Every business owner wants financial stability, but predicting revenue from one-time purchases is difficult because customers can be fickle. The answer: a recurring revenue model. They can help nurture a more loyal customer base as long as you provide value and good customer service.
But, implementing a recurring revenue model for your ecommerce business isn’t as easy as sticking a “subscribe-and-save” button on your product pages. You’ll need an enticing product selection and a revenue model that provides high value if you want buyers to stick around for the long term. Here’s what you should know about recurring revenue models as you plan your big subscription debut.
Recurring revenue provides your business with a stable source of income and makes it easy to anticipate consumer spending. Subscriptions are essentially pre-orders, so they help you plan everything from sourcing to staffing by telling you what you’ll need before you need it.
The benefits don’t only show up on a month-to-month basis, either. Subscription revenue gives you more certainty surrounding your profits into the future, so you can be confident when creating budgets and financial forecasts.
Now, it’s time to determine the best recurring revenue model for your business. Here are the four types of recurring revenue models that work well for product-based companies.
The simplest product subscription offering is a flat-rate box. Consumers pay the same price for their shipment every month. Depending on what you plan to offer, you may send:
Typically, flat-rate subscription boxes are purchased on an auto-renew basis. If you send the same product or a curation every month, subscribers may not even have to do anything to get their box. This is the ultimate appeal of subscription shopping.
The downside of flat-rate subscriptions is that they won’t be the right fit for every potential customer. Some may find your prices too high to justify the investment; others may find your product volume too low to meet their needs. If you choose this model, you’ll need to make sure your offering meets enough consumers’ needs to support the expense of setting up a subscription.
BarkBox is a curated monthly box for dog parents. Subscribers can pay month-to-month or enter a 6- or 12-month plan. Longer commitment gives lower prices; annual subscribers pay $23/month. In return, they receive a regular shipment that has two toys, two treats and one chew.
Despite every customer paying one flat rate, they get products tailored to their needs. BarkBox’s sign-up process asks for details like the dog’s size and food preferences that are then reflected in the products each customer receives.
Merchants who want to appeal to multiple customer cohorts may opt for a tiered billing model, setting up subscription products at different price points. Tiered product offerings allow you to offer variable quality or volume of products, so buyers can pick the subscription that best fits their needs.
Because there’s more variety in your offering, you’ll be able to serve a broader customer base. Another benefit of having a tiered pricing structure is a potential increase in what consumers are willing to pay. Middle option bias causes consumers to gravitate toward whatever item is listed in the middle. When you have more than one product to offer, you can use this bias to nudge buyers toward whichever option you most want to sell.
Tiered product offerings require more work to administer. You’ll need to track the behaviors of multiple customer cohorts and potentially adjust your offerings to meet their needs. Make sure you’re not trying to serve too many potential audiences, either. Most tiered pricing models have three levels of product to avoid overwhelming customers and losing their interest.
Ipsy has long set the standard for beauty boxes with its flexible options that allow shoppers from multiple demographics to get in on the fun of a curated makeup selection. Ipsy offers three product tiers — at $13, $28 and $58.
The lowest tier is filled with samples and targeted at shoppers who want to try new products without feeling like they spent "too much." The middle-priced tier contains full-sized products that allow bigger spenders to make the excitement of their Ipsy bag last longer. And the top tier comes with products hand-selected by big names in beauty, which encourages trendsetters to splurge.
A one-off purchase can lead to a subscription if you offer automatic refills or replenishments for consumable aspects of your product. These products are called “sunk money consumables” because the customer must continue purchasing a refill to continue making use of the "sunk cost" of the original product.
Refill and replenishment subscriptions are a great way to get started if you don’t have an existing customer base. Your first sale — the product itself — will be easier to make because you don’t have to convince new customers to commit to a subscription relationship with your company. Give shoppers an excellent product and experience, and they’ll trust you enough to set up a subscription.
However, this subscription type only works for products that have a consumable component. If you sell clothes, there’s no way to tack on a subscription that users need to get the most out of their purchase. If you sell food, your entire product is consumable, which means buyers won’t have the original product (the “sunk cost”) to entice a refill.
Blueland’s cleaning subscription starts with a purchase of reusable cleaning supplies. Customers buy a high-end cleaning bottle (the “sunk cost”) and an order of concentrated cleaner tablets that dissolve in water. Assuming the customer is happy with the product, they’ll set up a subscription to replenish their supply of cleaner tablets so they can continue to use the bottle.
A hybrid recurring revenue model combines subscriptions and one-off purchases to give customers more product choices. Consumers who purchase a subscription get exclusive access to add-on products each subscription cycle and can pick and choose what to add to their usual box.
This recurring revenue model leverages customer loyalty. The promise of exclusive access or sales adds another incentive for customers to commit to a subscription. At the same time, buyers can then try new things each month without having to sign up for a continual supply of an untested item. They get a fun and customizable shopping experience, and you get a way to increase your average order value (AOV).
The hard part of a hybrid billing structure is handling all the moving parts. Your team will be fulfilling more complex orders every month, which means there’s more room for mistakes. There’s also the chance of overwhelming customers if you offer too many add-ons or try to cross-sell products that don’t make sense.
This quarterly subscription box comes with curated home décor items that make decorating a cinch, even for those without an artistic eye. Subscribers also have access to a members-only shop that stocks a number of décor items and add-on boxes with goodies like holiday or seasonal decorations. Consumers don’t have to buy these additional items, but they’re curated to match the products sent in the base box and sold at a discount, so they’re high-value add-ons.
Choosing the right recurring revenue model is only the first step. After deciding how to structure your subscription, you’ll need to consider your subscription pricing strategy. To compete in the subscription space, you need to find a balance of affordability and value to appeal to customers.
One last thing to remember: Don’t rush into your subscription launch before you’re ready. If you’re not sure which recurring revenue model is right for your product, that likely means you need to revisit your initial plan. Consider who your target audience is and how the products you sell will work in a subscription format. Look at your competitors to see what they’re doing and how you can improve on it.
Recurring revenue can be a boon for ecommerce businesses, but only those that get it right. Take the time to do your subscription launch right, and it will help you thrive.