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BFS Capital Blog

The Explosive Growth of Retail Subscription Services

May 13, 2017

The days of 10 CDs for a dollar long gone.

Actually, the days of CDs are more or less extinct too, but there was a time not so long ago when one could order 10 CDs for a penny from Columbia House or the BMG music service, and then get a new one every month after the initial batch.

This was a 1980s iteration of the subscription service, a concept that is now exploding and some have said is the future of the American retail industry. Subscription services give customers convenience and businesses a guaranteed revenue stream. But why have subscription services become so big? And what’s in store for the future of subscription services.

A Way to Weed Through the Options

Millennials, so the conventional wisdom says, are moving away from ownership to a sharing economy. Home ownership is at a 20-year low, and businesses like ZipCar and car2go have millennials opting to share cars rather than buy them. At the same time, the variety of products available is expanding, with everything from music to beer to beauty products producing an overwhelming number of choices.

Subscription services offer a double benefit to consumers: First, bundled subscription services like Birchbox, Stitch Fix, Dollar Shave Club or any number of beer collection subscriptions take the abundance of choices and give subscribers a curated collection. Secondly, all of it is delivered straight to their door, making a more convenient, personalized buying experience. Again, the conventional wisdom says that millennials value individuality and the ability to customize, so a subscription service is a natural fit for their buying habits.

Luxury retail goods have also become particularly appealing as subscription services. First, for those who can afford it, services like the Opulent Box deliver high-end jewelry from name brands for $25,000 a month. But more importantly, companies like Rent the Runway and Eleven James allow consumers of moderate incomes to rent couture dresses or sample unlimited watches for a fixed price every month. These retail subscription services effectively give younger consumers a way to utilize luxury goods without having to own them.

Guaranteed Revenue Means Higher Valuation for Businesses

As a startup company, maybe your big dream is to be bought out by an international conglomerate, and retire to Oahu at age 30. And what do those deep-pocketed conglomerates look at when deciding how much your business is worth? A big factor is predictable revenue, and when you’re selling to people on a recurring basis, that figure gets a lot higher. And with a fairly-stable cash flow, planning business expansion and other expenses is easier.

But more importantly, your customer insight is far deeper than it would be selling an individual product. When you sell a single product, all you learn about your customers is that one thing they prefer. Having your subscribers customize bundles or following their purchases on a monthly basis allows you to have a bigger variety of data points so you can market accordingly.

The key to success is leveraging this information to build customer relationships. Unlike a single-purchase model, where the customer satisfaction is largely based on their experience with the product, subscription services are based on what you offer, and on the relationships you build.

Look no further than Netflix to see how a subscription service can fall apart if these relationships are ignored. The company’s infamous 2011 subscription “split” – where streaming and DVD subscriptions were sold as separate items, increasing prices about 60% — lost them 800,000 customers and caused their stock to nosedive. Netflix quickly adapted the change after input from customers, and is now as much a fixture in American homes as the living room sofa.

Subscription Services Reach Far Beyond Small Retail

By no means are subscription services limited to retail. Service businesses are expected to be the next exploding sector of subscription services, especially in fields like marketing and technology.

Rather than offering a pay-per-project model, companies are shifting to a flat monthly fee that offers a variety of services. And companies can scale that package up or down depending on revenue stream. So if a startup finishes a big round of funding and needs to ramp up marketing to show an ROI, they can purchase a larger bundle of services, from advertising to social media to PR. Similarly, if a company doesn’t need much other than website, hosting and IT maintenance, they can scale down with their tech contractors to a smaller package.

The model might work for other, retainer-based services too. Having a monthly subscription to a lawyer might sound outlandish now, but as people adapt to a world of all-you-can-eat everything, all the time, the service industry won’t be far behind.

Big companies are in on the game too. Wal-Mart and Amazon have made big splashes with their box and music subscriptions, respectively. Interestingly, Wal-Mart’s first foray into subscription services was a $7-a-month sweets collection called Goodies Co. The retail giant used it as a loss leader to gather customer data. And while big businesses will certainly look to use subscription services as profit centers, the data they collect is just as important.

As a small business, however, you shouldn’t be intimidated by big retail’s subscription service offerings. Just like with a brick and mortar store, your small size allows you to specialize more effectively, and get to know customers more. You can develop better relationships, to a point where a customer will trust your recommendations before Wal-Mart’s. Combine that with quicker adaptability and seamless supply chain management, and a subscription service might be the way to go for your small business. Just make sure you’re not selling CDs.