Subscriptions such as Amazon Prime, Target Circle 360, and Walmart + continue to be popular ways for retailers to attract and retain customers by offering incentives such as product discounts, free returns, and free shipping. Types of retailer subscriptions vary from annual subscriptions, such as those offered by the aforementioned companies, to monthly curated box subscriptions such as Stitch Fix, BarkBox, and FabFitFun.
Customers who embrace subscriptions tend to enjoy the convenience and frictionless experience. According to Maximize Market Research Pvt. Ltd, the global subscription e-commerce market size was estimated at $120 billion in 2022 and is expected to reach nearly $640 billion by 2030.
But are subscriptions right for all retailers? With new billing platforms, remote customer support, and digital services, it may be worth considering.
Subscriptions are not new. Robbie Kellman Baxter, a consultant specializing in subscription business models, notes the business model dates to trade guilds in the 12th century. And in 1926, for example, a book mail order service debuted a new subscription service, The Book of the Month Club. It started with 4,000 subscribers and climbed to more than a half million of them within 20 years.
Among the benefits are that retailers enjoy a steady revenue stream and a wealth of data. Data can transform how companies procure their products and design products, and it can help reduce waste.
Also, knowing how many subscribers there are makes it much easier to forecast how much inventory is needed for a subscription service, which can help minimize excess inventory.
A Coresight Research consumer survey found that 56.9% of surveyed consumers are members of at least one loyalty program, and more than half spend more with retailers once they join their loyalty program, a net 39.5% higher overall spending. Of those surveyed, 75.4% valued the discounts such programs offer, followed by free or discounted shipping, at 63.2% of total respondents.
However, retailers that offer subscription services have a few drawbacks, such as the cost to acquire customers, the difficulty of retaining customers in a highly competitive subscription market, and the need to continuously find new ways to provide value and delight customers.
The largest retail subscription service is Amazon Prime. Consumer Intelligence Research Partners estimates that 180 million people had a Prime membership as of March of this year, an eight percent increase from 2023.
“Free” Delivery
The increasing cost of transportation, particularly the last mile, has led numerous retailers to offer “free” delivery as part of a subscription service to offset those costs and for some retailers to profit. Amazon, Target, and Walmart all include free shipping as part of their subscription services. Free shipping is also offered by such retailers as Sephora, which offers a loyalty service based on various levels; Barnes & Noble, which offers two membership levels ranging from free to $40 a year; and Best Buy, which offers three membership levels ranging from free to almost $200 a year.
Studies have shown that offering free delivery as part of a subscription service can help compensate for delivery costs, reduce customer churn, and be a significant revenue source. In fact, researchers from North Carolina State University and Texas A&M University calculated that membership-based free shipping programs (MFS) deliver a monthly average increase in net customer revenue by 12.75%, or $19.93.
The study also found that the free shipping benefit may motivate consumers to purchase more often and increase members’ purchase variety and impulse purchases.
However, free shipping might hurt retailers’ financial outcomes as the increased sales may not offset the lost shipping revenue and other associated costs.
As such, retailers are advised to price subscriptions accordingly, considering transportation costs and other operational and marketing costs that need to be considered within the pricing. Retailers may also need to raise product prices to help cover the costs not covered by the subscription price.
When considering the transportation costs and assuming the costs are optimized, the North Carolina State University and Texas A&M University study found that a lower free shipping threshold may result in smaller effects on MFS as the unlimited free shipping benefit becomes less attractive, whereas a higher membership fee may prompt members to purchase more to make their investment worthwhile.
But remember, the increased sales may not be able to offset the lost shipping revenue. Finding that sweet spot between a too-low and too-high membership fee is critical.
Optimizing Transportation Costs
If a retailer’s transportation costs are not optimized, or if the retailer is unsure if they are, it is best to have a third-party advisory group with deep expertise review the contracts to ensure they are receiving the absolute best rates, discounts, surcharge rates etc. We have consistently seen reductions in net delivery costs of over 16%, so now is the time to re-negotiate. Additionally, companies must ensure they are utilizing the right service levels and transportation modes; some should consider lockers or other third-party drop-off or pickup locations to further lower their costs.
The retailers should align themselves with a third party that is able to provide them with a competitive advantage as it relates to (BI) Business Intelligence, trends/alerts, and auditing of invoices. In the competitive marketplace, it is imperative that you have the tools to proactively manage your complex supply chain and the customers’ expectations.
Are Retail Subscriptions Right for You?
Before you answer this question, it’s imperative to:
- Do your homework.
- Decide what type of subscription and what perks to include. If you offer free shipping, be sure that you can afford it by optimizing your transportation costs.
- Price the subscription service competitively – not too low and not too high.
If you do decide to offer a subscription service, be sure to establish key performance indicators (KPIs) to measure its success and tweak as needed.
Jay Kent is the founder of SLB Performance, a business advisory company that helps companies lower their costs and drive shareholder value for the company. Jay has more than 25 years of experience in growth and turn-around companies with deep expertise in supply chain, global/domestic transportation, operations, omnichannel, retail, B2B, third-party logistics, vendor management, manufacturing, procurement, contract sales, industrial engineering, inventory planning/allocation, technology deployment, wholesale, and C-Suite executive leadership for medium to Fortune 150 companies.
This article originally appeared in the September/October, 2024 issue of PARCEL.
