Subscription is nothing new, but it’s becoming an ever more powerful force in global retail, allowing businesses to drive loyalty and recurring revenue, and giving consumers a convenient way to consistently receive great products and services from trusted brands.
As of 2022, the global value of the ecommerce subscriptions market stands at $96.61 billion and is forecasted to grow to $2419.69 billion by 2028.
Underpinning this growth has been the widespread adoption of smartphones, ecommerce, and streaming services. And while entertainment services are at the forefront, sectors like beauty and personal care and food and beverage have also seen strong growth in the prevalence of subscription models.
The barriers to entry have never been lower and the technology never more accessible for new entrants to the ecommerce subscription and retail market.
But if you want to get in on the action, you need to understand the underpinnings of ecommerce payments in retail, the different types of retail subscription, the benefits and challenges, and the best practices for managing your subscription model.
Read on to discover how to set your subscription business up for success.
Retail subscription is a business model where customers pay a recurring fee to receive a product or service on a regular basis, providing convenience for customers and steady, predictable revenue for businesses.
Subscriptions tend to offer customers regular replenishment of a particular product, exclusive access to products or services, or items curated by the seller and tailored to their personal preferences.
Retail subscription can be broken down into several types depending on what consumer need is being met and what product or service is being provided.
Worldwide, grocery subscription accounts for the largest market segment (41%), followed by personal care products (38%), and household products (34%), all of which can be categorized as reordering or curated models, making these the world’s most widely used subscription types.
Usage-based billing, also known as metered billing, is a pricing strategy where customers are charged based on their actual consumption of a product or service - rather than a flat fee - at the end of their subscription cycle. This subscription model is common in industries where consumption can vary greatly among customers, such as utilities, telecommunications, and cloud computing services.
Businesses operating as this subscription type usually provide a selection of new or unique items that have been curated by the seller, often tailored to the customer's personal preferences. The curated subscription model is popular in the fashion, beauty, and food industries.
This subscription model grants consumers access to exclusive digital products or services, such as video or music-based streaming services like Netflix or Spotify, or software like Adobe Photoshop.
Sometimes called replenishment, reordering is one of the world’s most widely used subscription types, saving customers time and effort by automatically delivering frequently-used products, like razors, toiletries, or pet food, at regular intervals. For example, Hello Fresh in the food category, and Harry’s in the personal care category.
Learn more: What is a credit card account updater?
Here are the main benefits of the subscription model:
While the benefits are numerous, businesses that rely on a subscription model also face many challenges.
Churn can be involuntary, where a subscription accidentally lapses because of a failed payment, or voluntary, where a customer decides they no longer need or enjoy using your service. Whatever the reason, churn represents the biggest threat to subscription businesses, which can only survive by generating recurring revenue from a loyal customer base.
Churn can increase in times of economic instability, when consumers see canceling subscriptions as a quick way to reign in their spending. Research from Checkout.com’s Global Retailer’s Handbook shows that 17% of consumers have recently canceled a subscription, and only a small percentage have shown an interest in signing up for new subscriptions.
Businesses need to expect some churn, and price it into their strategy, but should also employ measures to ensure their churn rate doesn’t become too high, which we’ll explain below.
It’s vital to choose the right payment platform for your subscription business, one that provides the right tools to take recurring payments and manage customer accounts. Businesses that choose a platform that doesn’t meet their needs risk failed payments, customer dissatisfaction, and ultimately, an existentially-high churn rate.
Subscription fraud is a type of financial fraud that targets subscription-based services. Fraudsters typically use stolen credit card information to sign up for these services, which can lead to financial losses for both you and your customers. This type of fraud has become more prevalent with the rise of digital and online subscription services.
Common types of subscription fraud include account takeover, where a fraudster gains access to a legitimate customer’s account; identity theft, where fraudsters set up illegitimate accounts using stolen or fake information; and friendly fraud, where customers claim they don’t recognize a subscription charge on their bank statement, which leads to chargebacks.
With the right management, subscription based programs and SaaS payments offer a combination of predictable cash flow, high customer loyalty and efficiency in terms of operations. As long as a company is able to effectively streamline its services and promote its values, then attracting millennials shouldn’t be a problem. From then on, they have the potential to become your biggest advocates.
Recent research indicates that nearly 92% of young consumers value loyalty programs, which means subscription plans that allow for convenience, reliability and consistency. Paying regularly using their debit or credit cards is a sacrifice that most millennials are willing to make if the result is having the convenience of getting goods and services shipped to them on the spot, without having to re-order every week or every month.
For merchants, this bodes well for business, since subscription-based customers often are loyal and will provide steady, predictable, reliable and recurring payments. However, there are some potential drawbacks, including declined authorizations which may result in decreased customer lifetime value.
Working with payment providers such as Checkout.com give merchants the flexibility to manage their subscription payment processing as they want. Another benefits for merchants is that they don’t need to be PCI compliant; Checkout.com holds the card data and provides an encryption to maximize security.
Subscription businesses should focus on quality over quantity when it comes to driving loyalty and reducing churn.
According to Sticky.io’s Subscription Commerce Readiness Report, consumers are becoming more selective about their subscriptions, with the average number of subscriptions dropping from 4.1 in March 2022 to 2.9 in July 2023.
For most consumers, the quality they seek should come in the form of flexibility, trust, and transparency, rather than unnecessary addons. Instead of trying to squeeze more value out of your customers, more value is to be found in providing a great service that encourages them to retain their subscription.
When it comes to ensuring that your subscription program runs properly, having the correct payment methods is key to making sure that you can effectively provide the ongoing, reliable service that millennials want. Out of the possible options, three payment types remain popular: credit cards, bank transfers and e-wallets.
As the number one online payment method today, credit cards are reliable due to their ease of setup and upfront payments. Though the cost of fees in regards to fraud and chargebacks can reduce profitability, for both businesses and customers, the ease of which credit cards can be used for payment outweigh the potential negatives.
Bank transfers can be difficult to set up due to bank processes, but when established, can offer merchants who use this method with lower fees and lower incidences of fraud.
Finally, e-transfers act as a middleman that handles the back-end of the previous payment methods. While not platforms of recurring payment on their own, many of these e-wallets have a proven track record of robust security when it comes to payments.
According to the Subscription Commerce Readiness Report, flexibility is a big factor for subscription consumers, who want to be able to choose from a range of plans and to have the choice to modify their subscription if necessary. Of the top 30 most successful merchants featured in the report, 97% gave their customers the option to pause or modify their subscriptions. In contrast, renewal without approval (31%), and the inability to pause or skip (27%) and change subscription frequency (23%) were listed as top reasons for cancelation.
Providing a great service to your subscribers starts the first time they checkout and continues every time you take a payment from them. That’s why checkout optimization is such an important factor for managing retail subscriptions.
Some simple checkout optimization strategies to implement are:
Prorated billing refers to the practice of charging customers based on the proportion of a service they have used or the time they have spent subscribed to a service within a billing cycle. Instead of charging the full subscription fee, the charge is adjusted or "prorated" to reflect the actual usage or subscription time. This is useful when a customer upgrades or downgrades their plan in the middle of a billing cycle or if they cancel or pause their subscription. It gives your subscribers flexibility and helps to build trust.
Make use of advanced data and analytics to gain granular insights into your subscribers, your service, and your churn rate.
Subscription analytics can help you to understand subscriber behavior, which you can use to make informed improvements to your service. It can also alert you to any dangerous increase in churn rate, and elucidate the reasons why, so you can take decisive action to bring it back under control.
Checkout.com provides all the tools your subscription business needs to take recurring payments, provide a great service to your customers, and keep churn rate low.
You can manage all your subscription payments on one platform through our modular solutions and suite of integrations, which make it easy to update or cancel plans at any time.
Meanwhile, our payments API empowers your global growth by allowing you to offer dozens of local payment methods, improving payment acceptance with local processing, and providing regional expertise.
Secure a loyal global subscriber base with Checkout.com’s subscription solution.