Why Magento stores with Subscription models have higher ROI
This article covers how implementing Magento Subscriptions increases your bottom line and Return on Investment (ROI). Implementing Magento recurring orders guarantees the business with a more predictable revenue stream, which can be used to calculate some important financial metrics. Providing your customers with benefits like convenience, flexibility (such as through Magento recurring billing) and unique personalized experiences will keep your customers coming back and build brand loyalty.
The Subscription Revolution
In the last decade, companies have been flocking to Subscriptions: some as a method for differentiation, while others specifically for growth opportunities. One of the pioneers of the Subscription revolution was Salesforce. The company was one of the first to discover that they could deliver their service through a paid subscription. Since then organizations in other industries have realized that the culture of their customer base has evolved from a preference to own to a preference to rent. "The best secular trend out there right now? ... I think it's the rise of the subscription economy, the legion of companies that make their money by selling some kind of subscription service, often in industries where we never even realized subscriptions could make any sense," said Jim Cramer, a best-selling author and CNBC's host of the show Mad Money. Subscriptions have allowed these companies to offer their customers several important benefits:
- Convenience – by not having to remember to place a recurring order; instead, it just shows up at your door!
- Flexibility to suit their needs – through flexible recurring billing options and terms, and control over their subscription
- Staying on budget – if the customer is paying a flat fee, there is no chance for unpleasant surprises; CapEx vs OpEx applies even in the B2C market!
- Bundling – they get all the benefits for one low price
- Unique personalized experiences – through studying their customers' habits, they deliver their products or services based on their customer's interests, sometimes even surprising them with a product or service they didn't realize they would enjoy
Now let's take a look at how implementing a Subscription model impacts your Return on Investment (ROI). You probably chose Magento for its scalability, security and rich features. But how does implementing Magento Subscriptions make a difference?
Implementing a Subscription Model
First and foremost, implementing a Subscription model guarantees a more predictable revenue stream through recurring orders. This means you can now easily calculate life time value, or LTV, 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," said Warrillow. "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." Just think of some recent billion-dollar subscription company valuations: DropBox, Salesforce, Honest Company and Dollar Shave Club.
One of the most important financial considerations a business must make is Cash Flow. And recurring orders/revenue also provide a chance to better manage it. Through Customer Centric Unit Economics, a business should also be able to calculate the Cost of Customer Acquisition, or COCA, which is made easier with subscriptions. Another added financial benefit 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. Retailers with subscription models, such as ProSource, have also reported lower service costs.
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 3 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 Netflix and Spotify. These companies provide you 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 (such as Stitch Fix), beauty (such as Birchbox) and food (such as Graze) industries.
Increasing Your Revenue
Offering Subscriptions can also increase your revenue by increasing product usage and overall engagement with your brand. For example, a 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 they offer 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. Research shows that the most important reason why consumers continue to subscribe to a service is 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.
"The bottom line? The subscription economy keeps taking over industry after industry after industry after industry because it's so darned lucrative and consumers love it," said Jim Cramer. And subscriptions are expected to continue to grow in the years to come. We live in a world where something is constantly fighting for our attention. Whether it's friends messaging you on social media, a slew of marketing emails you just received in your inbox, your boss who keeps calling you for a work emergency.. we are often overwhelmed by all of the communications we receive through the different media channels! As consumers, we are constantly presented with ads; and let's admit it, most of the time we dismiss them without a blink. We've also become sophisticated shoppers. We don't want just a product, we buy into a compelling service that will add value to our lives. The main point is, if a business is able to find that special offering, something that makes their customer tick, they can monetize it through implementing Subscriptions. Execute them correctly, and Subscriptions will boost your revenue, build customer loyalty, and, in turn, increase your net income and ROI.
For additional information on the topics discussed in this article, try the following resources or call us today and schedule a discovery call.
- McKinsey & Company: Thinking Outside the Subscription Box
- Hubspot: 7 Ways Subscription Models Get It Right
- Entrepreneur: Why You Should Use a Subscription Business Model
- Hubspot: The Most Important Ecommerce Marketing Metric You Are Not Tracking
- Investopedia: Capital Expenditures vs Operating Expenses