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Commitment Issues: The Role of Contracts in Subscription Based Services

Commitment Issues: The Role of Contracts in Subscription Based Services

The shift to mobile isn’t the only way that consumers are changing the way they shop. In fact, 80% of customers are demanding new consumption models, including subscription-based services. Businesses that utilize this model see significant growth, even for niche products and services; for example, Dollar Shave Club tripled its annual revenue between 2013 and 2015. In fact, this type of retailer has grown 3000% in the last three years.

The appeal is defined by the subscription-based service contract. More than just what the subscription box delivers, the contract defines the relationship between the customer and the brand. The power of this consumption model lies in how customers react to these contracts. This post will offer a brief overview of these services, why they’re popular, and the impact of contracts.

How Subscription Services Work

The format is simple: The customer pays a flat-rate fee regularly to receive a service for specific, limited periods of time, or a periodic box of product. Most current services revolve around some type of content. Netflix and Spotify are two leaders in their respective industries. Netflix sees extremely low churn rates (5%), and has 26 million subscribers in the U.S. alone and 75 million worldwide, a number expected to climb to 175 million by 2020. Spotify has a similarly low churn rate (2.2%, more than 4 points lower than its biggest competitor, Apple Music) and a solid 30 million paying users (twice that of Apple Music). It’s become popular enough that Sony has made Spotify the exclusive music experience on its PlayStation systems, which has garnered more than 5 million downloads since launch. Given the success of the subscription model, other service industries such as marketing and consulting are exploring and adopting it.

The delivered product subscription services are somewhat new. Where Netflix and Spotify follow the traditions of premium cable movie stations and Sirius XM, box subscriptions are a different segment. Boxes are delivered periodically, usually weekly, monthly, or bi-monthly (e.g., Blue Apron or Graze, Birchbox or Sephora Play!, and Carnivore Club or Marvel Collector Corps, respectively). Most are curated, though some brands keep the contents a surprise, while others allow customers to select their options from a limited set. Here’s a quick snapshot of some of the leaders:

  • Blue Apron: It has a solid CMGR of 9.8% and remains the leader for its sector in observable sales at three times greater than the next largest competitor (HelloFresh). It retains at least 28% of its customers after six months (more than 10% higher than HelloFresh).
  • Fabletics: Despite recent scandal, this newcomer reportedly brought in $150 million in sales in 2015. Exact numbers are unclear due to a lack of company transparency, but customer churn allegedly remains at about 2% or less and, along with other brands under the JustFab umbrella, is expected to stay high-growth.
  • The Honest Company: Recently valued at $1.7 billion, it brings in about $300 million in annual revenue for organic and other “green” and non-toxic household products.

How Contracts Work for Subscription Services

There are two major aspects to the subscription-based service contract. First, there are customer expectations. They exchange pertinent sensitive information (e.g., credit card numbers) in exchange for their services of choice. Most services provide the option to either opt in to specific choices or opt out of receiving a particular subscription box (e.g., Bespoke Post, which offers several iterations each month as well as the ability to skip). When this is the case, there is a regular deadline for the decision to be made. Most importantly, customers expect the terms of the contract to be clear and easy to follow, especially when it comes to adjusting their account, opting in or out of a delivery, or even canceling service. If customers feel like the process is complicated or too confusing, or if they feel gypped (or worse) as with Fabletics and Adore Me, both of which came under fire for their billing policies.

This is where the second aspect comes in, namely, adherence to regulations. Subscription services should be as transparent as possible, complete with fine print that customers are capable of understanding. State and federal regulations take it one step further to protect the consumer as much as possible from predatory or misleading companies. Automatic renewal regulations exist federally per the FTC, as well as at the state level throughout 24 states nationwide; while they vary, the point is requiring companies to clearly and conspicuously disclose the automatic renewal and, in some states, require authorization for such. Similar regulations are in place to ensure that automatic renewal is disclosed during the registration process and that reminders about recurring fees are sent to registered customers.

Perks of Using Contracts

Of course, when a brand and its terms are transparent, the benefits afforded by contracts outweigh the annoyances for most customers. There are several reasons.

Convenience

Recurring services like a subscription box offer the customer a variety of experiences, but the key feature is the customer not needing to worry about receiving what they want or need. Sometimes it’s something a customer regularly needs (e.g., razor blades from Dollar Shave Club), and sometimes it’s the ability to try expensive or luxurious items that they wouldn’t normally consider within their budget (e.g., Freshly, which delivers gourmet meals designed by top chefs using never-frozen, gluten-free, all-natural ingredients). It also alleviates the need to go to the store because everything is delivered to the customer at home.

Pricing

Since each industry has different needs, the price of these services is low in comparison to traditional, full-price retail shopping. Loot Crate, a geek collectibles box, costs only $16 per month for contents worth $50 or more, while Ipsy, a cosmetics box, costs a mere $10 per month for five deluxe samples and even full-priced cosmetics that can be worth $50 or more each. However, meal subscription services like Plated are significantly more expensive at $72 per week. Some subscription retailers also offer different levels of service to help customers select a box that best fits their budget.

Low Commitment

The convenience and favorable pricing already lend themselves to subscription services only requiring a small commitment from customers. The ability to opt in to specific boxes or opt out of a particular delivery gives the customer further freedom to commit, or not, as they choose.

Of course, this minimal amount of commitment can lead to problems for subscription-based retailers. Unfortunately, for as exponential as growth has been for this consumption model, it remains a niche portion of the market for its varied industries, and that means it’s all too susceptible to customer churn. Even market leaders, such as Birchbox, can face setbacks when they can’t fully maintain customer loyalty. In the face of chilling venture investments, the churn for Birchbox means that expansions into brick-and-mortar spaces have come to a halt, 6% of its employees had to be let go, and its competitors have taken leaps ahead of it. This highlights a critical aspect — Birchbox’s biggest competitor is Ipsy, which has captured loyalty with another low-commitment feature, namely community. Ipsy minimizes churn because its customers would be leaving more than a monthly box of product.

How Consumers Are Accessing These Contracts

Subscription services are very technologically forward, especially in response to customer demands. That is to say, customers want to sign up online, control their account online, and be able to adjust their preferences from within their account (including whether or not to receive a particular delivery or to cancel service). It should be no surprise, then, that most of these shoppers are Millennials, specifically 25 to 44, and tend to be well off with a median household income >6% average at more than $78 thousand. They also tend to be educated, and while the breakdown between genders is fairly even, it skews slightly toward women (58%). What’s more, they tend to be multicultural, culturally minded, and urban, with an interest in healthy or socially responsible lifestyles.

Millennials are likely the key demographic for these types of service thanks to subscription retail’s second greatest driver: social media. While search still accounts for most of the attribution (34%), social is responsible for 13.5% of traffic, which is more than 5 points ahead of traditional retail (8.4%). What’s more, the traffic is overwhelmingly mobile (52.8%, or about 9 points ahead of other retail). It’s not out of the question to expect leading-edge Centennials to follow similar patterns.

The popularity of subscription-based services continues to climb as customers’ shopping habits continue to evolve and their expectations for how to interact with brands continues to shift. That makes the subscription-based service contract a key part of how to ensure improved customer loyalty and continual business growth. It’s clear that the benefits for the customer translate into benefits for your business.