Five Models For Sustainable Growth
Part Four of a Five-Part Series
For several weeks we’ve been discussing business model innovation – a topic many of you have asked about. The first three posts covered Accelerators and Incubators, Premium, Personalized & Service-focused, and Platforms & Ecosystems models.
Today we look at Model #4 – Subscription, Rental, and Auto-Replenishment.
This is one of the hottest models for both B2C and B2B. The aim is long-term customer retention and recurring revenue. Amazon Prime and Netflix are two of the most well-known examples, but this model is also exemplified by Rent the Runway, Dollar Shave Club, meal kits such as HelloFresh, Blue Apron, and many others. Ikea is testing a subscription-based furniture leasing model, and Apple recently announced a move in this direction with its new TV offering.
Autoship, where customers sign up for ongoing delivery of items on a regular schedule, is a key component for many firms. For example, Chewy.com generated $3.53 billion in revenue in 2018, a 67.9% increase over last year and hit a 100% compound annual growth rate over the past five years. The majority of that revenue comes from its Auto-ship program, and average order values for these recurring shipments are roughly 6% higher than one-off purchases.
B2B industries are moving to subscription business models as well, driven in part by the Internet of Things (IoT). The Everything-as-a-Service (XaaS) business model has helped companies in theB2B space generate continuous revenue from their products.
Auto-replenishment, or IoT-enabled ‘smart subscriptions’ (which track inventory and usage) is another format which enables demand-driven, cost-efficient reordering and restocking processes. This model is being used by both B2B firms (such as HP, John Deere, etc. for parts and supplies) and B2C (Whirlpool, Samsung, GE Appliance, etc.). Amazon’s DRS (Dash Replenishment Service) is currently the leading solution provider.
Why would you pursue this model?
Subscription services are outpacing product sales for many B2C companies – Apple’s move to subscriptions is partly due to slowing sales of hardware; Amazon too has seen a slowdown in product sales. One of Amazon’s fastest growing segments is now subscription services like Kindle Unlimited and Amazon Music Unlimited. Its newest and perhaps boldest service is PillPack, where medication is sorted by the dose and delivered every month. “Our service and shipping are free – you only pay for your medication.” As Amazon increases its pharmaceutical capacity and leverages its Prime Now last mile delivery networks, it could offer rapid delivery for many types of medical products, from diagnostic tools to medicines and treatments.
Rental services. In the apparel industry (New York & Co., Ann Taylor, Express, Rent the Runway, etc.), the market is growing rapidly; it is expected to be worth $1.9 billion by the end of 2023. Rent the Runway subscriptions were up 160% year-over-year last fall and winter. Earlier this year, the company entered a pact with Williams-Sonoma Inc.’s West Elm unit to rent out home décor, not unlike Ikea’s furniture leasing model.
Auto-replenishment services. The main benefit inB2B is timely inventory management and control which can help predict demand as well as save costs. A ‘circular economy’ increases the barrier of entry for competitive goods by preventing consumer churn when inventory runs low. In B2C the advantage of providing products that never run out and that ‘talk’ to other products (smart refrigerators, etc.) provide invaluable insight into customers’ usage and potential future needs. The opportunity synergies between food, beverage, and cleaning supplies with appliances are particularly strong.
How does this model work?
Successful subscription models require a high degree of integration and communication inside organizations – marketing, sales, fulfillment, IT, supply chain, logistics/shipping, customer service, billing etc. must tie together seamlessly to ensure loyalty-building customer experiences. Technology, supply chain and logistics are all vital – as is real time communication between them.
With the adoption of this model, organization-wide metrics should include customer lifetime value, retention rate, churn rate, conversion rates (trial to buyer), renewal rates, average price/cost per order and other KPIs that emphasize acquisition, retention, and recurring revenue. Companies must nurture subscribers and continuously evolve the product/service. They must also decide what their cancellation policies and billing options will be (annual, month to month, pay per use, auto-renew, etc.)
Data analytics coupled with integrated CRM systems are the main technical capabilities required. Machine learning and/or AI capabilities can enhance offerings through deeper understanding of consumer needs. Partnerships and acquisitions are also common in this model. For example, Unilever acquired Dollar Shave Club to enter the subscription business, while other companies are making technology acquisitions to build IT and data analytics.
Bottom line
Overall, the subscription model can drive shareholder value through customer acquisition, retention, and recurring revenue. With the right cost and pricing structure, higher margins are possible since inventory would predictably match demand. Companies that execute the subscription model well can also increase revenue through higher pricing (loyal customers will renew even if rates go up, as Prime and Netflix have demonstrated), cross-selling, add-on products, and expansion into new adjacencies.
To succeed at this model, consider:
- Your company’s infrastructure – make sure your offerings and delivery are tied together seamlessly.
- Whether you will offer your subscription services through multiple channels (e.g. Amazon and others as well as your own website). Your pricing, billing and renewal options, cancellation policies, and potential add-ons make a difference; test and adjust accordingly.
- Your KPIs and metrics. Customer Lifetime Value is a vital component of this model. Measure and monitor continuously; reach out to subscribers proactively to ensure their needs are being met. Do not wait till their renewal period is up.
For more insight: Download our new briefing report 5 Business Models for Sustainable Growth (here) and keep following this blog series which builds on the report. We welcome your questions/challenges anytime; will either reply personally or address in future blog posts. Email me at cperkins@innovationedge.com or give me a call at 920-205-3297.