Subscriptions are a popular business model, because they enable companies to learn a lot about their customers, and increase their loyalty over time.
Mary’s Dairy vs. Butterbob.com
Subscriptions have been around for centuries, for home delivery of things like newspapers and magazines. Today, they’re more popular than ever: people subscribe to everything from steaming media to clothing boxes to shaving supplies.
Subscriptions give businesses a chance to ‘lock in’ customers by continuously tracking their behavior and using that data to make them even happier. On the other hand, if your customer gets lured away by a subscription competitor, you may never be able to get them back.
Take Mary’s Dairy, an imaginary app-based dairy delivery service. Mary starts her subscription delivery service to take on Butterbob.com, the entrenched competitor. Butterbob does on-demand (not subscription) deliveries only, with a la carte prices for each item ordered.
Mary launches with two subscriptions: The family plan, a mix of milk, butter and cheese deliveries for $49/month, and the healthy plan, a low-fat version. But Mary struggles to lure Butterbob’s customers, who like his products and are used to ordering from him.
So Mary tries a crazy idea to shake things up – “I Love Dairy.” For $75/month, you get an ever-changing delivery including all the basics plus many extras to surprise and delight – chocolate milk, ice cream, whipping creams, buttermilk, unusual cheeses, and more.
“I Love Dairy” is an immediate hit, and Butterbob’s customers start switching over. By the time Bob realizes and tries to compete, it’s too late – his customers are now committed to Mary.
Too good to be true? Maybe. Either way, here’s what Mary (or any subscription service) must do to remain successful:
Closely watch churn (dairy pun intended) and retention: Churn is the most important metric in subscriptions: how many subscribers you’re losing vs. new ones you’re gaining. Retention is another way of saying the same thing – how many of your subscribers do you keep once you’ve acquired them.
Keep improving your subscription product based on subscriber usage data. Since Mary lets subscribers personalize their deliveries by ‘opting-out’ of certain items (goat cheese, yecch), she knows their preferences and can theoretically provide personalized deliveries they’ll like more and more over time.
Keep your subscription pricing competitive and high-value. If a subscription is working (and the market big enough), eventually it will have strong competitors. Consumers will always gravitate toward the higher-value subscription (best products for the lowest price). And they’ll drop off (churn) quickly if a competitor offers better value.
Subscriptions are great for consumers if there’s enough competition in the market. Let’s hope Bob hangs in there and gives Mary a run for her milk money.