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 markets par podcastat delivers insight tools and tips from marketers and entreprend the trenchesin twenty five minutes or left. Many people may not be familiar with thedirect to consumer sales model, but you probably come across these techniccompanies. One of the best known is dollar shape, flop, so razors and razorblades. It's a model gaining huge momentum as rand looked to shelldirectly to consumers, rather than going through middle man than justonline or prator retails adal venture has great insight into thedirecto consumer model as a consultant PODCAST ER and author today we're goingto go, get into the Dette business and how it impacts. Marketing Adam welcometo marketing spark mark its so great to beer. Thanks for having me on. Let's start with the basics, what isthe D TC or subscription economy? Can you describe how it works and why it'sgaining so much from mentum, sure, D, DC or d? T C, I should say, is directconsumer that doesn't necessarily cover all subscription commerce companies,it's sort of the tip of the iceberg. What we talk about when we refer to thesubscription economy is this derivative of DC companies that are built on the back of subscribers. So if youthink of companies like Amazon, net, Flix, POTIIsales force, you mentioned dollar Shave, club, bark box and others- these aredirect consumer businesses that have built huge revenue on the back of asubscription type of model and when we say the subscription economy we're justtalking about the companies or basket of companies that are using this modelto drive growth what's been interesting. Well, let mego back a little bit. Probably a few years ago I subscribe to a clothingcompany and every month they would send me close, and I don't really buyclothes that often, but it eem get me a taste of what this description economywas all about. So I'm curious about what the driving factors are. Is itbrands trying to avoid the middleman? Is it brands trying to have ongoingrelationships with consumers? Is it consumers wanting to have an ongoingexperience with brands? Can you explain some of the underlying reasons why thisdescription economy is gaining momentum, both among companies trying to embraceit and consumers that are obviously ENTHUSIANA IC about it? From a company perspective, I would saythat there are a few drivers here, the first being customer loyalty in the ageof Amazon, which is eating retail alive. You don't have a lot of customers who are loyal to brands anymore, and so companies are challenged tobuild that customer loyalty and so rather than chasing transactions.They're building businesses that are driven on the relationship with thecustomer and because subscription has a constant touch point with the customer.It's much easier to build that relationship long term, then it is ifyou're, just selling them something once the other thing that, I would say isrecurring. Revenue is also a big driver for companies, so just as I mentionedthat it's difficult to build a business when you're selling them a product once shifting to a recurring revenue modelgives you that sort of revenue consistency over time, because thecustomers opted into their subscription, so they're being build for somethingeither build for a product and that product is shipped or build for aservice on a monthly basis. So that recurring touch point means recurringrevenue or more revenue over the long term, and also that deepening of therelationship with the customer and I'd say from a consumer perspective. Youknow the Dollar Shave Club story is really interesting because they did alot of things very well beyond just disrupting the incumbent. Theydeveloped a very compelling brand story:...

The Marketing and video that went viralon Youtte back in two thousand and twelve, where he got twelve thousandsign ups in twenty four hours, or something like that. That was a hugestory. I mean that had huge word of mouth effect and beyond that, you knowyou have this attraction from the customer to a brand. That's disruptiveto a brand that cares about the consumer that wants to develop thatlong term relationship, and I would say the overarching theme here ispersonalization and then we're talking about thiselement of convenience right. If I'm annoyed that I have to go and shop forsomething on a consistent basis and go back to the site or go back to thestore to replenish something that I'm running out of subscription gives me away around that it gives me that convenience element that I want. You know for a lot of peoplesubscriptions historically were around magazines or you know you would getyou'd sign up and you'd get the magazine delivered month after month ofyear after year. What I find really interesting about the subscripioneconomy is that how it has become so broad who would have thought thatbuying it dress, shirts or chocolate or Bacon? For that matter would besomething that you would subscribe to and I'm curious about how broad thesubscription economy can go. Can it apply to pretty much anything? If thereis consumer demand or is the subscription economy? Does it play wellin certain verticals certain types of products? Yes, I get this question alone fromperspective. Clients subscriptions not a model that works for every business;it doesn't work for every product. It doesn't work for every service. Thatsaid, how broad can it go? I would say it's broadening over time. We have incredible. Growth in theindustry were at roughly fifteen billion in terms of the globalsubscription you commerce market right now, that's expected to go to fourhundred and seventy eight billion by two thousand and twenty five. So that'sa compound annual growth rate of rufty. Roughly excuse me sixty eight percentover the period and obviously their industries within that growth that areaccelerating so beauty, cosmetics and personal care isa big category for subscription. You have fashion and accessories andapparel you've got food and beverage. You have connected fitness. You havemedia music streaming. The list goes on, so I think that the categories aregoing to broaden over time, and we just can. We just continue to see growthahead. Is this subscription model irresistiblefor many companies? The idea that, instead of doing one off or a customerby something two or three or four times a year, having that recurring, steady, constant revenue coming in fora lot of companies, I mean that's unbelievable. You look at the SASSmodel. For example, I spend a lot of time working with btsan es month aftermonth year after your people pay for the services companies pay for thoseservices, those digital services, people love Sass, because once you geta customer as long as you service in them properly, then you'll probablykeep them for a long time, and my question to you is how aggressively ourcompanies looking at subscriptions these days? Is it a model that theyfind increasingly difficult to ignore? I think it is. You know it's veryexpensive to attract a customer back after they've bought something once andshifting to a subscription model. Fundamentally, changes the way you dobusiness in that regard, because all of a sudden you're shifting the onus frommerchant to the customer and what I mean by that is when a customer signsup to a subscription. They are by default, opting into something, and sothey are assumed to be satisfied with whatever subscription they're signingup for over time unless they decide to cancel rather than having the onesbeyond the merchant to constantly spend marketing dollars to attract thatcustomer back back into the store back...

...to the website, whatever to make thatrepurchase or repeat purchase. So I would say: Yeah it's very, verydifficult to ignore the appeal of this before we get into the mechanics of thedescription economy. I read that the sustutit economy is a strategy that is,people focused instead of prodest focused and involves a shift in howcompanies view the product experience. Can you elaborate on that yeah I'd say: Legacy companies are runby old school thinkers and those old school thinkers are driven bytransactions. They're driven by volume of purchases last quarters resultsversus what this quarter can achieve. They really don't have a customercentric point of view and commerce is changing. We have you know: We've got the background ofthe pandemic, of course, but we're also moving to I'd, say a much morerelationship driven economy where consumers now have the power. This wasn't the case ten twenty thirtyyears ago, so yeah shifting to this type of model fundamentally transformshow a company choose to do business, and I think the appeal is there. So the sixty four thousand dollarquestion is: How do you make the shift for a company that has spent a lot oftime focused on transactions focused on one off or erratic spending byconsumers, or maybe Radis, not the best word, but periodic spending byconsumers? How does a company decide? I want to embrace the SOCCI economy. Irecognize this is the way that business is going to be done going for this isthe way that we're going to serve consumers consistently and it's goingto be a win and win relationship. Theoretically, so what do they start?How do they identify whether at a it has potential for their business andwhat are the first steps they should take to get going with the subscriptioneconomy? It's a variation on this question that I get asked a lot, whichis: Do you have a product or service, or do I have a product of service thatis potentially conductive to this model? So there's some nuance to answer inthis question, but in general I say the first step is to ask yourself: Can I create a subscription model thatfits within one of the three sort of broader subscription commercecategories and those are one replenishment to curation and threeaccess and I'll explain which what each of these are so replenishment is sort of the DollarShave Club category? It's the Amazon subscribing saves it's that model wherethe merchant is selling the customer, something that they're going to run outof every thirty sixty ninety days on average and they're going to have torepurchase that product at a point, a sale. It could be online or in store,it doesn't matter, but that customer is going to run out of that cream. Thatpeanut butter, those diapers, whatever those razors and they're going to needto buy more. Do you have products that fit this category? Are you sellingconsuming bulls that customers run out of that's replenishment? If the answeris yes, there's potential for replenishment type of subscription play.curation is the sort of second most popular. It's a product driven category-and you know some examples- are the bark boxes of the World Birch Box ipsysome of these cosmetic brands that are doing these novelties sample type boxes andsending those to customers. So you know what you're getting in terms of thebroader product category, so a subscriber to birch box knows that hereshe is signing up to a box of cosmetics. They just don't know exactly whatthey're getting same thing with bark box. If you're a dog owner you knowyou're getting a dog toy and a treat of some kind every month you don't knowexactly what it's going to be, but that surprising to light factors there, andthat keeps you hooked. So if you have products that you can curate that seemnew and novel, where you can surprise...

...and delight the customer, you have thepotential for curation play and the third is sort of the. I guessthe the cashall category access category. Do you have something that you can getbehind a pay wall? If that's really compelling, do you have a service thatpeople are constantly paying for? That's really appealing that you couldturn into some sort of subscription play these companies that are drivingthe access model. You know: are the net Flix es of the World Amazon, prime? Allof the gym memberships, the online dating sites, the pad APPs, themeditation APPs like calm or head space education courses that are hiddenbehind a pay wall online content, a paid newsletter. Something of thatnature. So can you provide some sort of exclusive access to members only or twosubscribers, and that's category number three, once you've identified whether one ofthe categories applied to you? What a next step you recognized theopportunity you know or think that you, your product, can apply into one ofthese three buckets. Where do you start? Where do you start strategically? Wheredo 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 workwe do. It's not always easy and I would say just in general that it's likestarting any other business or business line. It does take some work. It takesome knowledge and know how it takes some combination of capability systemsand tools to get the business off the ground. But you know the keys to success thatI'll share, which I think are incredibly important, include thefollowing. So number one personization personization is key to the long term.Success of these models subscription companies have generate more data onthe consumer. Over time can offer more. Subsequent individualized offerings cancustomize. The customer experience can develop that deeper relationship withthe customer. The second thing is customer experience, so value drivensubscription models that address pain, points that are associated withtraditional incumbents have huge potential to disrupt and scale. So whenyou look at Dollar Shave Club as an example, the existing experience for men interms of buying razors in a Cvan, a wall Greens in a shopper, Strog Martin,if you're in Canada, was incredibly annoying and that's what dollar ShaveClub saw so spotting that opportunity to disrupt the customer experience thathas to be there. Can you carve out a good story? Can you do a good job withyour marketing and storytelling creative? You know social driven andinfluence or based subscription companies are very, very, verysuccessful, and it's because a lot of the customerswho subscribe talk about that at the water cooler right. It wasn't cool totalk about buying razors. At a Wall Greens before dollar Shave Club camealong and made it very cool to talk about the Newest Subscriptions ShavingClub that you signed up for and then customer service I say is the fourthkey thing start thinking about your customer service infrastructure sosubscription companies that have a balance, focus between customeracquisition and back and retention, see way higher customer lifetime valuesover time and by default, lower subscribe or churn or cancellationrates and I'll just share before we move on.I know I'm rambling a little bit the common mistakes that people make whenthey jump into the space, and those include you know things likecategory fit, so I think I can develop some sort of a subscription model, butit's just a bad category. For example, I sell men shoes and I'm trying to sellmen shoes every month that doesn't really work when men's men usually buya pair of black shoes and a pair of brown shoes once a year market timing. So is it a good time tolaunch in your industry or space, and...

...then competition, of course, is theirwhite space for you to launch and grow. Those are some three things that needto be considered great, that's a great overview in terms of what you should doand what you should avoid. One of the things that fascinates me as a marketeris how the subscription economy impacts marketing. So traditionally we would beconstantly in market driving brand awareness trying to nurture leadstrying to encourage people that our brand is better than other brands. Butwhat happens when you have a ongoing relationship with a consumer whereyou're not necessarily trying to win them again and again, you've alreadygot them in the full. What you're trying to do is support them, encouragethem, provide them with confidence that they're in the right relationship. Sothat's one side of the coin. The other marketing angle is that you've gotpeople who aren't subscribers, yet you may have to educate them. You may haveto provide them with encouragement in terms of this is going to be a goodexperience. So how does the marketing mix change from being a very much of atransaction based organization to being subscription based? So it comes down in terms of customeracquisition and then I'll flip to the customer retention or customerexperience ID so in terms of bringing on new subscribers, we're alwaystalking about one cemetry here and that is your lifetime value to CAC ratio orcustomer acquisition cost ratio when you are acquiring customers, regardlessof the channel, that you're testing or you're acquiring that customer fromyou're constantly optimize for this particular K, Pi, no other K, Pi really matters. So if you have a lifetime value to cackratio of north of three to one you're in good shape, that's typically therule of thumb. I know I'll get some backlash or some feed back here fromfrom your listeners, an say: no there's there's more to it than that.Absolutely there is, but, generally speaking, if you want to rule of thumb,l TV to cack ratio of three to one or higher- if you are, you know, buyingmedia, be it on face book or Instar M or Google ads or whatever you're doing.However, you're split testing that marketing budget or ever that thosedollars are breaking down. You want to be able to get clarity on what your l TV to caratio is on the other side of the equation. Whenwe talk about nurturing the customer relationship, you're talking aboutother strategies to engage the customer and make them feel a part of the brandthat could be through email, that could be through text messaging that could bethrough direct mail or cards. You know we talked about how interesting it wasto see chewy. Have this whole team of people writing hallmark cards for theircustomers. There's lots of creative ways to do it, but yeah I'd, say you know we'retalking about two different things here: two sides of the corn, one side of itis customer acquisition and then the other side is: how does it work interms of nurturing that customer experience? But what I will say thelast thing I'll say about this market, I think, is an important thing to know-is once you've acquired that subscriberthat CPA, that that cost is that's accounted for. You now have thatsubscriber for subsequent months, hopefully for years, if they're, verysticky, so that up front cost that you pay for that consumer, that's a onetime hit versus a transactional sort of driven model where each time youacquire a customer that has a customer acquisition cost to it. It's interesting that you brought upChili and the fact that Ryan Cohen has been in the news. A Lot Ryan who wasthe CO founder of Chee, was a big investor in game stock and I'm surehe's got a lot of capital these days to invest in subscription economycompanies if he wants to. So that's a nice segue into the whole venturecapital subscription economy, relatinship because you're, seeing atremendous amount of money being poured...

...into these type of companies, and theobvious question to you is why to venture capital firms and privateequity firms for that matter, like description economies? Is it theconsistency of the business model, the reliability of of how these companiesoperate? What makes them so attractive to investors M in terms of being attracted to thesubscription economy in general? It's that growth rate, that's expected, sowe're at fifteen billion, like I mentioned, we're expected to go to fourhundred and seventy eight billion by two thousand and twenty five theircategories within within that you know, growth basket of companies that are going tobe growing at such a clip, so they're obviously attracted to the industry interms of being attracted to the actual specific companies. What many of thesefirms look for beyond product market fit a good team, solid growth et ce arethree factors. One is recurring revenue to his customer loyalty and three aspredictable cash flow and a subscription business provides allthree of those things. If you think about it- and if you are, you know an owner of afast scaling company or if you're thinking about starting a company andyou're, asking yourself sort of what impact does this have on valuation? Ifany, what we're seeing is really interesting where right now an acquireris paying- and I know, there's multiple ways to value companies multiples onIbadat top line. I get that, but if you're thinking about what kind ofimpact a transition to recurring revenue might have on your business, Ithink it's important to note this fact so acquires are paying about seventyfive cents for every dollar of one time, transactional revenue, yet they're,dishing out three dollars for every dollar of recurring revenue, in otherwords, dollar for dollar a subscription based business, is worth three x. Whata transaction one is well, the economics are compelling andyou can totally understand why a lot of inch capitis are killing themselves toget involved with some of these companies, and it will be interestingjust like the original e commerce evolution to see how this ses Cripti oneconomy from an investment perspective stands out. One of the things that Iwanted to circle back on when it came to comes to marketing, is pointprograms and loyal to programs that are run by traditional retailers. Like themore you shot there. The more points you get. What is this descriptioneconomy say about the future of the points economy? Is One going to killthe other? Can you combine the two? What's your take on how loyaltyprograms will evolve going forward? Amazon prime, which is arguably themost successful subscription business ever created, has prompted a lot ofestablished brands to rethink the structure of their existing loyaltyprograms. You know five. Ten, fifteen years ago points programs were verypopular at one point. They were ubiquitous moving forward. I don'tthink it's going to be that way. I think. Loyalty programs look a lot more.Like prime free points programs, they look good on the surface, but they'rereally again. This is sort of a merchant driven or a company drivenapproach to loyalty, verses, a consumer driven one, and when I say that, if youlook at what's happening with these points programs, they have longredemption times. Just let's use air miles and as an example,to just give people a clear picture of what we're talking about here. So ifyou look at Air Miles Long Redemption Times, poor awareness and understandingof the benefits and anemic usage, we don't see people using or redeemingtheir points a lot. Some people like use the term breakage, which is a fancy,were way of saying. You know, here's something we were given the customerthat they don't use. Breakage is extremely high with points programs, whereas on the flip side, if we look atAmazon, prime we've got a paid opted in...

VIP style subscription where brands get the benefit of apredictable source of recurring revenue. In the case of prime that's, you knowan annual membership fee of eighty bucks or a hundred bucks or whatever itis now which can be used to subsidize more benefits that go into that program.Like free shipping, like additional coupons like access to prime video, allthese things, so in turn, customers receive way more value, they become way more engaged and theyuse the programs more frequently and ultimate ultimately spend more moneyand from prime to Instan car. To you know: Restoration, hardwares, prime,like VIP program, the numbers back it up, instal carts, building, loyalty andengagement through therapy for VIP subscription program. It's calledInstigat Express. I think the numbers are incredibly promising, where theaverage ence to car shopper is spending about Ninety Fivedas, an order which isroughly twenty three hundred lars a year which, whereas express customers,on the other hand, who are paying ninety nine bucks a year for freedeliveries, are ordering twice as often and spending five tousand dollars ayear, and if we just go back Amazon. Prime same thing, typical Amazonchoppers spend seven hundred dollars a year. Prime Shoppers are spendingdouble that when we originally talked about havingthis podcast conversation, I understood that the subscription of coney wasgrowing and you hear stories about bark box and dollar shave, club and othercompanies that are experiencing really good growth. But when you look at thesixty eight percent year over your compound growth over the next fiveyears from going from a fifteen billion dollar to a five hundred billion dollarindustry, it is astounding and night. It's going to be really interesting tosee how things evolve, who the winners are who's going to lose and I'm sureyou're going to have a good ride as a consultant and someone who helpscompanies get into the subscription economy. It's going to be fascinatingto be in the eye, the hurricane. So one final question: where can people learnmore about you, your services and your podcast? So they can learn more atscriber Bascom, that's like subscriber. Without the SUB SCRIBER BASE COM formore, they can link to the podcast that I host off Ob scriber base or find mypodcast wherever they get their audio. So my podcast is called etentrepreneurs exposed and I interview founders of incredible businesses onthe show and yeah. I would also recommend people dive into some of thearticles and research that is coming out on thesubscription space. Forbes is running about the space. A Lot entrepreneur,ink, wired, Zora out of San Francisco has a ten a grate content onsubscription, so I'd encourage people to read more and one other thing thatyou fail to mention is that you have a book that you published recently. Yes,my first book, it's called the subscription boom. Why an old businessmodel is the future of commerce it's available everywhere. Unfortunately,with coved, a lot of stores are closed, but it is on business book shelves inon Amazon. Awesome, Adama thanks for your time, and thanks for everyone forlistening to another episode of marketing spark. If you enjoyed theconversation, leave a review and subscribe by, I tunes or your favoritepodcast tap for show notes of today's conversation and information about Adamvisit. Martins bark on cost. Last blog you'd like to learn more about how Ihelp TB SASS companies as a fractional SMO insult and adviser than an email tomark at marketing spark I'll talk to next o.

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