Share this on

Follow us on

Screen-Shot-2023-10-24-at-4.20.35-pm

The Sweet Spot of Subscription Success: Customer Value Meets Retailer Profitability

In the ever-changing world of retail, subscription programs have become a valuable strategy for forward-thinking retailers. However, recent shifts in subscription offerings by industry leaders like Amazon, Pret a Manger, Wesfarmers and Woolworths have shed light on the challenges retailers face in building subscription programs that resonate with consumers while also driving profits.

This article will unpack the key factors involved in designing successful retail subscription programs and discuss potential future developments in this rapidly evolving field.

Subscription’s Superpower in Retail

Subscription models involve customers paying an upfront fee for ongoing access to a product or service. While not a new concept, subscriptions have traditionally been applied to products or services with predictable usage cycles, such as gyms, mobile phones and newspapers. This dynamic often establishes a mutually beneficial scenario, where customers receive value exceeding the subscription fee, and retailers secure a larger share of their spending.

Amazon Prime set the benchmark, showcasing how a subscription model for free shipping could drive success across multiple retail categories. This prompted other retailers to follow suit, with some also focusing on free shipping, while others introduced entirely new propositions tailored to their markets. 

Take Pret a Manger, the global sandwich chain, for instance. This leading innovator in physical retail transformed its fortunes post-pandemic with a coffee subscription, offering up to five barista-made drinks a day. 

Dual Challenges Brought to Light by Recent Shifts

Two significant challenges in program design have been illuminated by recent shifts to the customer proposition at several subscription programs:

1. Tackling Unprofitable Customers 

Subscription programs can, unintentionally, 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.
  • Costs increase due to the extra home delivery and additional online pick-and-pack costs.

This inadvertent 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 encounter the intricate challenge of designing subscription programs that serve the needs of both in-store and online 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 Coles, Dan Murphy’s and Walmart all heavily favour online shoppers even though the vast majority of their sales are in-store.

In Australia, Wesfarmers and Woolworths have adopted distinct strategies to address the omnichannel opportunity. Wesfarmers initially launched its OnePass subscription with a focus on free delivery, but recently it has taken bold steps to attract more in-store shoppers, offering incentives like 5x Flybuys points for in-store purchases. The pivotal 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 mass-market proposition.

Conversely, Woolworths has shifted its Everyday Extra subscription to focus almost entirely on in-store customers. The 10 per cent discount off one shop benefit is no longer available on e-commerce shops; the “Extra Perk,” typically a free product, has to be redeemed at a store. Woolworths is now targeting online shoppers through the separate Delivery Unlimited program. This shift suggests that Woolworths is now deliberately segmenting its offerings to shoppers in different channels. Woolworths also noted in its FY23 results announcement that it has more to do “to scale Everyday Extra as a key value mechanic for all families, especially Savers” which suggests the subscription design is still being reviewed and there may be more changes to come.

Both Wesfarmers and Woolworths are now at the forefront of global retail subscription innovation and it will be fascinating to observe how consumers respond to Woolworths’ differentiated approach in comparison to Wesfarmers’ all-encompassing OnePass strategy.

The Next Chapter of Retail Subscriptions

With subscriptions gaining momentum among omnichannel retailers, it’s clear that innovation and evolution are imminent. Expect collaboration between retailers and brands becoming more prevalent, incentivising consumers to commit over multiple shops to specific brands within high-spend categories like beauty, pet care and parenting. Eagle Eye company Untie Nots is helping retailers with this opportunity through personalised and gamified “challenge” offers which encourage loyalty to specific brands and retailers.

Personalisation and segmentation will likely also play an increasing role as retailers tailor subscription models to cater to the unique needs of individual customers. I expect this will start with a greater variety of subscriptions to cater for groups interested in specific categories and will then evolve over time with increasingly personalised subscriptions, just as we are seeing loyalty programs become increasingly personalised.

In Sum

The world of retail subscriptions is evolving rapidly. Successful subscription programs will need to strike a delicate balance between customer value and retailer profitability. It’s definitely an exciting space to watch for future developments and innovations.

Jonathan Reeve
Author: Jonathan Reeve

Share this post

Leave a Reply

Your email address will not be published. Required fields are marked *