Subscription programs have emerged as a forward-thinking strategy in the modern retail loyalty landscape. However, changes in subscription offerings at retailers like Amazon, Pret a Manger, Wesfarmers, and Woolworths highlight one key challenge: balancing customer value with company profitability.
In this article, I’ll explore the key considerations for designing successful retail subscription programs and discuss potential future developments in this rapidly evolving area.
The Power of Retail Subscriptions in Loyalty Programs
Although subscriptions aren’t a new concept, applying them to the retail sector is relatively novel. Traditionally, subscriptions have been used for products or services with predictable usage cycles, such as gyms, mobile phones and newspapers. These models involve customers paying an upfront fee for recurring access to a product or service, often creating a win-win situation: customers receive value exceeding the subscription fee, while retailers secure a larger share of their spending.
Amazon Prime set a precedent by demonstrating how a subscription model for free shipping could drive success across multiple retail categories. This success inspired other retailers to introduce similar models, with some focusing on free shipping, while others launched entirely new propositions tailored to their markets. A notable example in physical retail is Pret a Manger, the global sandwich chain, which transformed its fortunes post-COVID with a coffee subscription offering up to five barista-made drinks a day.
Two Challenges with Subscription Programs
Changes to customer propositions in several subscription programs highlight two significant challenges in their design:
1: Handling Unprofitable Customers:
Subscription programs can inadvertently encourage unprofitable customer behaviour. For instance, consider a family with a $250 weekly grocery budget that spends all of it with one retailer, splitting their expenses between a $200 bulk e-commerce order with a $10 delivery fee and a $40 in-store top-up shop. If this family switches to a $20 per month delivery subscription and increases their e-commerce deliveries to two $120 orders a week, it results in lower profitability:
- Product sales remain unchanged at $240 per week.
- Delivery fee income decreases by approximately $20 per month (from 4 x $10 fees to 1 x $20 fee).
- Costs increase due to the extra home delivery each week which drives additional online pick-and-pack costs.
This unintentional negative impact highlights the necessity for retailers to carefully assess the net impact on profitability when introducing subscription options.
2: The Subscriptions Omnichallenge:
Omnichannel retailers face the complex task of creating subscription programs that cater to both in-store and e-commerce shoppers. Striking the right balance in a single program can be challenging, as most customers tend to favour one channel over the other. Also, because technology constraints make it simpler to deliver personalised entitlements to online customers, most retailers prioritise online subscriptions despite having significant in-store sales. The programs at retailers like Dan Murphy’s and Walmart heavily favour online shoppers even though the vast majority of their sales are in-store.
In Australia, Coles, Wesfarmers and Woolworths have all adopted different strategies to address the omnichannel opportunity. Wesfarmers initially launched its OnePass subscription with a focus on free delivery, but in 2023 it took bold steps to attract more in-store shoppers, offering incentives like 5x Flybuys points for in-store purchases. (Phil Hawkins, LinkedIn)
The big question here is whether this will be enough to significantly increase adoption among customers who prefer shopping in stores, particularly at Bunnings and Kmart, which have lower e-commerce penetration. Otherwise, Wesfarmers may need to consider additional in-store benefits, such as member pricing or personalised offers, to develop OnePass into a truly mass-market proposition.
Conversely, Woolworths shifted its Everyday Extra subscription to focus almost entirely on in-store customers in 2023, with the 10% discount off one shop benefit being removed from e-commerce. This attracted significant feedback at the time from existing subscribers and Woolworths then resumed the 10% off one shop availability on e-commerce shops. Pret a Manger also reduced the benefits of its subscription program in 2024, removing the free coffee component. This also attracted considerable attention in the press though Pret has maintained its revised offer.
The experiences of Pret a Manger and Woolworths highlight the challenge of finding the right balance between profitability and mass-market adoption, in particular when this involves removing benefits that customers had become accustomed to.
The Future of Retail Subscriptions
As subscription models continue to gain traction, collaboration between retailers and brands is likely to increase. This could incentivise consumers to commit to specific brands over multiple purchases, particularly in high-spend categories like beauty, pet care and parenting.
Personalisation and segmentation will play an increasingly important role as retailers tailor subscription offerings to meet the unique needs of individual customers. I expect this will begin with more category-specific subscriptions, evolving over time to offer increasingly personalised options – much like the personalisation seen in loyalty programs today.
Successful subscription programs will need to strike a delicate balance between offering customer value and ensuring retailer profitability.
