This Is What It Takes to Be a Subscription Industry Standout

Like Stitch Fix and Dollar Shave Club, you'll need to deliver in three main areas in order execute your breakthrough subscription concept.

learn more about Georg Richter

By Georg Richter

Stitch Fix

Opinions expressed by Entrepreneur contributors are their own.

The current retail landscape is marked by the continued erosion of physical retail. A CB Insights report shows that about 7,000 U.S. brick-and-mortar storefronts closed in 2017 due to their failures to create online presences as well as debt built up after post-financial crisis buyouts.

That, coupled with potentially higher interest rates and more expensive capital, means many physical locations are becoming burdens. Brands and retailers are being forced to look for alternate channels.

Ecommerce has been the go-to channel, but the subscription subchannel has also seen its share of adoption: Consumer insights firm Hitwise reported visit growth of more than 830 percent for subscription brands between April 2014 and April 2017. Plus, McKinsey & Co. reports that the industry has grown more than 100 percent each year in the past five years.

Related: 5 Reasons Why Building a Subscription Into Your Business Is a Winning Strategy

Besides the obvious benefit of additional and recurring revenue, subscription offerings allow retailers to glean important insights from recurring customer behavior. These insights are the foundation upon which long-lasting relationships with customers are built, so retailers such as Target with two subscription offerings are understandably excited about and investing in the subscription channel.

It's difficult to compete with the speed, price and product assortment Amazon offers, but subscriptions are the "in" form of convenient retail. Through subscription retail channels, retailers can provide customers with curated, exclusive and connected experiences that build deep, long-lasting relationships.

Becoming a subscription industry giant.

The idea of eliminating the retail middleman to deliver a great value got Dollar Shave Club off the ground, but the company's special sauce was in its messaging and advertising. Mike Dubin's memorable YouTube video achieved the exact response it intended in the company's target demographic of young men. Years after its acquisition by Unilever, however, the brand seems to have lost some of its original momentum as competitors such as Harry's have moved into the space and giants such as Gillette shift focus to new competitors.

Stitch Fix, on the other hand, has a very different value proposition: Data and personalization fuel its success. With the help of machine learning and real personal stylists, Stitch Fix delivers a curated and ever-improving product that has resonated with a huge audience. In the process, the company has solved a problem commonly experienced by today's consumer: indecision in the face of overwhelming choice. By presenting subscribers with just five options per delivery that reflect their own preferences, Stitch Fix removes much of the hassle from shopping for clothes.

Related: How a Subscription-Box Founder Is Using Data to Survive -- and Thrive

Plenty of other successful subscription businesses exist, but Dollar Shave Club and Stitch Fix each were "first movers" in their spaces, which gave them advantages they used to fuel growth. Breakthrough concepts like these require a killer idea or a significant variation on an existing product or service.

To have a shot at that level of success, make sure your subscription program is on point in the following areas:

1. Product, concept and storytelling.

An interesting product line is the heart of any subscription business. Sending the same items repeatedly isn't enough anymore. Amazon has that service, and it's called "Subscribe and Save." Walmart, Target and Chewy offer similar services. To go where the retail giants are not investing, move toward customization and delivering items specifically selected for users. Ensure product lines and the materials sent with each delivery match the brand concept and offer customers true value.

Another way of maintaining a high level of subscriber engagement involves educating and engaging with customers. PLAY! By Sephora is a monthly delivery of five beauty products, a book of tips, and access to how-tos and other video content. Also included is a pass to visit a local Sephora store where members can enjoy one-on-one tutorials on the box's products or can attend other exclusive events -- something traditional ecommerce doesn't include.

All these features are designed to increase the duration that people maintain subscriptions and to drive additional ecommerce and in-store transactions. As a general rule, customers must pay for at least three shipments from a subscription service for the company to break even. The main reason? Initial offers are often highly incentivized trials. Product lines for which the company breaks even immediately, like with full-price offers, tend to result in fewer people trying the product and shorter overall subscriber life span.

Related: 5 Essentials for Building a Subscription Business Customers Won't Quit

2. Data gathering, assessing and managing.

Keeping subscribers around for the long haul involves sending the right product to the right person at the right time. Surprising and satisfying a paying subscriber is derived from data involving acceptance rates, surveys and customer communications through various channels including social media, chat, email, phone, text and more.

Gather and carefully manage data points such as contact information, credit card information, package weight and inventory availability. But compiling this data is just the first step; brands must then assess that information and derive actionable conclusions from it. These conclusions should ideally help in acquiring better customers in terms of lifetime value and in keeping existing customers around longer.

Cloud computing and updated technology have made it possible to use real-time data to make the best possible decision for customers and businesses as a whole. Stitch Fix, for example, has developed complex algorithms that enable its team members to not only make accurate recommendations, but also to anticipate what customers will want in future deliveries so they can prepare inventory months ahead of time.

3. Technical execution.

The most undervalued part of a subscription business is the backend, but it's ultimately where profit margin is made or lost. Your company becomes profitable only if you capture the data points mentioned above and take action on the basis of that information.

Running out of inventory, paying too much for postage, canceling a subscription because a credit card failed once, charging the wrong amount or sending the wrong item are all common mistakes that weigh down a subscription business. On the surface, it might seem like these roadblocks should be easy to avoid, but it's often easier said than done.

Performing these basic functions flawlessly could quickly separate a business from its competition, yet almost half of small businesses -- 46 percent -- fail to even track their inventory, according to Wasp Barcode Technologies. To build a successful subscription business, companies must become intimately familiar with data far beyond the numbers of products left in their warehouses.

Subscription businesses are enjoying a surge in popularity, but the landscape is increasingly competitive. Subscribers who aren't delighted by the first delivery won't last long, even with a great intro offer, and even the most successful companies must fight to keep their churn rate minimal. To orient your business for success, start with a unique and high-quality product and then act on the wealth of data the subscription model allows you to gather. Finally, nailing the technical execution will allow you to not just survive -- but thrive -- on the often slim margins in the subscription economy.

Georg Richter

Founder and CEO of OceanX

Georg Richter is founder and CEO of OceanX, which is reinventing the membership economy by transforming customer-brand interactions and providing a powerful engine for subscriptions. Georg specializes in implementing next-generation technologies and innovative technology solutions that transform industries.

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