Why Magento Stores with Subscription Models Have Higher ROI
Today’s customer doesn’t want just a product. They buy into a compelling service that adds value to their lives. If a business is able to find that special offering — something that makes their customers tick — they can maximize their ROI by implementing subscriptions. When implemented correctly, subscriptions will boost revenue, build customer loyalty and, in turn, spur a higher ROI.
This article is for you if:
- You’re a Magento e-commerce merchant (or are thinking about becoming one).
- You are looking to achieve a higher ROI with a predictable revenue stream.
- You want insight on how to provide your customers with convenience, flexibility and unique personalized experiences.
- You would like to speak to an e-commerce expert about generating recurring revenue.
In the last decade, companies have been flocking to subscriptions — some as a way to differentiate themselves, and others for growth opportunities. Salesforce, a cloud computing company, was among the first companies in modern times to leverage a recurring revenue model by offering software subscriptions. Since then, organizations in other industries — food, fashion, beauty, etc. — have realized the culture of their customer base has evolved from a preference to own to a preference to rent.
In his book, The Subscription Boom: Why an Old Business Model is the Future of Commerce, Adam Levinter explains why a centuries-old sales strategy is making a comeback. After all, books and periodicals were leveraging recurring revenue 400 years ago.
“While recurring revenue is attractive, subscription also provides predictive cash flows, better inventory control and juicy customer lifetime values — all while avoiding the volatility of a typical boom-and-bust product cycle. Most importantly, subscription creates better customer loyalty by building a relationship between brand and customer. A traditional model means a brand must go to great efforts to re-engage a customer to make a repeat purchase,” Levinter explains in the book.
A reliable stream of recurring revenue is an obvious reason why any merchant would want to latch onto subscriptions. However, customers benefit in many ways as well.
- Convenience: Subscriptions allow customers to “set it and forget it.” With automatic recurring orders, they do not have to remember to place a new order for items they need and love. Instead, it just shows up on their doorstep.
- Flexibility: The best subscription merchants give their customers the ability to adjust their subscriptions to suit their needs. This comes in the form of flexible recurring billing options and terms, as well as control over their subscription.
- Staying on budget: If the customer is paying a flat fee, there is no chance for unpleasant surprises
- Bundling: In some cases, merchants are able to bundle products together in one subscription order, offering a discount on the total price.
- Unique personalized experiences: By studying consumer habits, merchants can cater to their customer's interests (sometimes even surprising them with a product or service they didn't realize they would enjoy).
A Higher Business Valuation is Tied to Higher ROI
Implementing a subscription model guarantees a more predictable revenue stream through recurring orders. This means you can easily calculate customer lifetime value, or CLV, as well as forecast revenue for future years.
John Warrillow, the creator of The Value Builder System, argues that recurring revenue is one of the most important factors for company valuation, which makes it extremely appealing to investors.
"The more guaranteed revenue you can offer a potential acquirer, the more valuable your business is going to be," Warrillow said. "Because a high percentage of the revenue of a subscription-based business is recurring, its value will be up to eight times that of a comparable business with very little recurring revenue."
In a previous blog post, we shared an example of this. Chris George, co-founder of the Subscription Trade Association, explained that MVMT Watches, a non-subscription business that generated $71 million per year, sold for $100 million. Compare that to the $200 million a year subscription-based Dollar Shave Club, which sold for $1 billion.
This example illustrates that simply implementing subscriptions automatically makes your business worth more. Keep reading for four more reasons subscription brands have the massive opportunity to generate a higher ROI.
1. The Predictability of Subscriptions
An added financial benefit of joining the subscription economy is the ability to forecast and manage costs, which have a direct impact on your bottom line. One example is shipping and fulfillment. With recurring orders, you can count on a specific number of shipments each month. Based on that information, you can pre-determine package size and weight and decide whether you can combine shipments together.
2. The Ability to Nurture Customer Relationships
Implementing a subscription model in your business can also help you strengthen relationships with your customers. By first analyzing consumer behavior, a subscription business can tap into a new stream of revenue offering a needs-based service. McKinsey & Company organizes subscriptions into three basic types: replenishment, access and curation.
- Replenishment subscriptions automate purchases for the consumer, whereby offering convenience and saving them time.
- Access subscriptions take advantage of bundling. Just think about Netflix and Spotify. These companies provide customers with access to endless entertainment for one low price.
- Curation subscriptions, which are also the most popular type (making up 55% of total subscriptions), bank on unique, highly personalized experiences. They eliminate the scenario where the consumer is presented with too many options and is then unable to make a choice. By studying their customers' behavior, they are able to delight them with a service that is specifically tailored to their preferences. Such examples can be seen in the apparel, beauty and food industries with companies like StitchFix, Birchbox and Graze.
3. The Chance to Upsell
While shopping online, you’ve probably seen the “Customers who viewed/bought this also viewed/bought that” module. That’s because the brand was taking advantage of an upselling opportunity. For example, a subscription company that falls into the curation category may offer its customers recommendations based on their tastes to get them hooked on a new product. If a company offers different subscription plans, they also create an opportunity to upsell. Outside of the retail space, this may even mean converting a customer from a freemium plan to a paid one.
4. The Opportunity to Offer a Personalized Customer Experience
Research shows that the most important reason why consumers continue to subscribe to a service is that they receive a personalized experience. A happy customer who is committed to your subscription is much less likely to shop around, so as a business you can count on their loyalty and reap the benefits of their long-term recurring orders.
Can Magento Really Help Generate a Higher ROI?
For online subscription merchants, selecting a robust e-commerce platform is at the top of the technology checklist. Shopify, WooCommerce, Opencart, Magento … the list of options goes on and on! So, how do you know which option is right for your business?
Obviously, we’re partial to Magento for many reasons, but the e-commerce experts at PowerSync are platform-agnostic (meaning they’ll be glad to steer you in the direction that’s best suited for your unique business needs). Schedule time for a complimentary strategy session if you need a little guidance.
In a previous blog post, we shared six appealing attributes that set Magento apart, and it hits the nail on the head when it comes to all of the points listed above. We invite you to read the full post, but to summarize:
- Magento is owned by innovative tech-giant Adobe — which means more advancements are on the horizon.
- The platform offers customization options, so you can preserve brand integrity while providing a stellar customer experience.
- It’s a feature-rich platform.
- Magento is easily integrated with CRMs like Salesforce, and there are many extensions available in the Magento Marketplace to expand functionality.
- Magento accommodates merchants that plan to scale.
- Educational opportunities and certifications are available through Magento U.
Additionally, Magento offers product recommendations that are powered by the Adobe Sensei artificial intelligence engine.
There’s no question that Magento’s abundant features can enhance both the merchant and customer experience. According to the Subscription Commerce Conversion Index, retaining subscriber loyalty is directly tied to faster, more flexible experiences. Ultimately, that loyalty leads to a higher ROI.
The Elephant in The Room
While Magento has a lot to offer, the platform does not natively offer a way to manage complex recurring orders. So, how can a Magento merchant achieve higher ROI through subscriptions?
- It is architected, designed, and supported by a company that uses the product itself.
- It takes into consideration the merchant as well as the shopper to provide the best experience for both.
- Shoppers can manage/modify subscriptions without having to go back through the purchasing process.
- mPower supports many different subscription business models.
- It meets the needs of various niche industries.
Additionally, PowerSync offers a subscription management solution for Salesforce, so Magento merchants who use the world’s leading CRM can also take that route to manage their recurring orders.
If you want to see our powerful and dynamic subscription management solutions for Magento and Salesforce, watch the demos below. We also invite you to schedule a complimentary call with one of our e-commerce experts to get subscription business advice and discuss a potential fit.