Retail vs. Subscription: The Differences (and How to Act on Them)

A 5K race and a marathon require different skills and different focuses. As do the retail marketing model and the subscription model: Retail relies on sporadic surges in customer activity; subscription depends on developing long-term customer relationships.

The subscription model is taking off in popularity, with Starbucks joining the trend and Dollar Shave Club striking fear in the heart of Gillette.

A firm understanding of how the subscription model differs from retail can be the difference between success and failure for marketers.

Subscription is different

Retail relies on impulse buys. Therefore, the size of the initial purchase determines whether the sale is successful. Subscription models revolve around lifetime value (LTV) and the chances of upselling customers in the future.

For a subscription model to pay up to 100% of the initial sale in acquisition costs wouldn’t be absurd (assuming the customer sticks around for six or nine months). But retailers would run themselves out of business if their costs of acquiring new customers were so high.

For that reason, subscription marketers have more to consider than retailers. Subscription models must…

  1. Attract the right people (not simply as many people as possible, like retails can)
  2. Retain those people and develop marketing efforts around defeating churn
  3. Grow the relationships with those people by convincing them to rate, review, and ultimately continue purchasing from them (Birchbox is particularly good at it.)

Doing those things right requires almost exponentially more work than what retailers have on their plates. And it doesn’t stop there. Each of those considerations manifest in even bigger tasks.

1. Attracting the right people necessitates adjusting key performance indicators (KPIs), for example

For retailers, the ultimate KPI is average order value (AOV). In fact, impressions, clicks, and conversion rates all lead up to AOV: In other words, how much does a customer buy in a single transaction?

Although those in the subscription space still look at impressions, clicks, and conversion rates, the concern is not AOV. Instead, it’s LTV: For example, how many free-trial customers went on to become actual subscribers? What’s more, how long did those subscribers maintain their subscriptions?

With that territory comes this question: Where are those customers coming from? Someone from a coupon site often has a lower LTV than someone from a more traditional site.

When our company worked with Audible, we knew that a subscriber coming from a coupon site didn’t have the same LTV as one coming from an author’s fan site. Even when both sources offer a free trial, the likelihood of maintaining a subscription beyond that trial period is much different.

2. Retaining those people requires setting different marketing budgets

KPI metrics will also affect the marketing costs per allowable target differently for retailers than for subscription providers.

If you’re selling wine, for example, your marketing cost is going to be a percentage of that sale. For every $ 100 of wine, you can expect to pay anywhere from $ 5 to $ 10 in marketing—or 5% to 10% of every sale.

If you’re selling wine subscriptions, on the other hand, you won’t commit 10% of an initial purchase to marketing; instead, you’ll assume the subscriber is in for six to nine months, and so what you’re willing to spend to attract and retain that consumer changes. At $ 50 a month, you might want to spend $ 15 to $ 30 for every customer, because the cost of the total purchase in much higher.

Coming into the subscription space with a retail mindset, you’re much more resistant to “losing” revenue in the first months, even though you’ll make it back later. Subscription companies are willing to give up substantial dollars up front.

3. Growing those relationships means structuring internal communications

Traditionally, front-end marketing databases are split. The data on who displayed, saw, and clicked on ads remains at the front of house, whereas those who subscribe to the service find a home at the back. But that information follows a customer throughout his or her entire life cycle, and the disassociation between acquisition and retention is a big problem for subscription marketing.

To optimize marketing on LTV, subscription services must involve both front-end and back-end systems. They must “talk” to one another to understand the effectiveness of their respective campaigns.

If, for example, you know the average LTV is $ 100, you’ll optimize all search terms on that particular number. But when you connect frontend and backend, you could find that your backend connects to $ 200 per customer and that your dollars are better spent on optimizing search terms associated with that audience; they’re higher in quality and spend more than “new” customers.

Subscription is almost always a longer-term approach to marketing than retail. It’s about striking a balance between volume and quality. You always want to get people moving though the doors, but you want most of them to be your ideal prospects. Getting there often requires understanding the affinity of customers and then adjusting your KPIs.

Being able to invest and focus the shift on more valuable, longer-term customers should be the goal of every subscription retailer. It’s about attracting, retaining, and growing your customer base.

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