Article

Tom Williams
Tom Williams 17 March 2020

Is Subscription Retail the Future?

The subscription model is on the rise thanks to its convenience and flexibility, but is it really the future of retail?

There’s no denying that shopping habits are changing. When you combine this with evolving lifestyle habits also, the landscape in which retailers and tech companies used to operate has really shifted – converging so the lines have blurred between the offerings. This in itself has partly led to the rise of subscription retail, which has boomed – growing by more than 100% in the last five years, according to McKinsey.

Some brands – such as Netflix, Amazon and Naked Wines – have really cornered the market and set the standard on how to make it work. As a result of this rise in popularity, more and more households are now familiar with the model, which before was relatively novel. Admittedly they were used to the monthly direct debit aspect – phone contracts and utilities have long been operating like that – but much like finance agreements, they were based on set-term contracts, whereas the beauty of the subscription model is its ease and convenience – people aren’t tied in.

This simplicity has no doubt spurred the success of the subscription model – if people are happy and content with the arrangement, they will continue the relationship. This is a cornerstone of retail, and one which many vendors have been working to for years, especially recently when online has opened up a far more competitive playing field. By this very nature, if the customer is let down, then the relationship will likely end.

Subscription retail, however, is different, as it takes away a lot of the thought process which goes into traditional retail. It delivers customers what they want on a monthly basis, saving them time and effort, and building a loyal fanbase in return. Physical retail doesn’t necessarily guarantee this success, as in-store promotions may mean a consumer tries a different brand on a monthly basis, spurring more impulse buys, which subscription retail eradicates.

This escape from sales fluctuations is useful in more accurately predicting supply and demand. Knowing how many members will receive services or goods that month helps to ensure correct stock levels, or shift excess stock if they know that subscribers will like the end product – something other retailers are unable to do.

However, it’s not all positive, and the core of subscription retail – its convenience – can be the downfall for some operators. Cancelling is easy, and provides little time to potentially make up sales. There is also a risk, especially with regard to perishable or fashion items that subscribers may return their goods and ask for their money back – meaning these costs must have been covered within the subscription to stay profitable. If not, the issue of high overheads and excess stock comes to the fore – all of which needs housing and then reselling if that’s indeed possible.

Consumers are also fickle. Aside from changing their minds, they do have a tendency to over-estimate how much they will use a product when they subscribe. Initial uptake is often high, but as customers realise they are not using the product or service as much as they estimated, subscriptions can reduce in quantity or cancellations rise. For subscription businesses trying to grow, this one step forward and then back is not ideal, as the costs of customer acquisition outweigh loyalty.

Therefore, for businesses considering moving into or offering subscription services, there is a definitive risk. Even for digitally native brands, the risk is still extreme – Netflix and Amazon Prime commission content based on targets, and expensive outlays based on predicted numbers can easily disrupt the balance sheet. Like many business strategies, what works for some may not work for others. So, businesses, retailers, tech companies, whomever, need to make sure they have covered their costs and there is enough of a demand before committing to offering it.

It shouldn’t be forgotten that there will always be a demand for the traditional procurement of goods – as some people will prefer to buy due to the value gained. This doesn’t mean the rental market will saturate – it’s anything but currently, with car leasing a prime example of an industry in the ascendancy; as it affords people the opportunity to budget on a monthly basis, over accommodating an outright spend.

What’s clear is that successful businesses will be the ones which can harness these varying consumer needs, providing flexibility and the best of both worlds. Whilst this of course won’t be an option for all, in today’s land of unmatched choice and convenience, meeting the consumer halfway will win you more favours than not.

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