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, the podcast that delivers insight, tools and tips from marketers and entrepreurs and the trenches in twenty five minutes or lets. Many people may not be familiar with the direct 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 and razor blades. It's a model gaining huge momentum as brand look to sell directly to 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 business and how it impacts marketing. Adam, welcome to marketing spark markets so great to beer. Thanks for having me on. Let's start with the basics. What is the DTC or subscription economy? Can you describe how it works and why 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 we refer to the subscription economy, is this derivative of DDC companies that are built on the back of subscribers. So if you think of companies like Amazon, Netflix, spotify, sales force, you mentioned dollar Shave Club, bark box and others, these are direct to consumer businesses that have built huge revenue on the back of a subscription type of model. And when we say the subscription economy, we're just talking about the companies. Are Basket of companies that are using this model to drive growth. What's been interesting? Well, let me go back a little bit. Probably a few years ago. I subscribe to a clothing company and every month they would send me close and I don't really buy clothes that often, but I do you have me get me a taste of what the subscription economy was all about. So I'm curious about what the driving factors are. Is it brands trying to avoid the middleman? is at brands trying to have ongoing relationships with consumers? Is it consumers wanting to have an ongoing experience with brands? Can you explain some of the underlying reasons why this description economy is gaining momentum both among companies trying to embrace it and consumers that obviously enthusiastic enthusiastic about it. From a company perspective, I would say 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't have a lot of customers who are loyal to brands anymore, and so companies are challenged to build that customer loyalty and so rather than chasing transactions, they're building businesses that are driven on the relationship with the customer and because subscription has a constant touch point with the customer, it's much easier to build that relationship long term than it is if you're just selling them something once. The other thing 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 when you're selling them a product once, shifting to recurring revenue model gives you that sort of revenue consistency over time because the customers opted into their subscription. So they're being build for something, either built for a product and that product is shipped, or build for a service on a monthly basis. So that recurring touch point means recurring revenue or more revenue over the long term, and also that 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 did a lot of things very well beyond just disrupting the incumbent. They developed a very compelling brand story, the marketing and...

...video that went viral on Youtube back into thousand and twelve where he got twelve thou sign ups from in twenty four hours or something like that. That was a huge story. I mean that had huge word of mouth effect. And beyond that, you know you have this attraction from the customer to a brand that's disruptive, to a brand that cares about the consumer, that wants to develop that long term relationship. And I would say the overarching theme here is personalization. And then we're talking about this element of convenience. Right, if I'm annoyed that I have to go and 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 I want. You know, for a lot of people subscriptions historically we're around magazines or you know. You would get you'd sign up and you'd get the magazine delivered month after month, year after year. What I find really interesting about the subscription economy is that how it has become so broad. Who would have thought that buying it dress shirts or chocolate, or bacon for that matter, would be something that you would subscribe to? And I'm curious about how broad the subscription economy can go. Canad apply to pretty much anything if there is consumer demand or is the subscription economy? Does it play well in certain verticals, certain types of products? Yes, I get this question along from prospective clients. Subscriptions not a model that works for every business. It doesn't work for every product, it doesn't work for every service. That said, how broad can it go? I would say it's broadening over time. We have incredible growth in the industry. We're at roughly fifteen billion in terms of the global subscription and commerce market right now. That's expected to go to four hundred and seventy eight billion by two thousand and twenty five. So that's a compound annual growth rate of rough de roughly, excuse me, sixty eight percent over the 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 and accessories and apparel. You've got food and beverage, you have connected fitness, you have media, music streaming, the list goes on. So I think that the categories are going to broaden overtime and we just consider we just continue to see growth ahead. Is this subscription model irresistible from many companies? The idea that instead of doing one offs or customer by something two or three or four times a year, having that recurring, steady, constant revenue coming in for a lot of companies, I mean that's unbelievable. You look at the SASS model, for example. I spent a lot of time working with bbsass companies. Month after month you're after your people pay for the services. Companies pay for those services, those digital services. People love Sass because once you get a customer, as long as you service in them properly, then you'll probably keep them for a long time. And my question to you is how aggressively. Our companies looking at subscriptions these days? Is it a model that they 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, and shifting to a subscription model fundamentally changes the way you do business in that regard because 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 satisfied with 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 dollars to 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 we get into the mechanics of the subscription economy, I I read that the subscription economy is a strategy that is people focused instead of product focused and involves a shift 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 those old 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 a customer 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 moving to, I'd say, much more relationship driven economy where consumers now have the power. This wasn't the case ten, twenty, thirty years ago. So, yeah, shifting to this type of model fundamentally transforms how a company chooses to do business and I think the appeal is there. So the sixty fourzeroll question is, how do you make the shift for a company that has spent a lot of time focused on transactions, focused on one offs or a ratic spending by consumers, or maybe Raddick's not the best word, but periodic spending by consumers. How does a company decide I want to embrace the suction economy. I recognize this is the way that business is going to be done going forward. This is the way that we're going to serve consumers consistently and it's going to be a win and win relationship theoretically. So where do they start? How do they identify whether it has a it has potential for their business, and what are the first steps they should take to get going with the subscription economy? It's a variation on this question that I get asked a lot, which is do you have a product or service or do I have a product or service that is potentially conducive to this model? So there's some nuance to answering this question, but in general I say the first step is to ask yourself, can I create a subscription model that fits within one of the 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 Amazon subscribe and saves. It's that model where the merchant is selling the customer something that they're going to run out of every three thousand sixty ninety days on average and 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 customer is 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 run out of? That's replenishment. If the answers yes, there's potential for replenishment 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 of the world, Birch box, ipsie, some of these cosmetics brands that are doing these novelty sample type boxes and sending those to customers. So you know what you're getting in terms of the broader product categories. So a subscriber to birch 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. If your dog owner, you know you're getting a dog toy and a treat of 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. So if you have products that you can curate that seem new and novel, where you 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 all category, the access category. Do you have something that you can gate behind a pay wall that's really compelling? Do you have a service that people are constantly paying for that's really appealing that you could turn into some sort of subscription play? These companies that are driving the access model, you know, are the netflixes of the world, Amazon Prime, all of the gym memberships, the online dating sites, the paid APPs, the meditation APPs like calm or headspace, education courses that are hidden behind a paywall, online content, a paid newsletter, something of that nature. So can you provide some sort of exclusive access two members only or to subscribers? And that's category number three. Once you've identified whether one of the categories apply to you, what a next step you recognize the opportunity, you know or think that your product can apply into one of these three buckets. Where do you start? Where do you start strategically, where do you start tactically? How much preparation and strategic thinking do you 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 always easy and I would say just in general that it's like starting any other business or business line. It does take some work, take some knowledge and know how. It takes some combination of capability, systems and tools to get the business off 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 more subsequent individualized offerings, can customize the customer experience, can develop that deeper relationship with the customer. The second thing is customer experience, so valuedriven subscription models that address pain points that are associated with traditional incumbents have huge potential to disrupt in 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, in a wall Greens and a Shopperstrug Mart, if you're in Canada, was incredibly annoying and that's what dollar shape club saw. So spotting that opportunity to disrupt the customer 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 talk about that at the water cooler. Right it wasn't cool to talk about buying raisors at a Wall Greens before dollar Shave Club came along and made it very cool 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. Start Thinking about your customer service infrastructure. So subscription companies that have a balance focus between 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 share before we move on, I know I'm rambling a little bit, the common mistakes that people make when they jump into this space and those include, you know, things like category fit. So I think I can develop some sort of 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. That doesn't really work when men's men usually buy a pair of black shoes and a pair of brown shoes once a year. Market timing, so is it a good time to launch in your industry or...

...space? And then competition, of course, is their white space for you to launch and grow. Those are some three things that need to be considered. Great, that's a great overview in terms of what you should do and what you should avoid. One of the 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 to nurture 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're not necessarily trying to win them again and again? You've already got them in the 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 side of the coin. The other marketing angle is that you've got people who aren't subscribers yet. You may have to educate them, you may have to provide them 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 transaction based organization to being subscription based? So it comes down in terms of customer acquisition and I'll flip to the customer retention or customer experience, I'd so in terms 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 cost ratio. When you are acquiring customers, regardless of the channel that you're testing or 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 to CAC ratio of north of three to one, you're in good shape. That's typically the rule of thumb. I know I'll get some backlash or some feedback here from from your listeners that say, you know, there's there's more to it than that. Absolutely there is. But generally speaking, if you want a rule of thumb, LTV TO CACK ratio of three to one or hire if you are, you know, buying media, be it on facebook or instagram or Google ads or whatever you're doing. However, you're split testing that marketing budget or however that those dollars are breaking down, you want to be able to get clarity on what your LTV to cack ratio is. On the other 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 part of the brand. That could be through email, that could be through text messaging, that could be through direct mail or cards. You know, we talked about how interesting it was to see Chewy have this whole team of people writing 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 different things here, two sides of the coin. One side of it is customer acquisition and then the other side is how does it work in terms of nurturing that customer experience? But what I will say, the last I'll say about this mark, and I think it's an important thing to note, is once you'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're very sticky. So that upfront cost that you pay for that consumer, that's a one time hit versus a transactional sort of driven model where each time you acquire a customer that has a customer acquisition cost to it. Yeah, it's interesting that you brought up Chi and the fact that Ryan Cohen has been in the news a lot. Ryan, who was the cofounder of Chewi, was a big investor in game stock and I'm sure he's got a lot of capital these days to invest in subscription economy companies if he wants to. So that's a nice seguey into the whole venture capital subscription economy relationship, because you're seeing a tremendous amount of money being poured into...

...these type of companies and the obvious question to you is why do you venture capital firms, and private equity firms for that matter, like subscription economies? Is that the consistency of the business model, the reliability of of how these companies operate, what makes them so attractive 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 I mentioned, were expected to grow to four hundred and seventy eight billion by two thousand and twenty five. Their categories within within that, you know, growth basket of companies that are going to be growing at such a clip. So they're obviously attracted to the industry. In terms of being attracted to the actual specific companies, what many of these firms look for, beyond product market fit, a good team, solid growth, etcetera, are three factors. One is 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 about it and if you are, you know, an owner of a fast scaling company or if you're thinking about starting a company and you're asking yourself sort of what impact does this have on valuation, if any? What we're seeing is really interesting. Where right now, an acquirers paying, and I know there's multiple 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 have on your business, I think it's important to note this fact. So acquires or paying about seventy five cents for every dollar of onetime transactional revenue. Yet they'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 transactional one is. Well, the economics are compelling and you can totally understand why a lot of enter cavities are killing them. I was to get involved with some of these companies and it will be interesting, just like the original ecommerce evolution, 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 came to comes to marketing is point programs and the loyalty programs that are run by traditional 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 your take on how loyalty programs will evolve going forward? Amazon prime, which is arguably the most successful subscription business ever created, has prompted a lot of established brands to rethink the structure of their existing loyalty programs. You know, five hundred and ten, fifteen years ago, points programs were very popular. At one point they were ubiquitous. Moving forward, I don't think 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're really again, this is sort of a merchant driven or company driven approach to loyalty versus a consumer driven one. And when I say that, if you look at what's happening with these points programs, they have long redemption 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 we look at Air Miles, Long Redemption Times, poor awareness and understanding of the benefits and anemic usage. We don't see people using or redeeming their points a lot. Some people like to use the term breakage, 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 high with points programs, whereas on the flip side, if we look at Amazon prime, we've got a paid opted in...

VIP style subscription where brands get the benefit 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 or whatever it is 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, all these things. So in turn, customers receive way more value, they become way more engaged and they use the programs more frequently. In ultimate ultimately spend more money. And from prime to INSTA car to you know, restoration hardwares, prime like VIP program the numbers back it up. INSTAT carts building loyalty and engagement through their fee for VIP subscription program it's called instant card express. I think the numbers are incredibly promising, where the average in sto car shopper is spending about ninety five dollars in or, which is roughly twenty three hundred dollars a year, which whereas express customers, on the other hand, who are paying ninety nine bucks a year for free deliveries, are ordering twice as often, spending fivezero a year. And if we just go back to Amazon prime, same thing. Typical Amazon shoppers spend seven hundred dollars a year. Prime Shoppers are spending double that. When we originally talked about having this podcast conversation, I understood that the subscription economy was growing and you hear stories about Bark box and dollar shave club and other companies that are experiencing really good growth. But when you look at the sixty eight percent year over year compound growth over the next five years from going from a fifteen billion dollar to a five hundred billion dollar industry, it is astounding and I it's going to 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 ride as 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 final question. Where can people learn more about you, your services and your podcast so they can learn more at SSCRIBER Bascom. That's like subscriber without the sub subscriber basecom. For more they can link to the podcast that I host off of Scriber base or find my podcast wherever they get their audio. So my podcast is called Eto entrepreneurs exposed and I in review founders of incredible businesses on the show. And Yeah, I would also recommend people dive into some of the articles and research that is coming out on the subscription space. Forbes is running about the space a lot. Entrepreneur ink, wired Zora out of San Francisco has a ton of great content on subscription. So I'd encourage people to read more. And one other thing that you fail to mention is that you have at booked that you published recently, yes, my first book. It's called the subscription boom. Why? An old business model is the future of commerce. It's available everywhere. Unfortunately, with Covid a lot of stores are closed, but it is on business book shelves in on Amazon. Awesome. Adam. Will thanks your time and thanks for everyone for listening to another episode of marketing spark. If you enjoyed the conversation, leave a review and subscribe by Itunes or your favorite podcast APP. For show notes of today's conversation and information about Adam, visit marking spark dot com slash blog. If you'd like to learn more about how I help MEDB SASS companies as a fractional CMO consult and advisor, send an email to mark at marketing spark dotcom. I'll talk to you next time. I.

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