A Deep Dive into the Fast-Growing Subscription Economy

ABOUT THIS EPISODE

The subscription economy is expected to grow from $15-billion this year to $475 billion by 2025. That's 68% year-over-year growth.

Adam Levinter operates in the eye of the hurricane as a subscription economy consultant, podcaster, and author.

In this episode of Marketing Spark, Adam and I explore why the subscription economy is growing so fast, the sectors seeing the most momentum, and how companies can embrace a subscription business. 

We also take a look at how the subscription economy will impact marketing, which will focus on customer acquisition and, as important, customer nurturing.

You're listening to marketing spark, thepodcast that delivers insight, tools and tips from marketers and entrepreurs and the trenchesin twenty five minutes or lets. Many people may not be familiar with thedirect to consumer sales model, but you've probably come across these types of companies, one of the best known as dollar shape club, which sold razors andrazor blades. It's a model gaining huge momentum as brand look to sell directlyto consumers rather than going through middleman such as online or bricks and mortar retailers. Adam inventor has great insight into the direct to consumer model as a consultant, podcaster and author. Today we're going to go get into the DCC businessand how it impacts marketing. Adam, welcome to marketing spark markets so greatto beer. Thanks for having me on. Let's start with the basics. Whatis the DTC or subscription economy? Can you describe how it works andwhy it's getting so much momentum? Sure, DDC, or DTC I should say, is direct consumer. That doesn't necessarily cover all subscription commerce companies.It's sort of the tip of the iceberg. What we talked about. When werefer to the subscription economy, is this derivative of DDC companies that arebuilt on the back of subscribers. So if you think of companies like Amazon, Netflix, spotify, sales force, you mentioned dollar Shave Club, barkbox and others, these are direct to consumer businesses that have built huge revenueon the back of a subscription type of model. And when we say thesubscription economy, we're just talking about the companies. Are Basket of companies thatare using this model to drive growth. What's been interesting? Well, letme go back a little bit. Probably a few years ago. I subscribeto a clothing company and every month they would send me close and I don'treally buy clothes that often, but I do you have me get me ataste of what the subscription economy was all about. So I'm curious about whatthe driving factors are. Is it brands trying to avoid the middleman? isat brands trying to have ongoing relationships with consumers? Is it consumers wanting tohave an ongoing experience with brands? Can you explain some of the underlying reasonswhy this description economy is gaining momentum both among companies trying to embrace it andconsumers that obviously enthusiastic enthusiastic about it. From a company perspective, I wouldsay that at there are a few drivers here, the first being customer loyalty. In the age of Amazon, which is eating retail alive, you don'thave a lot of customers who are loyal to brands anymore, and so companiesare challenged to build that customer loyalty and so rather than chasing transactions, they'rebuilding businesses that are driven on the relationship with the customer and because subscription hasa constant touch point with the customer, it's much easier to build that relationshiplong term than it is if you're just selling them something once. The otherthing that I would say is recurring revenue is also a big driver for companies. So, just as I mentioned that it's difficult to build a business whenyou're selling them a product once, shifting to recurring revenue model gives you thatsort of revenue consistency over time because the customers opted into their subscription. Sothey're being build for something, either built for a product and that product isshipped, or build for a service on a monthly basis. So that recurringtouch point means recurring revenue or more revenue over the long term, and alsothat deepening of the relationship with the customer. And I'd say from a consumer perspective, you know, the Dollar Shave club stories really interesting because they dida lot of things very well beyond just disrupting the incumbent. They developed avery compelling brand story, the marketing and...

...video that went viral on Youtube backinto thousand and twelve where he got twelve thou sign ups from in twenty fourhours or something like that. That was a huge story. I mean thathad huge word of mouth effect. And beyond that, you know you havethis attraction from the customer to a brand that's disruptive, to a brand thatcares about the consumer, that wants to develop that long term relationship. AndI would say the overarching theme here is personalization. And then we're talking aboutthis element of convenience. Right, if I'm annoyed that I have to goand shop for something on a consistent basis and go back to the side,to go back to the story to replenish something that I'm running out of,subscription gives me a way around that it gives me that convenience element that Iwant. You know, for a lot of people subscriptions historically we're around magazinesor you know. You would get you'd sign up and you'd get the magazinedelivered month after month, year after year. What I find really interesting about thesubscription economy is that how it has become so broad. Who would havethought that buying it dress shirts or chocolate, or bacon for that matter, wouldbe something that you would subscribe to? And I'm curious about how broad thesubscription economy can go. Canad apply to pretty much anything if there isconsumer demand or is the subscription economy? Does it play well in certain verticals, certain types of products? Yes, I get this question along from prospectiveclients. Subscriptions not a model that works for every business. It doesn't workfor every product, it doesn't work for every service. That said, howbroad can it go? I would say it's broadening over time. We haveincredible growth in the industry. We're at roughly fifteen billion in terms of theglobal subscription and commerce market right now. That's expected to go to four hundredand seventy eight billion by two thousand and twenty five. So that's a compoundannual growth rate of rough de roughly, excuse me, sixty eight percent overthe period and obviously their industries within that growth that are accelerating. So beauty, cosmetics and personal cares a big category for subscription. You have fashion andaccessories and apparel. You've got food and beverage, you have connected fitness,you have media, music streaming, the list goes on. So I thinkthat the categories are going to broaden overtime and we just consider we just continueto see growth ahead. Is this subscription model irresistible from many companies? Theidea that instead of doing one offs or customer by something two or three orfour times a year, having that recurring, steady, constant revenue coming in fora lot of companies, I mean that's unbelievable. You look at theSASS model, for example. I spent a lot of time working with bbsasscompanies. Month after month you're after your people pay for the services. Companiespay for those services, those digital services. People love Sass because once you geta customer, as long as you service in them properly, then you'llprobably keep them for a long time. And my question to you is howaggressively. Our companies looking at subscriptions these days? Is it a model thatthey find increasingly difficult to ignore? I think it is. You know,it's very expensive to attract customer and back after they've bought something once, andshifting to a subscription model fundamentally changes the way you do business in that regardbecause all of a sudden you're shifting the onus from merchant to the customer.And what I mean by that is when a customer signs up to a subscription, they are by default opting into something and so they're assumed to be satisfiedwith whatever subscription they're signing up for over time unless they decide to cancel,rather than having the onus, beyond the merchant, to constantly spend marketing dollarsto attract that customer back back into the store, back to the website whatever, to make that rep repurchase or repeat...

...purchase. So I would say yeah, it's very, very difficult to ignore the appeal of this. Before weget into the mechanics of the subscription economy, I I read that the subscription economyis a strategy that is people focused instead of product focused and involves ashift and how companies view the product experience. Can you elaborate in on that?Yeah, I'd say legacy companies are run by old school thinkers and thoseold school thinkers are driven by transactions. They're driven by volume of purchases,last quarters results versus what this quarter can achieve. They really don't have acustomer centric point of view and commerces is changing. We have, you know, we've got the background of the pandemic, of course, but we're also movingto, I'd say, much more relationship driven economy where consumers now havethe power. This wasn't the case ten, twenty, thirty years ago. So, yeah, shifting to this type of model fundamentally transforms how a companychooses to do business and I think the appeal is there. So the sixtyfourzeroll question is, how do you make the shift for a company that hasspent a lot of time focused on transactions, focused on one offs or a raticspending by consumers, or maybe Raddick's not the best word, but periodicspending by consumers. How does a company decide I want to embrace the suctioneconomy. I recognize this is the way that business is going to be donegoing forward. This is the way that we're going to serve consumers consistently andit's going to be a win and win relationship theoretically. So where do theystart? How do they identify whether it has a it has potential for theirbusiness, and what are the first steps they should take to get going withthe subscription economy? It's a variation on this question that I get asked alot, which is do you have a product or service or do I havea product or service that is potentially conducive to this model? So there's somenuance to answering this question, but in general I say the first step isto ask yourself, can I create a subscription model that fits within one ofthe three sort of broader subscription commerce categories, and those are one replenishment to curation, in three access, and I'll explain which what each of these are. So replenishment is sort of the dollar Shave Club category. It's the Amazonsubscribe and saves. It's that model where the merchant is selling the customer somethingthat they're going to run out of every three thousand sixty ninety days on averageand they're going to have to repurchase that product at a port of sale.That could be online or in store, it doesn't matter. But that customeris going to run out of that cream, that peanut butter, those diapers,whatever, those razors, and they're going to need to buy more.Do you have products that fit this category? Are you selling consumables that customers runout of? That's replenishment. If the answers yes, there's potential forreplenishment type of subscription. Play curation is the sort of second most popular.That's a product driven category and you know some examples are the bark boxes ofthe world, Birch box, ipsie, some of these cosmetics brands that aredoing these novelty sample type boxes and sending those to customers. So you knowwhat you're getting in terms of the broader product categories. So a subscriber tobirch box knows that he or she assigning up to a box of cosmetics.They just don't know exactly what they're getting. Same thing with bark box. Ifyour dog owner, you know you're getting a dog toy and a treatof some kind every month. You don't know exactly what it's going to be, but that surprise and delight factors there and that keeps you hooked. Soif you have products that you can curate that seem new and novel, whereyou can surprise and delight the customer,...

...you have the potential for curation play. And the third is sort of the I guess, the the catch allcategory, the access category. Do you have something that you can gate behinda pay wall that's really compelling? Do you have a service that people areconstantly paying for that's really appealing that you could turn into some sort of subscriptionplay? These companies that are driving the access model, you know, arethe netflixes of the world, Amazon Prime, all of the gym memberships, theonline dating sites, the paid APPs, the meditation APPs like calm or headspace, education courses that are hidden behind a paywall, online content, apaid newsletter, something of that nature. So can you provide some sort ofexclusive access two members only or to subscribers? And that's category number three. Onceyou've identified whether one of the categories apply to you, what a nextstep you recognize the opportunity, you know or think that your product can applyinto one of these three buckets. Where do you start? Where do youstart strategically, where do you start tactically? How much preparation and strategic thinking doyou have to do before you decide to launch this business model? Yeah, so, I mean that's that's the work we do. It's not alwayseasy and I would say just in general that it's like starting any other businessor business line. It does take some work, take some knowledge and knowhow. It takes some combination of capability, systems and tools to get the businessoff the ground. But you know, the keys to success that I'll share, which I think are incredibly important, include the following. So number one, personization. personalization is key to the long term success of these models. Subscription companies that generate more data on the consumer over time can offer moresubsequent individualized offerings, can customize the customer experience, can develop that deeper relationshipwith the customer. The second thing is customer experience, so valuedriven subscription modelsthat address pain points that are associated with traditional incumbents have huge potential to disruptin scale. So when you look at dollar shape club as an example,the existing experience for men in terms of buying raisors in a CVs, ina wall Greens and a Shopperstrug Mart, if you're in Canada, was incrediblyannoying and that's what dollar shape club saw. So spotting that opportunity to disrupt thecustomer experience that has to be there. Can you carve out a good story? Can you do a good job with your marketing and storytelling and creative? You know, social driven and influencer based subscription companies are very, very, very successful, and it's because a lot of the customers who subscribe talkabout that at the water cooler. Right it wasn't cool to talk about buyingraisors at a Wall Greens before dollar Shave Club came along and made it verycool to talk about the Newest Subscriptions Shaving Club that you signed up for.And then customer service, I say is is the fourth key thing. StartThinking about your customer service infrastructure. So subscription companies that have a balance focusbetween customer acquisition and backend retention see way higher customer lifetime values over time and, by default, lower subscriber churn or cancelation rates. And I'll just sharebefore we move on, I know I'm rambling a little bit, the commonmistakes that people make when they jump into this space and those include, youknow, things like category fit. So I think I can develop some sortof a subscription model, but it's just a bad category. For example,I sell men's shoes and I'm trying to sell men's shoes every month. Thatdoesn't really work when men's men usually buy a pair of black shoes and apair of brown shoes once a year. Market timing, so is it agood time to launch in your industry or...

...space? And then competition, ofcourse, is their white space for you to launch and grow. Those aresome three things that need to be considered. Great, that's a great overview interms of what you should do and what you should avoid. One ofthe things that fascinates me as a marketer is how the subscription economy impacts marketing. So traditionally we would be constantly in market driving brand awareness, trying tonurture leads, trying to encourage people that our brand is better than other brands. But what happens when you have a ongoing relationship with a consumer where you'renot necessarily trying to win them again and again? You've already got them inthe full? What you're trying to do is support them and courage them,provide them with confidence that they're in the right relationship. So that's one sideof the coin. The other marketing angle is that you've got people who aren'tsubscribers yet. You may have to educate them, you may have to providethem with encouragement in terms of this is going to be a good experience.So how does the marketing mix change from being a very much of a transactionbased organization to being subscription based? So it comes down in terms of customeracquisition and I'll flip to the customer retention or customer experience, I'd so interms of bringing on new subscribers, we're always talking about one key metric here, and that is your lifetime value to cach ratio, or customer acquisition costratio. When you are acquiring customers, regardless of the channel that you're testingor you're acquiring that customer from, you're constantly optimizing for this particular KP I. No other KPI really matters. So if you have a lifetime value toCAC ratio of north of three to one, you're in good shape. That's typicallythe rule of thumb. I know I'll get some backlash or some feedbackhere from from your listeners that say, you know, there's there's more toit than that. Absolutely there is. But generally speaking, if you wanta rule of thumb, LTV TO CACK ratio of three to one or hireif you are, you know, buying media, be it on facebook orinstagram or Google ads or whatever you're doing. However, you're split testing that marketingbudget or however that those dollars are breaking down, you want to beable to get clarity on what your LTV to cack ratio is. On theother side of the equation, when we talk about nurturing the customer relationship,you're talking about other strategies to engage the customer and make them feel a partof the brand. That could be through email, that could be through textmessaging, that could be through direct mail or cards. You know, wetalked about how interesting it was to see Chewy have this whole team of peoplewriting hallmark cards for their customers. There's lots of creative ways to do it. But yeah, I'd say, you know, we're talking about two differentthings here, two sides of the coin. One side of it is customer acquisitionand then the other side is how does it work in terms of nurturingthat customer experience? But what I will say, the last I'll say aboutthis mark, and I think it's an important thing to note, is onceyou've acquired that subscriber, that CPA, that that cost is that's accounted for. You now have that subscriber for subsequent months, hopefully for years if they'revery sticky. So that upfront cost that you pay for that consumer, that'sa one time hit versus a transactional sort of driven model where each time youacquire a customer that has a customer acquisition cost to it. Yeah, it'sinteresting that you brought up Chi and the fact that Ryan Cohen has been inthe news a lot. Ryan, who was the cofounder of Chewi, wasa big investor in game stock and I'm sure he's got a lot of capitalthese days to invest in subscription economy companies if he wants to. So that'sa nice seguey into the whole venture capital subscription economy relationship, because you're seeinga tremendous amount of money being poured into...

...these type of companies and the obviousquestion to you is why do you venture capital firms, and private equity firmsfor that matter, like subscription economies? Is that the consistency of the businessmodel, the reliability of of how these companies operate, what makes them soattractive to investors. In terms of being attracted to the subscription economy in general, it's that growth rate that's expected. So we're fifteen billion, like Imentioned, were expected to grow to four hundred and seventy eight billion by twothousand and twenty five. Their categories within within that, you know, growthbasket of companies that are going to be growing at such a clip. Sothey're obviously attracted to the industry. In terms of being attracted to the actualspecific companies, what many of these firms look for, beyond product market fit, a good team, solid growth, etcetera, are three factors. Oneis recurring revenue, to is customer loyalty and three is predictable cash flow,and a subscription business provides all three of those things. If you think aboutit and if you are, you know, an owner of a fast scaling companyor if you're thinking about starting a company and you're asking yourself sort ofwhat impact does this have on valuation, if any? What we're seeing isreally interesting. Where right now, an acquirers paying, and I know there'smultiple ways to value companies multiples on Ebada top line. I get that,but if you're thinking about what kind of impact transition to recurring revenue might haveon your business, I think it's important to note this fact. So acquiresor paying about seventy five cents for every dollar of onetime transactional revenue. Yetthey're dishing out three dollars for every dollar of recurring revenue. In other words, dollar for dollar, a subscription based business is worth x what a transactionalone is. Well, the economics are compelling and you can totally understand whya lot of enter cavities are killing them. I was to get involved with someof these companies and it will be interesting, just like the original ecommerceevolution, to see how the subscription economy from an investment perspective, stands out. One of the things that I wanted to circle back on when it cameto comes to marketing is point programs and the loyalty programs that are run bytraditional retailers. Like the more you shot there, the more points you get. What is the subscription economy say about the future of the points economy?Is One going to kill the other? Can you combine the two what's yourtake on how loyalty programs will evolve going forward? Amazon prime, which isarguably the most successful subscription business ever created, has prompted a lot of established brandsto rethink the structure of their existing loyalty programs. You know, fivehundred and ten, fifteen years ago, points programs were very popular. Atone point they were ubiquitous. Moving forward, I don't think it's going to bethat way. I think loyalty programs look a lot more like prime freepoints programs. They look good on the surface, but they're really again,this is sort of a merchant driven or company driven approach to loyalty versus aconsumer driven one. And when I say that, if you look at what'shappening with these points programs, they have long redemption times. Just let's useair miles and as an example to just give people a clear picture of whatwe're talking about here. So we look at Air Miles, Long Redemption Times, poor awareness and understanding of the benefits and anemic usage. We don't seepeople using or redeeming their points a lot. Some people like to use the termbreakage, which is a fancy work way of saying, you know,here's something we're giving the customer that they don't use. Breakage is extremely highwith points programs, whereas on the flip side, if we look at Amazonprime, we've got a paid opted in...

VIP style subscription where brands get thebenefit of a predictable source of recurring revenue. And the case of prime that's,you know, an annual membership fee of eighty bucks or hundred bucks orwhatever it is now, which can be used to subsidize more benefits that gointo that program like free shipping, like additional coupons, like access to primevideo, all these things. So in turn, customers receive way more value, they become way more engaged and they use the programs more frequently. Inultimate ultimately spend more money. And from prime to INSTA car to you know, restoration hardwares, prime like VIP program the numbers back it up. INSTATcarts building loyalty and engagement through their fee for VIP subscription program it's called instantcard express. I think the numbers are incredibly promising, where the average insto car shopper is spending about ninety five dollars in or, which is roughlytwenty three hundred dollars a year, which whereas express customers, on the otherhand, who are paying ninety nine bucks a year for free deliveries, areordering twice as often, spending fivezero a year. And if we just goback to Amazon prime, same thing. Typical Amazon shoppers spend seven hundred dollarsa year. Prime Shoppers are spending double that. When we originally talked abouthaving this podcast conversation, I understood that the subscription economy was growing and youhear stories about Bark box and dollar shave club and other companies that are experiencingreally good growth. But when you look at the sixty eight percent year overyear compound growth over the next five years from going from a fifteen billion dollarto a five hundred billion dollar industry, it is astounding and I it's goingto be really interesting to see how things evolved, who the winners are,who's going to lose, and I'm sure you're going to have a good rideas as a consultant and someone who helps companies get into the subscription economy.It's going to be fascinating to be in the either hurricane. So one finalquestion. Where can people learn more about you, your services and your podcastso they can learn more at SSCRIBER Bascom. That's like subscriber without the sub subscriberbasecom. For more they can link to the podcast that I host offof Scriber base or find my podcast wherever they get their audio. So mypodcast is called Eto entrepreneurs exposed and I in review founders of incredible businesses onthe show. And Yeah, I would also recommend people dive into some ofthe articles and research that is coming out on the subscription space. Forbes isrunning about the space a lot. Entrepreneur ink, wired Zora out of SanFrancisco has a ton of great content on subscription. So I'd encourage people toread more. And one other thing that you fail to mention is that youhave at booked that you published recently, yes, my first book. It'scalled the subscription boom. Why? An old business model is the future ofcommerce. It's available everywhere. Unfortunately, with Covid a lot of stores areclosed, but it is on business book shelves in on Amazon. Awesome.Adam. Will thanks your time and thanks for everyone for listening to another episodeof marketing spark. If you enjoyed the conversation, leave a review and subscribeby Itunes or your favorite podcast APP. For show notes of today's conversation andinformation about Adam, visit marking spark dot com slash blog. If you'd liketo learn more about how I help MEDB SASS companies as a fractional CMO consultand advisor, send an email to mark at marketing spark dotcom. I'll talkto you next time. I.

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