Battle of eCommerce Business Models: Why #SubscriptionWins

Subscription commerce seems to be having a moment. Subscription businesses were on the receiving end of more than $350 million in venture capital funding in 2014, a nearly 100 percent year-over-year increase in funding growth, according to CB Insights. The Honest Company, one of the subscription economy’s biggest success stories, is gearing up for an IPO.

The influence of subscription commerce is so large that it’s forcing even the largest corporations to follow suit. When Procter & Gamble launched a subscription service for Gillette razor blades last year, it was a clear response to Dollar Shave Club’s runaway success with the model.

But there is a precedent for an innovative Internet business model gaining rapid traction, only to later struggle: Flash sales. Flash sale sites and subscription businesses arrived on the scene around the same time, and while the deeply discounted flash site deals resonated with customers for a while, they’ve fallen out of favor in recent years, as customers’ priorities have shifted.

Now that the subscription industry is hitting its stride, we wanted to examine where subscription companies are excelling and where they can improve in order to avoid the same fate as flash sale sites. Our team at Retention Science analyzed data across three different types of businesses flash sale (Groupons of the world), subscription (companies that arrange recurring shipments or services) and standard retail (businesses with an e-commerce site). We crunched the numbers of over 10 million orders completed by more than 2.5 million unique customers to see how each type of business fares in various areas of customer retention and engagement.

Our analysis revealed a couple of notable findings that go a long way towards explaining why some models excel, and what is needed for sustained growth:

Average orders per customer in 12 months:

  • Subscription ‘ 7.68 orders
  • Retail ‘ 2.36 orders
  • Flash sales ‘ 1.41 orders

Subscription companies outpace retail and flash sale businesses by a long shot when it comes to a customer’s average numbers of orders in the span of a year. Although customer churn continues to impact each of these models in a major way, which we discuss below, subscription companies seem to have a leg up on the competition. They have a strong subset of loyal customers that continually reorder, increasing the number of average orders. For those subscription companies that are dedicating marketing dollars to creating an ongoing and engaging experience for the customer, it’s working.

But despite providing a natural framework for strong customer retention, many subscription commerce companies are still missing the mark and experiencing high levels of churn. Check out the numbers:

Customers that did not make a repeat purchase in the six months following their first order:

  • Subscription ‘ 72 percent
  • Retail ‘ 91.5 percent
  • Flash sales ‘ 93.8 percent

Across every business model analyzed, customer retention poses a significant problem. The overwhelming majority of customers opt for a one-off purchase, regardless of the type of business from which they’re making an order.

That being said, although just over 7 in 10 subscription shoppers do not make a second purchase within six months, subscription businesses still experience significantly higher customer retention than flash sales and e-commerce retailers. This isn’t surprising: Subscription companies prioritize investments in retention strategies, that other acquisition-focused companies neglect, because they need to be ‘sticky’ and encourage customers to renew their subscriptions. However, despite making retention a priority from the get-go, there is room for improvement.

While flash deals gained a lot of traction early on, possibly due in part to the appeal of extremely low prices during the economic downturn, they have lost the momentum. The shift away from these sites toward subscription businesses is indicative of the change of customer priority from price to value. The lowest price is no longer the deciding factor behind purchases; instead, customers are seeking out brands that deliver value to them regularly and meet their expectations for a personalized experience.

Subscription services have a leg up when it comes to retention, it’s clear there is still much room for improvement. In order to capitalize on the built-in advantage, subscription companies must focus on providing lasting, long-term value to customers. Head here for more information on why customers churn – and more importantly, how to prevent it.