Insight

Subscription Models: CPG's Not So Secret Weapon

The wide adoption of digital channels has dramatically disrupted the way people shop. Consumer expectations have shifted to where convenience, speed, experience and personalization have become table stakes for the purchase of everything from airplane tickets to diapers. Digital-first brands are jumping on the opportunity to meet these expectations, and building one-to-one relationships with consumers.

Large CPG companies competing in categories like home cleaning and personal care are struggling to meet high standards while still delivering growth and protecting margins. The imperative for CPGs to find new channels and revenue streams has never been stronger, with many organizations turning to direct-to-consumer (DTC) options and subscription service models.

The subscription economy has boomed in tandem with rising popularity of standalone DTC companies and e-commerce demand. Subscription-based companies have grown 300 percent over past seven years, and are outpacing the S&P 500 in overall percentage revenue growth by 5X.

For CPGs, the advantages of a subscription-based business are clear.

• Subscriptions create predictable, recurring revenue streams: According to Clutch, 54 percent of shoppers are engaged with a subscription service. Service growth provides a more consistent and predictable revenue channel, unlike other retail channels which can fluctuate based on factors like seasonality.
• One-to-one relationships with consumers drive deeper insight: Subscription services build one-to-one relationships with consumers and provide channels to collect first-party data for more informed product innovation, service improvements, and pricing optimization.
• Subscriptions drive loyalty: Building one-to-one relationships drives loyalty with ongoing engagement, giving potential for upsell through curation, personalized offers and product discovery.

Understanding the Subscription Economy

Though subscription services are growing in popularity, there isn’t a one-size-fits-all model. CPGs must evaluate overall program goals, what service would provide the best results for the brand, and how it sunscription fits in with other channels, like e-commerce and retail partnerships. There are three common types of subscription models:

• Replenishment: Replenishment subscriptions allow consumers to have everyday goods delivered on a regular basis. DollarShaveClub, now owned by Unilever, was one of the first to popularize this model, delivering monthly packages of razors and other grooming products straight to a shopper’s door. This model works best for brands that provide goods consumers purchase regularly, and offers opportunities to build brand loyalty by fulfilling everyday needs of the consumer in a way that is personalized and convenient.
• Curation: Curation-based subscriptions gives consumers the ability to personalize the delivery experience. In this model, the shopper sets preferences for items they’d like to purchase or are interested in purchasing, which are then curated for delivery. Unlike replenishment, curation offers room for product discovery. Customers can build their own boxes, receive a blend of chosen goods and recommended related products, or receive “mystery boxes,” assembled by the brand. For example, Birchbox, a DTC beauty subscription service, gives shoppers an opportunity to discover new products by creating curated boxes of items based on the customer’s pre-selected interests.
• Access: In an access-based subscription model, consumers pay a recurring fee for content or services. Subscription news services and streaming platforms like Netflix, Amazon Prime, or Spotify follow this model, allowing customers to access to exclusive content for a monthly or yearly fee. In early 2020, Panera Bread rolled out a subscription-based coffee service through their stores and mobile app. For a set fee, customers can sign up for unlimited coffee deals, which they can use for in-store or delivery purchases.

Subscription Challenges: Acquisition & Retention

Subscription services can provide exceptional value to CPGs by building direct relationships with consumers. But acquiring new customers -- and then keeping them -- becomes increasingly difficult in a more saturated market.

Research shows more than one-third of consumers who sign up for a subscription service cancel within the first three months. Consumers are more likely to churn when they feel their choices are limited, or they are dissatisfied with the product or service they are engaged with over time.

Getting Started With Subscription

When launching a subscription business, organizations can’t just apply a model and start shipping. CPGs must change their ways of thinking to provide end-to-end experiences focused on the customer, with subscribers treated like partners in an ongoing mutual value exchange. This requires organizational transformation around a detailed service design that captures all aspects of the consumer journey and how the company needs to react and engage.

A combination of front-end and back-ended process is necessary. DTC relationships help CPGs collect valuable first-party data, like on-site shopping behaviors and delivery preferences. CPGs can use this data with machine learning to optimize the supply chain for more specific demand analysis and fulfillment based on individuals rather than distribution centers, or to evaluate partnerships with third-party delivery services, like Postmates or Instacart.

To start, CPG companies should work with what they know: consumers’ category preferences. Take the laundry category for example, where companies like P&G have a suite of fabric care products that meet various needs. With knowledge of usage occasions, frequency of replenishment and ingredient preferences, P&G could start with a DTC subscription-based business focused on laundry. This allows the company to test-and-learn by monitoring behavior and quickly optimizing features, functionality and pricing to find a model that delivers enough value to maintain ongoing usage and loyalty.

Subscription models represent a significant opportunity for today’s traditional CPGs to further meet consumer demands, find new sources of growth and circumvent aggressive competitive forces. Once the service gains traction and shows value, the CPGs can expand into adjacent categories, extending reach and deepening existing consumer relationships.