Why eCommerce Subscription Services Are So Popular, and How to Build Your Own

People sign up for online subscription services for many different reasons. Subscriptions strive to satisfy customers’ desire for convenience, discovery, personalization, or novelty. Because of its many appeals—and because of the reliable revenue stream it can provide businesses—subscription services have been steadily gaining popularity over the past decade.

Unlike many other business models, subscription-based companies have seen little impact on their growth since the start of the COVID-19 pandemic. In fact, one quarter of such businesses are seeing their subscriber acquisition rates accelerate, and even among those whose growth has slowed, half are still growing.

The subscription eCommerce market overall is growing at an incredible rate. Research by the McKinsey Institute shows an increase of more than 100% a year since 2013. Subscription revenues have consistently grown around five times faster than S&P 500 industry benchmarks.

McKinsey found that at least 15% of online shoppers have subscribed to an eCommerce subscription service over the past year. Almost 35% of those respondents have three or more such services.

Looking forward, 25% of consumers plan to subscribe to more services in the future. Some estimates have shown that by 2023, 75% of direct-to-consumer (DTC) businesses will offer subscription services.

Whether you already have an eCommerce business and are interested in transitioning to a subscription model or you want to start a new eCommerce business with this model, subscriptions can provide a great opportunity for growth.

Read on to learn about the pros and cons of subscription services, the three main categories they fall into, and how to get started running this type of business.

The Three Main Types of Subscription Services

An eCommerce subscription service is one that requires customers to pay a monthly fee to receive recurring shipments of products or access to exclusive benefits. Subscription services are generally divided into three categories: curation, replenishment, and access. Each category fulfills different needs and desires for customers and comes with its own set of challenges and opportunities.

Curation Subscriptions

Curation is the most popular type of subscription service, accounting for 55% of all eCommerce subscribers. Curation subscriptions provide a professionally selected collection of new items or highly personalized experiences each month.

This model works especially well for categories such as apparel, beauty products, and food. Stitch Fix, an online apparel seller that focuses on helping each customer develop their own style, delivers its members a monthly box of clothes picked by expert stylists. Birchbox aims to simplify its members’ beauty and personal care routines with monthly curated boxes and instructions. Blue Apron offers meal kits that allow busy professionals and families to cook at home more easily with pre-portioned ingredients and recipes delivered every week.

Birchbox and Blue Apron are both in the top five most popular subscription services overall.

A look at Stitch Fix’s curation subscription model.

Curated boxes can generate good profits for businesses like these, but they also require higher operating costs than other subscription models. These higher costs primarily come from the work of expertly curating personalized collections for your customers.

The key to retention with curation subscriptions is providing a personalized experience that becomes more tailored to the individual customer over time. These subscribers also want to feel they are getting good value for their money by receiving exciting and innovative products.

Replenishment Subscriptions

The second-most popular type of subscription service, with 32% of subscriptions, replenishment services allow consumers to automate purchase and shipment of products they use regularly. Typical products include razors, cat litter, or vitamins.

For example, Amazon Subscribe & Save, the most popular subscription service overall, allows customers to automate the purchase and delivery of various “everyday essentials.” Other replenishment subscriptions are built around more niche products, like Dollar Shave Club, which specializes in grooming products, and Ritual, which focuses on monthly multivitamin deliveries.

For this subscription model, strategic pricing is the most important aspect to ensure profitability and retention. Financial incentives such as discounts and a strong and consistent need for the product are the primary motivations for customers to sign up for and stick with these services.

Access Subscriptions

Subscribers to these services pay a monthly fee to gain exclusive access to lower prices or members-only perks, such as free shipping and returns. The primary categories that use this model are apparel and food.

For example, the popular online shoe and clothing store JustFab incentivizes customers to become VIP members with steep discounts, store credit, and free returns and exchanges. Similarly, NatureBox customers save on the brand’s healthy and nutritious snacks and snack boxes by purchasing a membership. Thrive Market, an online organic food and household item seller, gives monthly gifts to members while also offering up to 30% savings on exclusive products only available to subscribers.

The breakdown for a Thrive Market membership.

Consumers of these subscription services value convenience the most, followed by personalization.

Pros of Subscription Services

These subscription models share a variety of benefits for the customer and the business, as their growing popularity can attest.

Consistent Revenue

Monthly subscription fees from your customers give you a more predictable stream of revenue. This predictability allows you to more accurately forecast your sales and profits, providing more stability for scaling your business. It also allows you to anticipate your inventory turnover time, helping your inventory management become much more efficient.

Increased Retention and Higher Customer Lifetime Value (LTV)

Subscription services are all about building strong customer relationships. The insights you gain on each of your subscribers through regular customer care interactions allow you to increase your personalization efforts, which ensures even greater loyalty.

A subscription model can turn one-time or sporadic buyers into long-time customers. As long as you provide amazing products and services, a subscription model potentially offers much higher LTV than other business models, since happy subscribers will continue to generate consistent revenue for years.

Lower Acquisition Costs

The higher customer LTV of subscription models also translates to lower acquisition costs. Because each customer you acquire results in more revenue down the road, you will need to acquire fewer customers to generate revenue. The more extensive data you will gather about your existing subscribers will also allow you to optimize your marketing, wasting fewer resources. Your overall acquisition costs—the spending required to gain new customers—will go down, and you can pass those savings along to your customers to continue ensuring loyalty.

Cons of Subscription Services

Of course, eCommerce subscription services come with their share of downsides for businesses. It’s important to understand the challenges you will face if you follow this model and the best ways to overcome them.

Churn Rate Has a Higher Impact

Subscription services have a great potential for long-term retention compared to other business models. However, many of these services still face high churn rates, the opposite of retention rates, when they don’t meet customer expectations.

The McKinsey study found that nearly 40% of eCommerce subscribers have canceled their subscriptions. The higher the churn rate, the more difficult it is for these types of businesses to cover their acquisition costs. Since subscription models are based on retention, a high churn rate can be a serious problem.

The three-month cancellation rate for subscription services is over one-third. At six months, the cancellation rate goes up to over half. For meal kit services, a highly competitive market, cancellation rates at six months are even higher (60-70% and above).

On the other hand, replenishment services such as Amazon Subscribe & Save and Dollar Shave Club have a higher long-term subscription rate than other types, with 45% of members subscribing for at least one year.

To reduce churn rates, make sure to provide increased personalization over time. Customers are more likely to maintain a subscription if they find they are receiving more value from it the longer they are subscribed, such as through more tailored products and product recommendations.

For customers, the ability to customize order volumes to match their requirements, as well as to pause deliveries when needed, is a strong deterrent from canceling a subscription. Tiers of service, which allow customers to select different price points for their subscription, are also a great retention tool.

Lower Conversion Rates

Another downside of subscription services is lower conversion rates than other business models, probably because subscriptions require much more commitment than one-off purchases. Only 55% of customers who consider a service subscribe. As with retention rates, replenishment services outperform other types of subscription services with higher conversion rates.

To increase conversion rates, make sure you define what makes you different from your competitors. Customers need to have a clear reason to choose your service over any others. We’ll talk more about finding your niche and communicating the value of your business in the sections below.

How to Get Started With a Subscription Business

Just like any other eCommerce business model, you need to start by doing your research and evaluating whether you’re prepared to commit to providing these services. Make sure you’re not launching a subscription service just because other businesses are doing it.

You have to offer something that will appeal to customers and address their specific needs. Your business must be able to stand out from the crowd, especially as the market becomes more saturated. You also need to have the fulfillment structure, resources, and eCommerce platform required to support your new subscription business.

Step One: Figure Out Who Your Customers Are

You need to know the demographic and behavioral data of your target audience if you want to effectively sell a subscription service to them. You must understand why they would need your service and what would make them choose it over others.

If you have an existing eCommerce business, you should already have a wealth of data on your customers that you can use to build the ideal customer profile. If you’re just starting out, you will need to consult data for your industry and from your competitors.

The most important information you will need to know about your ideal customers is what they’re lacking or want to improve in their lives and how your service will help them. For example, customers who subscribe to meal kit services tend to be busy professionals who don’t have the time or skill to cook elaborate meals every day, but who want to eat at home.

Of course, you’ll need to get more specific for your particular service. For example, subscribers to EveryPlate are different from other meal kit subscribers because they are cooking for a family (rather than a couple or single), are more budget-conscious, and tend to stick to more classic, homestyle recipes.

Conversely, health-conscious and environment-focused Green Chef subscribers tend to be drawn by its USDA-certified organic ingredients and the availability of keto, paleo, vegan, and gluten-free diet menus.

Building a detailed profile of your ideal customer and what products or services would appeal to them the most is the first step in attracting the kind of member who stays loyal to your business for years to come. Remember: subscription services are all about retaining happy customers with personalized offers and value that’s meaningful to them.

Step Two: Understand Your Niche

Once you understand your ideal customer, it’s time to look at the market.

Like with any other business model, you need to develop an in-depth understanding of your niche before you can effectively carve out your place within it. Some subscription categories are over-saturated and incredibly competitive, so you may want to avoid those unless you have an extraordinarily appealing offer.

Niche products such as razors or lingerie make up around 20% of the subscription box market and tend to perform better than more general categories such as clothing or fashion.

No matter what your category or industry is, research your competition and find out what customers love about them. More importantly, find out what customers wish your competitors offered, and figure out how you can provide that missing value.

Step Three: Craft Your Offer

There’s no way around it: your subscription service has to stand out, even within your chosen niche. Without a stellar offer that clearly communicates the unique value you provide, your conversion rates will remain low and your churn rate will skyrocket.

Developing additional services and experiences for your subscribers, on top of a high-quality base offer, can help you provide more value to your customers. Customers of subscription services are more motivated by value, convenience, and personalization than by receiving the lowest overall prices.

For example, Birchbox, one of the top beauty subscription services in the market, advertises itself as “the fun, casual side of beauty.” Its offers are focused on simplicity, convenience, and practicality rather than glamor, trends, or fashion. Its website and promotional materials place emphasis on defying the beauty industry’s impossible standards and avoiding the overwhelm caused by too many choices.

Subscribers can customize their monthly boxes as much or as little as they want, and educational and instructional materials on health and grooming routines are included in the kits and on the website. All in all, Birchbox is meant to be as user-friendly as possible.

Pricing is also an important factor in crafting your offer. While you obviously want to set a price that will attract customers, it also needs to be a price that will provide your business with a healthy profit margin. Customers are willing to pay premium prices for high-quality products and services.

You can use Cratejoy’s subscription box pricing calculator to estimate how much you will need to charge for a monthly subscription.

Step Four: Focus on Retention

Once you have grown a solid subscriber base, you should focus on retaining those customers. As we’ve mentioned before, customers will quickly abandon subscription services that don’t provide them enough value.

Curation and access customers expect their subscriptions services to get to know them and send or offer them increasingly relevant products. Many of these services ask new customers to complete a quiz when they join, but that’s just your first insight into each customer.

As subscribers receive their new products, provide them with the opportunity to give feedback on what they liked or didn’t, especially if you run a curation service. If you run an access service, keep track of the products subscribers buy with their membership. Take note of any adjustments they make to their orders or subscriptions. Use this information to provide the most relevant suggestions to customers in the future.

For replenishment subscription services, remember to continue to provide value and convenience. Customers tend to sign up for these services so they don’t have to worry about purchasing convenience items each month. Keep tabs on their satisfaction with the process by allowing them to give feedback. Just as importantly, give them the opportunity to adjust the quantity or frequency of their deliveries so your products don’t pile up unused.

Customer service is essential in any eCommerce business, but especially so for subscription companies, where the goal is to develop a long-term relationship with your customers. 96% of consumers say customer service is crucial to brand loyalty, so make sure yours is top-notch. Read our post on how to automate aspects of customer service to improve your overall customer care quality.

Make sure you treat your existing subscribers like integral members of your community. Find out where your customers spend time online and engage with them on those platforms. The more positive experiences your customers have with your brand, the more likely they are to keep their subscriptions. To learn about how to create meaningful connections with your customers on social media, read our post on the topic.

Finally, encourage customers to pay their subscriptions in advance or auto-renew their monthly payments. Many subscription services offer discounted monthly prices for customers who commit to a six or twelve-month subscription. These incentives increase retention and will save your business lots of money on acquisition.

Step Five: Track Key Performance Metrics

Customer retention efforts (step four) and performance metric evaluation (step five) should occur in lockstep with each other throughout the life of your business. The most important metrics for you to keep track of are monthly recurring revenue, customer acquisition costs, customer lifetime value, and churn rate. Of course, you should always continue to gather qualitative data on your customers’ experience as well so that you know what you need to improve.

Businesses that offer subscriptions have to strike a careful balance with all these metrics to ensure they remain profitable and sustainable. Even more so than with other business models, you’ll need to keep a careful eye on cash flow. Adjust your core offer, messaging, prices, tiers, and add-ons wherever necessary to lower acquisition costs and increase retention. If your customers have complaints, listen to them.

By tracking these key performance metrics, you can monitor and improve the health of your subscription service and take advantage of the stability of this model to scale your business.

How We Can Help

Now that you know the most important factors that go into crafting a successful eCommerce subscription service, it’s time to put this information into practice.

The high level of personalization subscribers expect and the importance of managing acquisition costs mean that you’ll need a powerful, high-converting website and an expertly crafted marketing strategy. At Optimyze Digital, we build custom websites and online stores that boost engagement and sales for our customers. We also develop tailored marketing strategies that have generated over $10 million in yearly eCommerce sales over the past three years.

Contact us today to find out how we can help you create and grow an incredibly profitable eCommerce business.