So far, in this eight-part series titled "8 Reasons Subscribers Are Better Than Customers," we've seen why subscribers increase the value of your company, increase the lifetime value of a customer, smooth out demand, provide free market research, boost cash flow and stay loyal. Today, we look at how the subscription business model increases cross-selling opportunities.
In a traditional business, the customer buys your product or service once and it is up to you to try and convince them to buy again in the future. In a subscription business, you have what I call "Automatic Customers" who agree to purchase from you into the future as long as you keep providing your service or product. Through the research for my new book, I've discovered there are nine different subscription models that are being leveraged by everyone from a fashion designer to a condom maker.
Amazon has come a long way since its days of just hawking cheap books online. Of course, you can still buy books on the site, but today's Amazon will sell you everything from diapers to laundry detergent. Increasingly, it is digging deeper into our pockets through the subscription service called Amazon Prime.
Amazon Prime subscribers pay Amazon $99 a year in return for goodies like free streaming of thousands of movies and TV shows and free two-day shipping on most Amazon purchases. According to a 2015 report released by Consumer Intelligence Research Partners, there are now more than 40 million subscribers to Amazon Prime worldwide.
If you were to carve out Amazon Prime as a stand-alone business, it would already be a four billion-dollar subscription company, but that severely underestimates the value of Prime to Amazon. Like many subscription models, Amazon Prime is a Trojan horse that is expanding the list of products consumers are willing to buy from Amazon and it's giving the eggheads in Seattle a mountain of customer data to sift through. It was never about the $79," said Vijay Ravindran, who worked on the team that launched Prime at its original price of $79 per year, and who spoke to Brad Stone, the author of The Everything Store: Jeff Bezos and the Age of Amazon. "It was really about changing people's mentality so they wouldn't shop anywhere else."
According to Consumer Intelligence, the average Prime member now spends $1,500 on Amazon purchases each year, compared with $625 for non-Prime customers. We cannot say Prime members spend that much more just because they are members, since presumably a lot of Amazon's best customers would have been attracted to the free shipping offer. However, this data seems to suggest that once someone becomes a Prime subscriber, they become even more loyal to Amazon.
Given the positive impact Prime seems to have on customers' buying behavior, some analysts have argued that Amazon should drop the fee for subscribing to Prime in order to grow the program even faster. But that thinking misses a key element of Amazon's strategy. When you pay $99 per year to become a member, you want to "get your money's worth." Suddenly you start checking Amazon's pricing on all sorts of products, from paper towels to sneakers, with hopes of "making back" what you invested in the membership. Given Amazon's aggressive pricing and seemingly endless product selection, you can almost always find what you're looking for at a price that's lower than what you could find elsewhere. When you factor in free shipping, it becomes an easy decision to buy from Amazon.
BirchBox Customers Buy More
A subscription business model allows you the opportunity to talk to your customers on a regular basis as they enjoy the benefits of your subscription. This means you get an opportunity to up-sell them on products and services beyond their basic subscription.
Take, for example, the story of BirchBox, which offers a $10-per-month subscription that delivers a collection of cosmetic and skin-care samples to your door in a beautifully wrapped box made of recycled packaging. Instead of buying the full-size version of a moisturizer, only to find it doesn't quite work for your skin type, BirchBox allows its customers (there are BirchBox programs for women and for men) to discover new products before shelling out for the big bottle.
BirchBox founders Katia Beauchamp and Haley Barna are cagey about the number of subscribers they have, but according to a 2013 Forbes article, BirchBox was up to 400,000 subscribers and growing quickly. If you're doing the math at home, that makes for almost $50 million of subscriber revenue. Not bad for a young start-up run by a couple of thirty-somethings.
But the real money for BirchBox--and the cosmetic companies who give them most of their samples to distribute for free--is in the conversion. According to Forbes, more than half of BirchBox subscribers have bought a full-size version of something they sampled from the BirchBox e-commerce site.
Not only is a subscription the sale that keeps on giving, it is also a sale that can quickly lead to a customer requesting adjacent products and services, further boosting the lifetime value of a subscriber.
This article is adapted from the new book The Automatic Customer by John Warrillow. The book is published by Portfolio, an imprint of Penguin Random House, and is available wherever books are sold. Copyright John Warrillow, 2015.