. But, Burkhart says that’s something that will likely develop as the industry matures.

An Industry Coming Of Age

A few years back, customers approached Recurly looking for a subscription service. Period. They didn’t know what they really wanted, just that subscriptions (sometimes) worked.

Now, says Burkhart, customers are making much more sophisticated requests. Their wish lists are based on prior successes, and they want to know if Recurly can help them with merchandising, catalogs, bundles, automatic promotions for expiring subscriptions and renewal marketing, among other things.

Spillover is starting to happen from the eCommerce world, too, as merchants begin to take subscription commerce more seriously. Understanding of the model’s complexity has increased among marketers and the industry in general.

And, the programs themselves are becoming more sophisticated and mature, with customized merchandising offerings to make the service sticky. Burkhart said allowing customers to personalize a box-of-the-month by adding a single one-time item increases satisfaction and keeps them on the hook over a longer range of time.

Next? Webster sees the potential for rent-to-own scenarios. For instance, if she gets an item of clothing from Rent the Runway and loves it, she may not want to rent it — but, she may be ready to own it. Or, another customer may drive a Porsche around for three months and want to commit.

Burkhart said that’s the idea. If Porsche is letting millennials drive around in its cars, why wouldn’t it try to convert them into Porsche owners at the end of the trial? But, whether or not it happens, the company continues to generate revenue along the way as consumers pay rent on the car — or whatever else it is to which they’ve subscribed.

Either way, from the business side of things, subscription commerce is definitely a win.

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