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Real talk: very little is more attractive for an ecommerce business than having a robust recurring revenue and MRR base.
When people think about recurring revenue, they typically think about SaaS, utilities, etc. But that's no longer the case.
In recent years, product-based subscriptions and paid memberships have exploded in popularity, and it's easy to see why. For customers, they provide convenience and cost savings, while for brands, they bring in reliable, recurring revenue and higher business valuations.
Benefits Of Recurring Revenue For Ecommerce
The Subscription Model isn't just convenient for customers, it's an amazing way for businesses to boost their revenue and predictability.
- Recurring Revenue Flow: With customers signing up for recurring orders, businesses can bank on a consistent stream of income. This stability can be a game-changer and make budgeting, forecasting, and growth planning so much easier.
- Increased Profitability: One of the main benefits of subscriptions is that recurring orders tend to be much more profitable than a customer's first order. That's because you've already paid to acquire that customers - recurring sales go right to the bottom line without the acquisition cost.
- Less Reliant On Ad Networks & Algorithms: If you're growing your business by paying Meta or Google tons of money for expensive customers that mostly only buy once, you're always terrified that one day, ads are going to stop working for you. Building a subscription base means that the revenue won't stop right away if something happens to the algorithm.
- Better Valuations When It Comes Time To Sell: Why do you think SaaS businesses often sell for 10X or bigger multiples? MRR, baby! Very little increases the valuation of your company more than a robust recurring revenue base.
While there are lots of different flavors, there are three main types of ecommerce subscriptions that have been proven to work - each with their own advantages, nuances, and challenges.
Let's break down each one.
The Replenishment Model
The first of the four ecommerce subscription types is the Replenishment Model.
This is probably the most popular type of ecommerce subscription model, and it works best for consumables or products you use and go through on a regular basis.
Some great examples would be food products (ex. Olipop, MUD\WTR), supplements (InnoSups), pet food (ex. Sundays Dog Food or The Farmer's Dog), personal care products (Curie Deodorants), or cleaning supplies (ex. Dropps).
The big premise of these subscription services is to make it easy and convenient for customers to get recurring deliveries of the products they need, when they need them.
Why This Model Rocks
Replenishment based businesses that nail subscriptions become incredibly valuable. In theory, customers may genuinely want to use your consumable product forever if they like it enough and incorporate it into their daily/weekly habits.
Think about your favorite deodorant, the dog food you prefer for your pup, a trusted daily creatine supplement, or the coffee you've been drinking for the last five years.
Once you find something you like, there's really no need to shop around - and that loyalty is golden if you're a brand. As long as your customers are actually consuming your product and enjoying it, you can theoretically keep them subscribing for years and years.
Challenges To Consider
The Replenishment model only works as long as your customers are consuming your product on a regular basis. As soon as they stop getting value or using the product, it's very likely they will churn - and there's not much you can do about it.
The Replenishment model only works as long as your customers are consuming your product on a regular basis.
Many replenishment-based brands fail to address this - they'll spend a ton of time, energy, and money acquiring subscribers, but very little getting them to actually consume. This results in many companies following this model having significant churn issues.
Another challenge is that consumers are increasingly skeptical of subscriptions - especially when money is tight.
This means that in order to get someone to subscribe (especially for order #1), you need to make subscribing the clear value winner when compared to buying one off.
The fastest-growing subscription brands typically scale with a very compelling offer for subscribing - whether a starter kit, significant price savings, free gifts, or even just restricting their selling plans so you have to subscribe.
Finally, replenishment businesses usually have a lower barrier to entry than most other types of subscriptions, which means you'll likely have some competition.
It's important to make sure your product stands out from the crowd and offers a unique value that customers can't get anywhere else. That being said, if you can pull off an amazing Replenishment Model subscription service, it can be a major boon for your business.
The Curated Box Model
The next type of subscription ecommerce businesses typically use is the Curated Box Model.
This is when a business curates a variety of items and packs them into a themed box, which is then shipped out on a regular cadence (monthly, quarterly, yearly).
This type of subscription works great for markets that respond well to novelty, entertainment, or companies that serve hobbies/interests.
Some great examples of the curated box model might be BarkBox (pet toys/treats), Stitch Fix (curated clothing subscription), RockBox (jewelry rental service), Mystery Tackle Box (fishing gear & accessories subscription box).
Why This Model Rocks
The Curated Box Model is very popular right now because it's different and exciting for customers.
It's a great way to sell variety and novelty - you do the heavy lifting to curate great stuff fro them that they would likely never have found on their own.
The idea of getting a surprise package in the mail every month really resonates with many customers - and can lead to excellent customer retention. And it's an excellent business model if you operate in a "giftable" segment, such as clothes, jewelry, education, kids, etc.
Challenges To Consider
The challenges with the Curated Box Model are similar to the Replenishment Model, but in different ways.
For starters, it's important to make sure you're curating your boxes and including products that will be relevant for customers.
If people don't like what they get in their boxes each month, your retention rate is going to suffer - so it's essential to keep the content of your boxes fresh and exciting. Another big challenge is pricing - you need to make sure the value of the box justifies its cost, otherwise people may not see the point in subscribing.
You can also increase retention by giving subscribers a choice in what goes into their boxes, as well as offering discounts or other incentives for sticking around longer.
Finally, it's important to make sure your customers are getting something unique in the boxes that they can't get anywhere else. If people are just getting stuff that they could find on Amazon or at their local store, there's not much incentive to subscribe.
The Membership Model
In the Access Model for recurring revenue, customers typically pay a membership fee to have access to either your products or services (think Costco), or special benefits & deals (Amazon Prime, etc).
This model can be rewarding for customers because they get exclusive access to long-term savings, brand loyalty perks, and member-only discounts.
Why This Model Rocks
The Access Model is all about giving customers a great value for their money in exchange for their loyalty. The goal is to capture as much wallet share from each customer in your industry segment as possible.
The goal of the access model is to capture as much wallet share from each customer as possible within your product segment.
With this subscription type, you can offer exclusive discounts and deals to members that they won't be able to get anywhere else. You can also provide access to exclusive products or services that non-members don't have, as well as loyalty rewards for staying subscribed for longer periods of time.
In addition, access-based subscriptions give you an opportunity to build a strong brand loyalty among your customers.
Many brands use the access model to offer exclusive experiences to members, such as early product releases, first access to sales, or VIP treatment.
This helps to create a sense of community amongst your subscribers and can lead to higher customer retention rates than other subscription types. The best subscription brand on the planet, Amazon, is the the reigning king AND queen of the Access Model.
This is a great approach to consider if you still want recurring revenue, but don't have products that naturally lend themselves to either of the first two subscription models.
Challenges To Consider
The biggest challenge with access-based memberships is keeping up with the demands of customers and making sure you remain the best-value place to shop.
You need to make sure you're offering enough exclusive value in your subscription that customers feel like they're getting their money's worth - otherwise, they may not stick around for very long.
It's also important to remember that access-based memberships often more upfront investment than other types of subscriptions, so it may take longer for them to start making a profit.
Finally, you need to make sure that your customer service is excellent - access-based subscriptions rely heavily on customer support and the customer experience. If people don't feel like they're being taken care of, they won't stick around for long.
Recap
Ultimately, the type of ecommerce subscription you decide on depends on your own unique business model and customer base.
The Access Model is great for businesses that are willing to invest heavily in an ecosystem of member benefits. While this can result in lower cash flow at first, they might be the most resilient long-term businesses.
The Replenishment Model is a no-brainer for businesses that sell products customers need (or want) on a regular basis. This model is easy to set up and requires minimal effort to maintain, so it's a great choice for ecommerce brands who want to provide an easy, hassle-free shopping experience for their customers.
The Curated Bix is great for businesses that want to create a personalized experience for each customer. It's also great for brands with lots of products who want to show customers what they have to offer.
No matter which model you choose, it's important to remember that the subscription business is an ongoing process. You need to constantly evaluate how your subscriptions are performing and make adjustments if needed.
With enough hard work and dedication, you can create a successful ecommerce subscription business that brings in a steady stream of revenue for years to come.
If you run a Shopify brand with a subscription program or are considering starting one, we can help! We are a team of ecommerce subscription strategists who specialize in helping high-growth brands build and scale MRR and retention programs. Reach out today for a no-commitment intro call.
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