Why retailers are embracing the subscription model

In the past, your grocer only charged you when you physically took goods out of the store. But these days, more and more retailers are looking for ways to keep the pennies flowing from month to month to keep their incomes steady. 

The success of the subscription model first emerged in the software industry.

Companies found that they could generate higher revenues if they put their customers on rolling subscriptions, instead of just getting them to pay hefty license fees upfront. 

Businesses preferred it too because it gave them more flexibility. They didn’t have to commit to a particular piece of software long-term, allowing them to switch and adapt if the situation called for it. 

Retailers, though, were slow to catch on. And even today, Amazon is still the only major outlet to have successfully created a subscription service in the form of its Prime product.  

But that’s about to change. Companies are realising that a lot of consumers want to save money using subscriptions. And, therefore, they’re changing their models. 

It’s better for customers

Customers want discounts, but until recently, they haven’t had payment mechanisms that made it possible.

Buyers often had to manually select the goods that they wanted each month and then place their orders, which was hard work for them and created insecurity for the seller. 

With subscription models, though, both parties get what they want.

Sellers have more certainty about the volume of goods they need to order and pass on to consumers. And buyers are able to get deep discounts on products they would have bought regularly anyway. 

Thus, the new approach seems to be better for everyone. It’s a win-win, and it takes some of the difficulty out of supplier relationships and demand forecasting. 

It makes it easier to get paid

Most retail subscription services rely on direct debit collection.

Here, banks automatically take money out of customer’s accounts and pass it over to yours. Thus, you get paid no matter what, even if they have other bills they need to pay. 

This approach to getting paid offers more security.

It makes it less likely that a customer will turn around and suddenly decide that they no longer need your services because they’re out of money. Instead, they’ll cut down elsewhere - on the things that they can control - and leave their payments going to you. 

What’s more, stopping a direct debit usually requires talking to their bank on the phone. And, again, that’s a hassle, which is something that discourages them from doing it. 

Subscriptions, therefore, don’t guarantee that your customers will pay you forever. But getting rid of them requires effort. And that can work in your favour. 

It makes forecasting easier

Thanks to Covid-19, forecasting has been much more difficult recently.

Fits and starts in demand mean that many companies in the supply chain are struggling to meet orders or have too many products sitting in their inventories.

In theory, subscription models should smooth out demand over time by making volumes consistent and predictable. Companies know precisely how many goods they need to provide because customers have told them the quantities that they want. 

It impresses shareholders

People who own shares in your company also want to see that you have a sustainable pricing model that allows you to maintain a high level of profitability.

And subscriptions are a great way to do that. Investors suddenly feel confident that you are able to generate returns, and they will reward you for it by pushing up the value of your stock. 

When the value of your stock is higher, you’re able to issue more shares and boost your capital reserves. And that gives you access to more credit. 

It helps you outcompete your rivals

Retail margins tend to be low because of the sheer amount of competition in the sector. You can’t really charge much more than the going rate without your customers going to your rivals. 

Subscriptions, however, allow you to get around the pricing issue cleverly. Instead of just offering discounts that eat into your profits, subscriptions actually help lower your costs as well.

The benefits come down to the advantages discussed above. When you can forecast demand, you don’t have to build so much redundancy into the system.

And, therefore, you can often lower your prices without affecting your margins. 

Ultimately, this is how you can win in retail. All you do is create a pricing model that makes it easier to predict demand.

You then use this knowledge to save on warehousing and distribution.