Ecommerce companies that sell products on subscription and then automatically ship them are often highly successful and highly valued. Plated, an auto-ship meal delivery service, was purchased by Albertson’s for $200 million.
Continuity ecommerce combines recurring revenue, connected devices, and auto-ship functionality. It’s subscriptions on steroids, and it’s becoming big business. In this article, I’ll explore how merchants can implement continuity programs — both direct and through marketplaces.
Profitability in ecommerce is driven by multiple factors, but repeat customers are more profitable than first-time buyers. The math is simple: If the customer buys just once, the cost of acquiring that customer typically wipes out any profit on the sale. If you can amortize the acquisition costs over multiple sales, the customer is profitable. Moreover, repeat customers tend to spend more on each visit, making the relationship doubly attractive.
Customers on continuity programs typically buy three to six times per year compared to only once or twice for average customers.
But there’s another important dimension to continuity programs: order profitability. Optimized continuity programs enable merchants to increase inventory turns of highly profitable products and, as a result, obtain volume discounts on the inventory side.
Subscription retail is not new. In recent years, however, basic retail subscription programs have been replaced by much more sophisticated continuity programs that leverage deep learning and analytics to drive order profitability though inventory efficiencies and long-term customer relationships. These programs have exploded online with many new direct-to-consumer brands. Dollar Shave Club, for example, reinvented men’s shaving by selling razors on continuity. Stitch Fix showed that curated fashion can work well in the continuity model. And Birchbox did the same for cosmetics and beauty. These companies have been widely emulated.
According to a McKinsey study in late 2017, continuity commerce retailers grew sales from $57 million in 2011 to $2.6 billion in 2016. Recurring revenue models are highly valued by investors, driving higher valuation multiples. Big companies have snapped up start-ups in this space for serious money: Unilever bought Dollar Shave Club for $1 billion, and Albertsons acquired Plated, a meal delivery service, for $200 million.
The McKinsey study also showed that 15 percent of online shoppers have signed up for one or more continuity programs, frequently through monthly boxes. These consumers are often younger, affluent urbanites who value service.
But the concept of continuity commerce is broadly applicable for ecommerce retailers and brands, not just specialized companies.
3 Approaches
- Consumable replenishment. If you are selling a fast-moving consumer product, continuity commerce can be attractive to customers. It’s especially relevant to products that are close to or touch the body, where consumers are brand loyal. Examples are cosmetics, deodorant, toothpaste, sanitary products, shampoo, body wash, laundry, over-the-counter medicines, and dietary supplements. It also includes pet products. The closer a product is a daily essential — and inconvenient to buy locally — the more likely an online continuity model will succeed.
- Category ownership. If a customer is interested in, say, hydrating body wash, she is likely interested in similar products, such as moisturizer, makeup remover, and so on. Similarly, a customer buying organic pet food for her dog is likely wanting dog chews, pet vitamins, and various over-the-counter pet medicines. In other words, once you secure a customer on a continuity program, additional category items can easily be introduced. “Surprise and delight” marketing techniques, such as including a sample gift in recurring shipment, can be effective. And when timed correctly, these surprises reduce churn by reinvigorating the relationship.
- Connected products. Connected devices often require consumables, such as capsules for tea and coffee machines, filters for refrigerators, or paper and toner for printers. Consumables are typically high-profit items. Most connected devices don’t make it easy to buy these consumables, even though it’s a golden opportunity to build direct relationships with consumers, regardless of where the product was sold.
Customer Expectations
- Value. Consumers expect better value when buying on an auto-ship, continuity program, especially where they are buying a bundle of products or committing to a minimum number of purchases. Generally, merchants should avoid free trial offers and big upfront discounts. Both will recruit high-churn customers. To lower costs, ship replenishment items in inexpensive “green” packaging, passing the savings onto customers while leveraging environmental concerns.
- Convenience. The convenience of never running out of a staple item should not be underestimated, especially if the product has limited distribution, is bulky, or inconvenient to purchase locally. Making the process easy and frictionless appeals to many consumers.
- Transparency. Consumers expect transparency because continuity programs require their trust. This means easy termination, great service, and no nasty surprises on their credit card bill. All will help build a relationship that lasts years. Just a hint that it will be difficult to cancel is enough for many consumers not to sign up.
- Flexibility. The top reason why customers cancel continuity programs is lack of flexibility. An example is a customer going on a vacation and needing to pause or defer delivery. Or perhaps a customer wants to modify the program because his needs have changed. These modifications should be as simple as pressing a button, sending a text message, or making a quick call. When they’re not, it can quickly result in cancellations.
Backend Decisions
The secret to high-performing continuity commerce is the backend. Which products should you offer? How can you minimize churn? When to deliver and when to collect payments? These are the topics I’ll cover in part two.