Subscription Businesses for eCommerce Business Owners. The Complete Guide.

As customers, most of us are pretty used to subscriptions, perhaps subconsciously. If you have Netflix, a gym membership, Amazon prime, or a Costco membership you're already subscribed. As a business owner, should you offer subscriptions? What are the pros and cons? and how would you do it?

In this article, I walk you through how to implement a subscription model in your business coming from my experience setting up, selling, and managing over 2K subscriptions in an eCommerce start-up.

What is a subscription business?

Let's start with a definition for framework purposes.

Subscription Business Definition

A subscription business is a business model where customers enter a billing agreement to receive automatic access, products, or services from a company with an agreed-upon frequency.

What are the benefits of subscription businesses?

Let's explore the benefits of subscription businesses for both, the customers and the companies that offer them.

Benefits of a Subscription Business for the customer

For customers, subscription models often offer the following:

• Convenience: facilitate access to products and services without the need of having to go through the process of reordering every time.

• Exclusive deals and perks: Customers receive a discount or other perks and benefits for entering recurrent subscriptions.

Benefits of a Subscription Model for eCommerce Businesses

When running an eCommerce business - selling products through an online store - a subscription model could offer the following benefits:

• Revenue predictability & cashflow health: Subscriptions bring a stream of recurring revenue (MRR) to feed businesses' operations with some level of projected consistency.

• Increase the lifetime value of a customer (LTV): A customer that subscribes may be a customer for longer and may generate a higher $ value over time than if the customer was just a one-time customer or a recurrent customer that is not a subscriber.

• Upsell, cross-sell, and higher AOV: Having a subscriber is having a customer consistently connected to you and consistently receiving your product and your marketing which makes upselling and cross-selling easier increasing your AOV (Average Order Value) as a result.

• Offer exclusive perks and benefits to loyal subscribers: When a customer becomes a subscriber, they are displaying trust and love for the product and the company. These customers are most likely to become your biggest fans and recommend your products to friends, family, and their communities. The power of word of mouth.

What type of products can I turn into a subscription business?

Here are some of the top products you can turn into a subscription business:

Products that are consumed on a regular basis

Products or services that a customer will need over and over on a regular basis are great candidates for subscription models. Food, drinks, supplements, baby products, contact lenses, and pet food are examples of products that customers will most likely run out of after a specific time period.

Subscriptions are about convenience and reducing the friction that comes with recurrent purchases. By offering a subscription option for products that customers need on a regular basis, customers can receive products directly at their doorstep without having to:

1. Run out of a staple item in their routines.

2. Go through the time-consuming shopping process again - either in person or online.

3. Have to wait for shipping.

4. Or, have to set up their own reminders to shop again.

Memberships that unlock premium features

Recurrent memberships that unlock access to exclusive products, offers, and content are also examples of subscription models.

Let's use Costco as an example. Costco is a store of physical products offering products (often in bulk) at warehouse (discounted) prices. To have access to these special prices and other perks, customers pay a recurrent member subscription.

Idea: you can offer both 1) have special features, pricing, and content for members only, and 2) still offer general access to other newer customers who may not know you enough yet to make the commitment to start a membership. This way, you can offer both, a generic shopping experience, and a VIP-exclusive community - giving you more time and opportunity to convert one-time customers into memberships, as well as cross-sell and upsell both.

Creative Subscription Business Models

You could turn pretty much any product business into a subscription model. There are pretty creative subscription model ideas out there, for example, box subscriptions offering clothes, jewelry, make-up, toys, slimes, and other crafty products.

The key to subscription businesses is for the subscription to solve a specific problem the customer is having. Let's do a quick overview of how one of these subscription businesses would work. For this example, we are looking at a clothing company offering subscription options for their customers:

1. The company offers a monthly subscription sending 10 handpicked items to the customer based on their preferred style - the problem this subscription is solving is "having to go shopping for people who love fashion but dislike going shopping".

2. The customer likes this brand (and clothes), the messaging is on point, the call to action is clear and the customer subscribes.

3. The company sends a box of pre-selected items in an agreed-upon frequency, let's say monthly.

4. The company provides the option for the customer to return the items that were not a good fit and keep their favorite ones.

5. The customer is now happier, looking more fashionable and not having to worry about going shopping.

6. The company receives monthly revenue for solving a problem for this customer on a recurrent basis.

The key to creating and promoting subscription businesses is for the subscription to consistently solve a specific problem the customer is experiencing.

Subscription Models: SAAS vs physical products

An interesting industry known for its subscription model approach is the SAAS industry (Sofware As A Service). Well-known companies that offer software access and/or upgrades from the generic software to their subscribers are companies like Apple, Microsoft, and other businesses providing online tools (Zoom, Canva, Adobe, email marketing platforms like Mailchimp or Klaviyo), educational material (Medium, Havard Business Journal) and Entertainment (Netflix, HBO, Youtube) among others.

If you own a product business there are interesting lessons and ideas you can take from looking at how SAAS companies operate. There are plenty of resources available out there to study SASS subscription models. While I recommend seeking ideas and inspiration, be aware that

• Many SAAS companies have high startup costs (engineering + ensuring compliance and security are expensive) - which is why they may need funding and investors at a very early stage.

• Companies that count on heavier funding may be able to afford to experiment with significant losses that other smaller start-up businesses may not be able to afford.

• Software subscription businesses may have different benchmarks to define success than the ones for other start-up product and services companies with little to no outside investment, for example, when it comes to projections, churn, and expenses to fix technical errors, improve software, ensure compliance and security, and other aspects of the industry.

How do I find subscribers?

It takes a little bit of time, strategy, and trial and error to not just find the ideal customers, but also to:

1. Lockdown competitive pricing and subscription perks offered

2. Learn how to promote your subscription offers (value proposition, copywriting, funnel, targeting, creatives).

3. Ensure fulfillment, customer support, and order management system are set up in the most efficient way.

When you are thinking about finding subscribers - consider the following:

• Funnel Theory: It would be easier to convert a current customer into a subscriber (Bottom of Funnel - BOF) than someone that just found out about you who is not a customer yet (Top of Funnel - TOF).

• Value proposition: Ensure your subscription model is solving a problem and that you are clearly communicating the problem and the solution (attention to the value proposition and copywriting).

• Customer feedback: Ensure that your solution makes sense to the customer - for example, selling a monthly subscription to receive a new TV every month may not be very successful, but offering a yearly membership to upgrade your TV every year with some perks included could be a different story. Be open to switching your offer and receiving feedback from your customers (surveys may help here too).

Turn one-time orders into subscriptions

To get your first subscribers, I would recommend starting by leveraging your already existing customer database. They are the most likely to subscribe because they have already bought from you so we assume that they know you, trust you, and love you - especially recurrent customers. It should be pretty doable to find a list of your recurrent customers in Shopify, Klaviyo, or similar platforms. Here are the benefits of promoting subscriptions to existing customers:

1. Less friction: You don’t have to go again through the process of proving your trustworthiness because they already went through the decision-making process of trusting you and buying from you before - so there is less friction here than with a brand new customer.

2. Lower costs: Your existing customers are already at the bottom of your marketing funnel (BOF) vs new customers who are at the top of the funnel (TOF), You may be able to cut costs of acquiring brand new customers by retargeting (often less expensive per conversion) and setting automated emails/follow up communication.

3. Upsell, cross-sell and increase AOV: If you offer multiple products and or services, you may be able to increase your subscription AOV (Average order value) and or upsell and cross-sell with more ease.

Your existing customers who already know you, trust you and - hopefully - love you are closer to subscribing to receiving recurrent products than brand new customers.

Here are some ideas to convert your current customer list into subscribers:

1. Email Marketing - this can be an automatic flow for recurrent customers (you can start with 2-3 emails).

2. Text Marketing - this can be an automatic flow for recurrent customers (you can start with 2 texts - make sure your customer has provided consent to receive promotions via text).

3. Direct Phone Calls - this can be an outreach program that you or your sales team do.

4. Social Media DMs - this can be an outreach program that you or your sales/social media team do.

5. Inserts - you can a flyer or a QR code in their next package with a link to upgrade their subscription.

6. Advertising - retargeting existing customers with a one-time special offer when they subscribe (% discount, or a free month, or a perk).

Acquire new customers and turn them into subscribers

When you only offer subscription options, potential customers have no other option than to subscribe to try your product. My recommendation is to offer both options - one-time orders and subscriptions.

However, if you are still aiming to convert new customers into subscribers you could try to leverage common customer acquisition channels until you find the right channel where your customers are the most receptive to signing up for a subscription to try it.

To find subscribers, you could use the conventional tools and channels you would use to acquire new customers. Here are some ideas:

• Funnels & Paid Ads: Create high converting customer acquisition and sales funnels and run traffic to them via advertising channels Facebook, Google PPC, Media Buying, Pinterest, Instagram, etc. Retargeting ad strategies and automated email follow-ups could become your new best friends.

• Affiliate Programs: With affiliate platforms like Share-a-Sale, you can reach people that are already members of subscription platforms. These members are already familiar with entering subscriptions to receive a specific feature or perk + some of these platforms could allow you to promote your brand to highly targeted audiences. For example, if you sell protein powder subscriptions, you could reach the members of a fitness program (where customers already pay a monthly membership), and they could be more likely to sign up to receive recurrent protein powder from you.

• PR (Public Relations): Also if you get into publications or blogs with high traffic you may get visibility and the first impression from some potential customers that may turn into subscribers in the future. Remember, it takes an average of 7 touch points to convert a customer.

• Ambassador programs: Ambassadors may be able to add that personal touch to your promotions and share with their friends and family the perks of subscriptions they believe in - while they earn commissions per new order at the same time.

• Influencers programs: Similar to ambassador programs, influencers already have an audience with whom they have established trust - working with influencers and UGC (user-generated content) could be a powerful way to drive more traffic to your online shop (and subscriptions).

• SEO (Search Engine Optimization): It is a bit more of the long-term game, but you could create high-quality and SEO-rich blogs that over time can rank high on Google, potentially allowing you to reach a wide audience based on the demand and relevancy of the keywords used.

• Direct Sales: Doing sales calls, DMs, texting.

If you only offer subscriptions (and not the opportunity to buy one-time) you may get customers who don’t intend to subscribe and who subscribe anyways to be able to try your products - especially if it is the only option you offer.

Because of this, with brand new customers that become subscribers right away, it could be a good idea to count on a higher initial churn rate for your projections. Churn rate is the rate at which you lose subscribers. For example, a churn rate of 10% in the last 3 months, means that you lost 10% of your recurrent revenue from subscriptions in the last 3 months. For projections, it could mean that if things stay as they are, you can count on 10% of subscribers dropping after 3 months.

Value proposition vs. deal proposition

Customers that don't originally intend to subscribe (or stay subscribed) will most likely unsubscribe after the 1st, 2nd, or 3rd month - if they have forgotten to cancel the subscription or cancel their initial free trial and realize they are still on a subscription when they see the charge in their credit card. Because of this, when you are working on acquiring new customers - you may want to be intentional in creating the right message and the right offer to attract those customers that are really passionate about your product or really need the subscription that you are offering vs. the customers that are driven by discounts,

Focusing on discount-oriented offers can create a scenario where you will have to consistently focus on the next discount, competing with others for the best price and lowering your price (sometimes so much that it may start eating up your profits). There may be scenarios where playing with discounts may make sense if you aim to keep a percentage of customers that actually end up loving the product and choose to stay with you. My recommendation, however, is to focus on value proposition, attracting the customers that are passionate about the product and the company, and not solely about the discounts.

Churn rate is the rate at which you lose subscribers. For example, a churn rate of 10% in the last 3 months, means that you lost 10% of your recurrent revenue from subscriptions in the last 3 months.

How do I promote and sell subscriptions?

Handle objections before they happen

When offering subscription options to your customers, there are some friction points -or objections - your customers have that you may want to consider addressing in your marketing and content to increase conversions. Here are the top objections I have seen and some ways to handle them when promoting subscriptions:

1. "Am I going to be hooked forever?" - Communicate how easy it is for your customer to cancel their subscription (and actually make it easy and SHOW them how with clear instructions).

2. "Is this a scam?" - Showcase reviews and as much social proof as possible, especially during the checkout process.

3. "So, how often are you charging me again?" - Clearly layout the terms of the billing agreement, frequency, and products they are receiving. Clearly is the key word here. No super complex or long explanations, and of course, no gimmicks. Icons and quick visuals can help make the message clearer.

4. "I didn't know it was a subscription" - Ensure that during the buying process they have the opportunity to confirm multiple times that they are signing up for a subscription to minimize confusion and send an automated email receipt after the customer has placed a subscription order.

5. "What is the refund policy?" - Ensure that you have a refund policy readily available on all pages of your website and that this refund policy also includes how to cancel the subscription, how to manage their account, and how the customer can access, and delete and change their information. A 30-day money-back guarantee in the case the product is not what they expected or similar can also be an attractive selling point when offering subscriptions.

6. "This is too complicated" - Make subscribing an easy no-brainer process during add to cart and checkout: one big button with a clear CTA (Call to Action), short sentences, a short checkout process, providing the option to manage their own accounts and cancel anytime, make customer support available and ready to help with a live chat or a phone number, especially as the customer is in the "Add to cart" and "Checkout" steps of the subscribing process.

7. "Why would I subscribe?" - Communicate the benefits: "subscriptions get a % off," "subscribers get free shipping," or "subscribers get extra benefits." If you offer both, one-time orders and subscriptions, what are the special perks that subscriptions get that non-subscribers wouldn’t get? Let your customers know.

Make your offer clear

When testing a new subscription model you've never tried before, you may want to consider creating an intro offer to make it more attractive for new subscribers - like a free trial, a discounted trial, or a reduced price for the first few months to name a few options. Here are other things to keep in mind when it comes to your subscription offer:

1. Promote your subscription offer on the product page, "add to cart" and "checkout" - highlight the benefits, perks, and savings of upgrading to a subscription.

2. Create a "subscribe and save" landing page where you explain the subscription process, the return/refund policy, the frequency, and answer FAQs. This should be somewhere visible in the Menu of your online store, in the footer, and referenced and linked across other pages on your site.

3. Add your subscription offers to other parts of your website - banners, sticky elements, pop-ups.

4. Add the details about your subscription offers in your social media - about, description of your business, highlights + bio + link in the bio (for Instagram).

5. Add the details of your subscription offers at the button of your emails or as a PS.

Layout the terms

When it comes to compliance, my recommendation is to hire a qualified legal professional to help you stay compliant, and protect your customers and your business. Here are some ideas of some common practices you can ask your qualified legal counsel about (this is not legal advice in any way) :

• Return policy that is easily findable - this can help your conversions, especially with new customers. New customers will feel more comfortable trying your store when they know they can return their purchase if needed, and understand the time window they have to return and get a refund if the purchase is not what they expected.

• Terms of agreement that are easy to find on your website or funnel (for example, at the footer or top menu).

• Checkboxes in the checkout process where your customers agree they have read the terms, some customers may have clicked "subscription" by mistake or may not be aware of the terms of agreement and/or return policy.

How does a subscription business work?

Below I'll walk you through the backend of how subscription businesses work::

For the customer, this is the experience of subscribing

This is a common scenario for a customer subscribing to recurrent billing, many scenarios and flows can happen depending on the software you use and your operations set up, this is one example of them:

1. The customer gets on your website (eCommerce platform).

2. The customer chooses to sign up for a subscription (recurrent billing) and adds it to the cart (or upsells to a subscription from a one-time product sale).

3. The customer chooses a frequency for the subscription (15 days, 30 days, 60 days).

4. The customer goes to checkout - the checkout process could take place in your eCommerce platform, designated checkout, or in your order management system (depending on your setup).

5. The customer adds Shipping and billing information (or recovers it if it is a recurring customer).

6. The customer agrees to terms and conditions and recurrent billing.

7. The customer checks out.

8. The customer receives a confirmation email from your customer order management system.

9. The customer receives the product.

For the business, the subscription process looks like this

This is a common scenario for a subscription business, many scenarios and flows can happen depending on the software you use and your operations set up, this is one example of them:

1. Customer information goes to your order management system that manages customer data and orders and the subscriber's data gets saved.

2. A confirmation email is sent to your new subscriber from your order management system.

3. Your order management system connects to your payment getaway (or vice versa).

4. Customer Information goes to Payment Gateway (Stripe, Paypal, Apple Pay, whatever you use to run payments).

5. The payment gateway communicates with the bank.

6. The bank runs the payment.

7. The payment gateway platform communicates with the eCommerce platform or your order management system.

8. The order management system confirms payment has gone through.

9. The order management system communicates with 3PL (3rd party logistics) or in-house shipping and fulfillment - this is where fulfillment and shipping will take place.

10. 3PL or in-house shipping and fulfillment system - prepares and processes the order (you could also use Shopify fulfillment or any fulfillment options that your eCommerce platform offers).

11. Order ships.

12. The fulfillment company sends an email to the customer that the order has shipped.

13. The customer receives the order.

14. After the frequency date that the subscription customer has set up (15, 30, 60 days) the process will start again automatically.

Below is some additional technical information on how recurrent billing takes place after the first billing cycle is completed:

After the first billing cycle is completed, there is a waiting period (subscription frequency) until the automated billing process starts again. When your customer agrees to recurrent billing they allow your eCommerce management system to send a signal to the payment gateway to trigger a new payment to run. The process could start earlier if you send your customer an alert that their next subscription payment will be happening in the next 7 days (or X days). This allows your customer to be prepared for a new incoming shipment and it also allows your customer the opportunity to cancel, hold their subscription or make changes,

What are the downfalls of a subscription business?

technical errors with subscriptions are a potential (and very real) problem when it comes to subscription businesses, especially when you (or your web development team) are doing custom code and integrations things can go wrong at any minute. Here are technical issues, customer experience issues, and payment gateway issues when running a subscription business:

Technical Needs and Common Technical Issues

Customer data is the most headache part of a subscription business, here’s why:

For basic subscription setups, you can start with an app/software that is easy to set up. However, subscriptions get technically complicated when it comes to

1. Platform limitations: depending on the platform you choose, it can be more technically advanced to customize specific aspects of the subscriptions, for example, a customer wants to make a very specific change on the frequency that is not supported in your subscription order management platform.

2. Integrations: connecting our subscription data from our order management system to our email marketing platform (Klaviyo, Sendgrid, Active Campaign, or MailChimp).

More on integrations: Basically, the problem starts when you need a specific piece of data, for example, if you want to send an email to people that are subscribers of product X. Then, if the platform you are using doesn't support that you may need a developer. The developer will properly connect the platforms together so they can communicate the specific information you want to each other. There are some basic pieces of data that are automatically integrated with some of the most popular platforms but if you want to get more granular and specific you're going to most likely need a developer to make those connections. It is normally a one-time setup, but it can become overwhelming (and costly) if you don’t have the right development team in place or if anything breaks or glitches after setup (which is common).

Here are some common technical glitches when having an eCommerce subscription business:

• The subscription can stop firing (check your subscription management system and payment status)

• The connection between all platforms involved may fail (3PL, Order & Subscription Management platform, payment gateway)

• When you are trying to further segment your customer data - than what your apps allow - things can get complicated quickly. Developing custom integrations is common when trying to optimize the performance of email marketing and when bringing customer data - and most importantly subscription data - into a CRM.

Customer Experience Issues

• Lots of customer support tickets if your subscription is not fully explained on the site and customers are not receiving consistent notifications from you about upcoming orders and communication doesn’t seem easy between customer support and subscribers.

• Returns and refunds - some customers may change their minds or never meant to be in a subscription in the first place and wanted to try it for a lower price, so then you may face returns and refunds plus any additionals fees for restocking products, time to provide customer support, fees to ship and create shipping labels to return products

• Potential disputes - some customers may have subscribed to your product inadvertently or they may be new customers that are not used to talking to your business or who may have found that reaching out to you is hard (e.g. they can’t get on the phone with you easily). Unfortunately, in these situations, customers may just open a dispute with their bank instead of trying to work out the refund with you directly. Consider that disputes normally have an additional cost per dispute if you lose the dispute ($10-$15 per dispute) plus the time and labor spent submitting documentation, etc. If you have too many disputes this could be a problem and the payment gateway system may flag you and take you out of the platform - which is a

• Lots of bounced payments due to lack of funds or changes in billing and shipping information. Bounced payments are VERY common and happen more often than you may think. Prepare for it when you are working on your projections. The bright side: you can run email marketing strategies to recover these payments or reach out to your customers to update information.

• Subscription churn rate - which is the percentage of people that naturally stop buying from you and that cancel their subscriptions because either they don’t need it or they got disengaged with your brand and product. Most subscription businesses have a churn rate depending on their industry and you can look at subscription churn rate benchmarks easily online. Make efforts to keep subscribers engaged with email marketing, reach-out programs, retargeting, and offering VALUE with content and offers so they don't get disengaged.

How do I set up a subscription business?

Systems to Consider when Starting a Subscription Business

Here are some of the top systems to look out for when starting a subscription business:

✓ Subscription Order Management System: My recommendation is to start with an easy platform and upgrade to other platforms as you grow and your needs change. Remember that the best platform you can use is the platform that fulfills your needs, for you and your business. Some common subscription management platforms to checkout for your eCommerce business are Recharge, Bold, and Sticky.io among others.

✓ Finances: Make sure that you understand your numbers - profits, projections, costs. Is your subscription business profitable? Do you have a profitability plan in place? Do you have the room and resources to test and lose money at the beginning with a plan in mind to tweak things until you get it right?

✓ Shipping & Fulfillment: When you have a subscription business, basic things like creating a return label, and inspecting products for quality control when they are returned, may get even more complex.

✓ Cancellation Policy: Scenarios like subscribers wishing to cancel and return months' worth of product could come up, and you need a plan for your customer support team and systems set in place to know how you will handle these scenarios.

✓ Refunds: Ensure that you have a way and a system to handle refunds for canceled subscriptions, and or a trained team that knows how to cancel and properly handle refunds and disputes.

✓ Inventory: Make sure you are not going to run out of inventory. Have an inventory forecast sheet in place so you can foresee when you need to replenish since now you will have recurrent orders to fulfill.

✓ Quality Control: Make sure quality control is on point (prepare for manufacturing defects or shipping issues).

✓ Projections: Make sure that you have the operations and logistics in place to handle the first subscriptions and scaling issues that may come with, for example, satisfying demand. If you are doing something handmade, then you will need manpower and more raw material. If you are getting your products from overseas, then you will need to calculate inventory and the runway until you run out of stock.

✓ Customer Feedback: Make sure to have feedback from your current customers and internal team on how the subscriptions are working and customer satisfaction (surveys, customer reviews, direct feedback).

Conclusion

In this blog, we have gone over the definition of subscription businesses, the benefits of having a subscription business, how to find subscribers for your eCommerce store, how to promote your subscription business, how to handle your subscribers' objections before they happen, how to set up your subscription business, the downfalls of having a subscription business, and the systems to have in place to start a subscription business.

Need me to help you set up your eCommerce subscription business? Click here to schedule a call.