We all know that e-commerce is growing but one of the fastest-growing niches within e-commerce is the subscription-based business model. This area of e-commerce has seen explosive growth over the last few years and has also been increasingly popular with consumers.
There are many benefits to starting a subscription-based business and in many ways, these businesses can be superior to a traditional e-commerce retail store.
If you’ve been interested in learning how to create a subscription service business, this article will give you all the core information that you need to start your journey. We’ll go over exactly what an e-commerce subscription-based business is and what you’ll need to get started in this lucrative industry.
What Is A Subscription Business Model?
A subscription-based business focuses on recurring purchases – either monthly or other set intervals. These purchases can include items that consumers need regularly, such as razors or soaps.
They can also be products in a specific niche or category that is of interest to the customer. In these cases, a subscription-based business will often offer a curated assortment of products that are sent to the customer on a regular basis. Or Monthly access to certain services, known as a streaming service for TV shows, movies, music, and more.
The key advantage of this business model is that it uses a subscription revenue model and recurring billing. With recurring billing, the lifetime value from individual customers can be much higher than with a traditional e-commerce store that sells retail items.
Below we’ll explain these advantages in detail.
One of the most important benefits of running a subscription business is that income and revenue are much more consistent and predictable. Instead of constantly trying to acquire new customers on a daily basis, a subscription business instead has monthly recurring customers.
This means it’s much easier to anticipate and plan what your income and revenue will be month to month. Many subscription models work on an annual recurring basis which means that not only can you get better month-to-month predictable revenue, but this also applies to your annual revenue.
More Operating Cash
One of the common struggles for small businesses is to secure enough operating cash on hand to expand and cover expenses. A subscription business helps to alleviate this pain point by ensuring that a majority of revenue from each customer is taken upfront.
As mentioned, most subscription businesses operate on an annual model with customers paying the annual total for a monthly subscription. This means the business gets the money for the whole year from that customer on day one. This drastically alleviates cash flow issues that many small businesses struggle with.
Higher Return On Customer Acquisitions
The high cost to acquire a customer is also a common pain point with small businesses and especially e-commerce businesses. Online advertising can be expensive and when e-commerce stores are only selling individual items for a one-time purchase. These advertising costs can significantly threaten margins.
Subscription businesses solve this issue by increasing the overall spending of each customer. This means that your cost to acquire new customers will have a much higher ROI.
Customer Loyalty And Communication
One of the great aspects of subscription businesses is that loyalty is built into the business model itself. Because you’re sending new products to each customer monthly, you’re in constant communication with that customer. This constant communication opens up opportunities to stay relevant and build brand loyalty over time.
Other business models try to replicate this through either mailing lists or newsletters sent to past customers. but it doesn’t have the same built-in organic quality as a subscription business model.
Additional Selling Opportunities
The enhanced customer communication we just mentioned also opens up a huge opportunity for additional marketing. You already have a recurring relationship and trust with that customer. This means that your additional offers made to that customer will carry more weight.
Understanding The Different Subscription Business Models
There are three main types of subscription businesses and most online stores will fall into one of these categories. Below we’ll go over each of these business types as well as the pros and cons for each one.
Replenishment Subscription Model
This may be the one that most people are familiar with. In a replenishment subscription business, products that are used regularly and then need to be replaced can be packaged into a recurring subscription model.
It’s common to see this business model with items such as razors or other consumables that customers need on a recurring basis.
Subscription Model Pros
One big advantage of this business model is that it’s an easier “sell” to the consumer. You are selling an item they already need and buy at regular intervals. You are simply offering it with more convenience and often at a lower price.
This makes it easier to convert leads into customers.
Your customer retention is also higher due to the inherent nature of the products being sold. They already need these products regardless. So assuming they are satisfied with the service you provide, there is little incentive for them to change.
Subscription Model Cons
The biggest drawback of this business model is that it’s highly price sensitive. Which means margins are often smaller than in other business models.
Consumers in this area want lower prices and much of the competition will be touting prices as a main selling point. This means you’ll need volume in both product sales and customers to compete on a price basis.
For those who have difficulty running a highly efficient business, this may be a struggle.
You’ve probably seen advertisements for these types of subscription boxes either online or even on television. These are businesses that focus on a specific niche or category of products that are then curated by the business before being sent to the customer every 30 days.
A common example of this type of business can be found in fashion – either men’s or women’s. Each month the business will curate a specific grouping of fashion items and send those to their customers.
Consumers enjoy clothing subscriptions and the like such as in this business model for two reasons. First, it can sometimes take them out of their shopping rut and expose them to new items they may not have tried or experimented with otherwise.
Next, it also allows for anticipation and excitement when that new package arrives because they don’t know exactly what it may contain. So each month it’s almost like receiving a present or a gift as a surprise.
This curated-style subscription box business model has great untapped potential. It can be applied to many niches and categories where there is little competition as of yet. It’s a very adaptable model.
Subscription Boxes Pros
The biggest benefit of this model is the high margins. Which makes it the opposite of the previous business model. These subscription boxes are often seen as luxury or discretionary spending, so the subscription pricing can be higher. Customers are looking to “treat” themselves, and the pricing can reflect that.
Subscription Boxes Cons
While there may be higher margins, the products are also not seen as necessities like in the previous business model. This means there will generally be fewer repeat customers.
This can be countered with successful advertising to acquire new customers. Acquiring new customers will be far more critical than with the replenishment model as the churn rate is generally higher with subscription boxes.
The next biggest issue with this model is the sourcing and operational complexity of curating and sourcing various items each month. This means you will need to be dealing with suppliers far in advance to secure products. You’ll also need strong forecasting skills to make sure you meet demand perfectly and don’t end up with too little or too much product.
This is especially true considering subscription boxes often deal with trendy items. So the shelf life may be much shorter than something like pet toys or razors sold via the replenishment model.
Club Or Access Business Model
In this model, customers pay a monthly fee to gain access to a host of products that are sold at discounted prices. These products can be in a specifically targeted niche or they can be more general items.
This isn’t necessarily a new business model as buyer’s clubs have been around for some time in the retail space. In this case, it’s just being adapted to the e-commerce model. These are also sometimes referred to as service subscriptions.
Some popular subscription services in this category are offerings like Amazon Prime or Thrive Market. Although many smaller Niche services exist as well.
These subscription-based services offer a dual channel for revenue. You earn money on both the subscription and on products sold. You also have more opportunities for upselling and more frequent purchases since customers can order whenever they want, not just at recurring intervals.
This business model needs to be managed very carefully to make sure that customers always feel their membership is worthwhile. This means that either through exclusivity, perks, or low pricing, customers need to feel they are getting value for their monthly membership.
This can create a delicate balancing act when managing the business and setting pricing or member perks.
Making Subscription Business Models Work For You
Now that you know the key types of subscription business models that exist, it’s time to decide which business idea is best for you. The decision process should include which product or industry you’re knowledgeable in, your business skill set, and your goals for the business. Let’s look at how to start your small subscription business.
Decide On Your Product
This comes first when deciding how to start a subscription box business. You’ll want to focus on markets and industries you have experience with or knowledge of. For example, if you have experience in the fashion industry or retail clothing industry, a subscription box service in this niche may be a good fit.
If you have experience in personal fitness, health, or supplements, then a business in this area may be a good place for you to start building a subscription box service.
You’ll also want to conduct market research to learn where there are gaps in the marketplace where you can set up your shop. Some niches are oversaturated and the competition is mostly price-based. These are not great areas to start unless you have a distinct market advantage planned that others cannot easily copy.
Evaluate Your Skill Set
Different business models require different skills. Evaluate yourself and be honest with what your skills are.
Are you strong with analytics and number crunching? Are you happy pouring over spreadsheets to find inefficiencies? Then a replenishment business may be a good fit for you. Your skill set will keep costs low and you’ll run the business as efficiently as possible, saving even more money.
Determine Your Pricing Strategy
This means finding out where you intend to position yourself in the market. Are you a luxury brand that will focus on high-end pricing and services? Or are you focused on discounts and the best pricing possible?
This can also play into your customer acquisition strategy. Are you offering free samples, trials, or other perks? These can be great if they convert prospects into paying customers but can be huge money-loser if they don’t.
Remember Customer Retention
This subscription business model thrives on customer retention and those recurring memberships. This means that your existing customers must always feel they are getting value. To do this, you will need to always be adjusting your products or messaging so that customers feel the value proposition still makes sense.
If you have high customer turnover, then you’re essentially just running a regular e-commerce business and not reaping the rewards of a subscription business.
Determine Your Subscription Marketing Strategy
This can be tricky and trial and error are often needed to achieve success in modern online marketing. However, certain business models tend to do better with specific marketing channels.
Sponsored or paid influencer spots can be great for subscription box services. Having a trusted source speak about the quality or diversity of the products they received can do wonders to attract new customers.
Replenishment models can also do well with sponsor or influencer spots. But the margins may not be high enough to support this strategy at first. An option here is to then use traditional digital marketing like PPC with ads that address the consumer pain points associated with the cost and inconvenience of buying the same items over and over again.
Some companies use a free trial subscription box to hook customers. This can work, but you must be careful in how you go about trials so as not to end up losing money on free subscription boxes.
Whatever subscription marketing method you choose, you’ll need to focus on analytics since ad budgets can quickly spiral toward a negative ROI when not monitored.
Setting Up Your Subscription Business And Website
Your main entry point for customers will likely be your website. This is where they will come after learning about your product via marketing channels.
You have two choices here. You can either build from scratch, which is the most expensive option but gives you the most flexibility. The other option is to use a platform such as Shopify.
The advantage of using a platform is that the many functions needed already have apps or integrations that can easily be used. Most of this requires zero coding experience and there are plentiful tutorials online for most of these integrations.
If you’re on a tight budget, this may be the best option for you as well.
Setting Up Your Subscription Payment Systems
Regardless of your chosen business model, you’ll need a payment processor and gateway that is secure and has the features necessary to deal with various recurring billing options.
ECS Payments offers subscription business model payment processing for virtually all industries. This includes high-risk products and other services which other common processors may not allow.
Additionally, you will want to be sure you have a payment processor that can assist with any chargebacks you might receive from your subscription billing payments. Unfortunately, with subscription billing, many cardholders begin issuing disputes with their banks. Either because they don’t recognize the recurring payment or because they cannot figure out how to cancel their subscription.
Some tips to avoid this would be to make sure your business description is clear and matches the DBA name that the customer would recognize. Additionally, one of the best things you can do is make it very simple for clients to cancel whenever they want.
Source Your Products
Your business plan should already include the industry and product you plan on selling. Now it’s time to physically source that product.
You’ll also need to decide how these items will be fulfilled. Are you going to keep an inventory yourself or will you be using a fulfillment service? For single-product business models, you may be able to source and ship right from the same supplier without ever touching the product.
For subscriptions box services with various products, this won’t work. So you’ll likely need to source these various products and have inventory space available to hold and fulfill orders. This can be something as small as a garage if you’re just starting out.
Design Your Subscription Marketing Strategies
You may need marketing materials such as photos, videos, and product descriptions for whatever it is you have chosen to sell. You can do this yourself, although professionally made content will fare much better when attracting customers.
If your business model is truly unique, you’ll likely need a professionally produced explainer video to feature on your website along with shorter versions for advertising. You’ll also need high-quality product photos to use in various marketing materials.
Once that is completed, you can begin your advertising strategy. This can be focused on paid advertising, social media, sponsorships, or other channels.
If you’re new to online marketing for an e-commerce store, you need to start this process slowly. It’s not uncommon for early marketing campaigns to lose money before they become profitable. If you go in with a huge budget, you can lose it before you make that turn toward profitability.
Test all your marketing efforts and only scale them up when you have found a successful strategy. Never throw more money at a failing strategy hoping it will turn around. That may sound like common sense, but many entrepreneurs fall into the trap of spending more on a marketing campaign that has a negative ROI.
Adjustments And Final Thoughts
The key to running a successful business is to always be one step ahead. This means making constant adjustments based on actionable and reliable information.
Once your subscription business is off the ground, monitor every aspect of customer acquisition, retention, and other metrics to see where your efforts are succeeding and where they need improvement.
If you do this, you should be able to quickly grow your small business into a long-term successful enterprise that provides a highly-reliable monthly recurring revenue (MRR) stream.