How many times have you bought something from a site because of a flash sale? And then you never buy anything else from them again, or until another flash sale comes up? So while you’re able to get some fast one-off purchases if that’s your business model, it may not be the best way to attract and retain longtime customers that buy even when there is no sale.
Jerry Jao, CEO and founder of Retention Science, shares with us why his research found that subscription-based businesses not only lead to having paying customers longer, but also have much higher average order sizes compared to flash sale sites.
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Small Business Trends: Give us a little bit of your personal background.
Jerry Jao: I’ve started on eCommerce, first started as a power seller on eBay and sold things from Gameboy games to comic books to game consoles. So I’ve always been really passionate about eCommerce as an industry. And later on I founded a couple eCommerce-enabling technologies. I’m specifically focused on CRM and customer loyalty and retention, just ’cause I think it’s a really fascinating problem to solve, and also a problem I ran into when I was in eCommerce. So I founded Retention Science about three years ago. Really excited about solving customer retention problems for eCommerce and retailers from small to big.
Small Business Trends: So you came out with this blog post, and it gets you right to where we want to go — The Subscription Economy is booming, but 72 percent of subscription shoppers don’t make a repeat purchase. That’s pretty bad if you’re in subscription services and you don’t have a repeat buyer.
You also break it down and look at this in terms of subscriptions versus flash sales. So maybe to get things going, talk a little bit about what is the subscription economy, and then also talk about subscriptions versus flash sales.
Jerry Jao: Sure. The subscription economy has been really interesting to watch. And if you think about the early days, whether ShoeDazzle, JustFab and fast forward to three years later, the Honest Company, Dollar Shave Club. There’s been quite a few businesses that took advantage of this rising business model and really made some success out of that. If you looked at all the most recent growth around Dollar Shave Club, I think they raised over $60 million to grow. And also the Honest Company is rumored to file for an IPO later this year at a valuation of close to $1 billion.
And you look at this business model and you question, what’s so special about this business. And one thing that we notice is the recurring aspect of business. It makes a business much easier. It makes it much easier for business to forecast their revenue, and the customer churn is much more measurable. It’s a little more defined, and as a result, there are better and more festive ways that they can reduce what we call customer churn.
If you look at different business models, eCommerce is really sexy to begin with because consumers have much more access to different types of product, all with their fingertips. And a couple clicks away, they can search for a bunch of different products that they want to buy. But the one thing that’s always been really interesting is the flash sales model. The flash sales model made its way to the market and did really well because at the beginning the flash sales side had the advantage of not having to hold any inventory of product. And as you and I know, inventory is one of the biggest killers for eCommerce sites because the more inventory you hold, the more money the business will sit on and it presents a very big risk.
So, flash sales sites grew really, really quickly and then in the market we saw many of them, targeting both the premium markets sector as well as some of the lower end markets. There are many, many different flash sales sites — Zulilly of course, which went public last year. There are a lot of exciting businesses that rose around this particular business model, because there are advantages that come with the business model.
However, over time, one thing we discover and found really interesting is that it’s also a business model that wasn’t necessarily sustainable in the long term. And we saw a lot of businesses slowly deteriorating from not being able to continue to match its growth rate that it experienced early on. And we started looking to just what exactly the flash sale sites are selling and why did people eventually lose interest. And one of the biggest [things] we discover is the novelty wore out over the last three to five years? And, at the end of the day, flash sale sites present very exciting value proposition in a sense that it’s selling previous season’s products at a discount.
But at the same time, how many of us are really just looking for these discounted products? [Many] of them are an impulse buy — meaning how many of us can buy last season’s Gucci purses? How many of us can continue to buy very expensive, trendy couches or rugs or just all those really cool things? But maybe most of us don’t need [it], on a monthly or on a daily basis.
If you look at the subscription business model, how they’ve been very successful and how they’ve become very desirable over time is that most of the subscription businesses, they identify a very, very niche need. And that need typically has a recurring mechanism built into it.
So if it’s diapers (and you have newborns to toddlers) this is a consistent need that you will have. It suits the recurring business model very well for the subscription economy. Same with razors — think about you and I. For most men, we have to shave, whether it’s daily or weekly. And so those are needs that recur on a very regular basis. So I think because the subscription economy really identifies certain things that are a necessity, verses nice to have, then the subscription economy quickly really rose above the noise.
Small Business Trends: But interestingly you say 72 percent of subscription shoppers don’t make a return purchase.
Jerry Jao: The reality is that many customers drop out. So then the subscription customers actually made more repeat purchases within the first three month based on what we measure. And, of course, once those customers actually became subscribers, we definitely noticed that the customers stay on much, much longer versus the flash sale site customers.
Small Business Trends: Yeah, I was looking at your average order per customer in twelve months, in the post here. Subscription, $7.68 vs flash sales, $1.41. So it seems like if you’re a subscription business, because the model calls for customers to buy on a monthly basis, or subscribe and stay and pay on a monthly basis, not only do you get more orders but you can spend more of your time and effort on keeping those folks — making the value for them enough that they stay on board. Whereas flash sale, you’re always in customer acquisition mode.
Jerry Jao: You’re absolutely right, Brent. And the challenge of constantly being in acquisition mode — it’s not only very, very expensive and the investment for businesses upfront is really high. It’s hard to retain, and it’s hard to actually measure if there is a clear pattern in terms of how the customers are behaving with you. With the subscription business model, it is a little easier to be able to find a niche to target. And of course, it’s hard to grow a business — it doesn’t matter what kind of business model you have. But, at the end of the day, with subscription business models there’s a more clear pattern. And when you are subscribed as a customer to the business, there’s a lot more information businesses get out of you.
For example, if I bought something on Zulilly or on Fab, it’s hard for the business to know: who am I as a customer? What’s my price sensitivity? Because every product is discounted versus if I look at a subscription package, typically they have different tiers or products. So, if you look at Dollar Shave Club, they have the lowest tier razors, which some people think that fulfills their needs, versus let’s say, you and I typically grow a bigger beard. We might need the executive package which is more expensive, but it’s more durable.
So, based on the product that we subscribe to, typically businesses have quite a bit of information that they can assume of the customers. And therefore, market to us very differently in order to retain us. And that’s something that’s definitely very powerful.
Small Business Trends: Is it possible, or how difficult is it, for a company who started with the flash sale mentality to change or transition over to the subscription mentality?
Jerry Jao: A lot of businesses are evaluating themselves and what they carry, and then see that the business model can transition or have both. One thing we’ve seen that’s fairly interesting is that many of the subscription models — eventually they also evolve into an eCommerce, meaning that people can buy on their site one-off.
So, if you look at Birch Box, if you look at the Honest Company, both of these, initially subscription businesses, now also have an eCommerce component on the site. So on their website, customers can also buy a product one-off instead of just having to subscribe to their subscription boxes or bundles. And so, if you look at flash sale sites, it depends on their supply chain, depends on the kind of product that they carry. It’s that easy for people to subscribe to that I think there is definitely an opportunity for them to switch.
And, for example, look at JustFab. They sell jewelry. They sell purses, and on a monthly subscription basis they will send you a pair of shoes for, I think, just under $40 … $39.99. And if there are flash sale sites that focus on, let’s say, shoes or other types of product that they can find on a monthly basis, they can deliver the same type of goods at the same cost to their customer. Then they can certainly experiment with that business model as well.
Small Business Trends: Can you point people in the direction of where they could find out more? Get the infographic, see the blog post?
Jerry Jao: Sure, absolutely. They can go to retentionscience.com/subscription, and they can find a lot of information beyond just the infographic.
This is part of the One-on-One Interview series with thought leaders. The transcript has been edited for publication. If it’s an audio or video interview, click on the embedded player above, or subscribe via iTunes or via Stitcher.