The Challenge of Pricing for Retailers Launching Subscriptions

Subscription programs are hot right now, but they’re not just for startups. Last year, major omnichannel retailers including Under Armour, Ann Taylor, and Old Navy launched subscriptions for their customers as part of overall omnichannel strategies.

Omnichannel retailers and other companies offer subscriptions for different reasons. For large manufacturers and consumer packaged goods companies, subscriptions drive consumers to buy direct rather than from retailers. Retailers already selling direct to consumers via brick-and-mortar locations and e-commerce sites are adding subscriptions as a new way to connect in an ongoing and relationship-driven way with their customers.

However, simply starting a subscription service doesn’t guarantee a flood of loyal new customers. Subscriptions come with some new challenges, not the least of which is pricing. How retailers choose to price their subscription offerings is a critical determining factor in whether their programs succeed.

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The Benefits of Adding a Subscription

Large retailers such as Under Armour and Old Navy are testing the subscription waters for a few reasons, three of which stand out: they want to nurture customer relationships, generate recurring revenue, and gain valuable customer data.

First, these services foster long-term relationships with customers, taking traditional retailers from transaction-based to relationship-based models. Subscriptions allow retailers to create holistic relationships with their subscribers to provide curated items and exclusive products, which strengthen brand loyalty. As thousands of retail stores close every year, with at least 1,000 more planned to close in 2018, loyalty can make the difference between success and bankruptcy.

In addition, subscriptions generate reliable, recurring revenue, providing a steady stream of income alongside improved customer relations. For companies constantly fighting for position as Amazon.com and Walmart race to offer the lowest price possible, adding a subscription program provides a valuable competitive differentiator.

Finally, subscriptions help omnichannel retailers gain valuable customer data to improve their products and sales tactics. Retailers can track what customers want, create live databases, and provide more personalized offerings while incentivizing future purchases. And because a subscription means more touchpoints with every customer, retailers have more opportunities to gather feedback and improve their services.

The Subscription Pricing Conundrum

Current retail strategies focus heavily on discounts throughout the year. To grab retail customers, subscriptions must demonstrate comparable value.

Last holiday season, for example, several stores flew banners advertising sales of 50 percent off in-store or online throughout the extended shopping season. These deals extended from Black Friday through New Year’s. Old Navy, for example, offered 74 percent off after Christmas. These strategies have trained consumers to wait for discounts or withhold purchases until an even better deal arrives.

For subscriptions, navigating this discount-heavy environment can be tricky. Subscription prices cannot exist independently from store prices, as value is a key psychological element in deciding to subscribe. When discounts vary from day to day in-store, subscriptions must match or beat those prices to keep customers interested. In today’s transparent world, any attempt to get more money from subscribers will inevitably lead to social media backlash and product returns.

There are a few potential ways to remedy this situation. Retailers could offer exclusive products, such as preseason products or truly unique items, through subscriptions to entice customers to sign up and stay subscribed. With exclusive products, there's no opportunity to compare pricing vs. the discount or promo of the day. Aggressive bundling, which can mask discount discrepancies, could also work.

Unfortunately for some brands, retail and subscription channels inherently conflict. They don’t need to. Merchandisers, marketers and brand owners must oversee pricing from the top to succeed on both fronts. Anything else will lead to negative sentiments and customer ire.

These leaders must recognize that consumers are drawn to consistent products and pricing. They don’t want to pay $40 for $60 worth of product one month, then $20 for $30 worth of product the next. For omnichannel retailers, the challenge is to keep subscription boxes valuable without sacrificing opportunities for sales in stores — or discounting subscriber items and cheapening the value of the subscription boxes.

Elements of a Successful Subscription Price

Omnichannel or not, the key metrics for subscription channels remain about the same for everyone. Retail brands that hit their targets for these subscription metrics, without stepping on their own brick-and-mortar toes, will enjoy the benefits of this new sales avenue through these improved key performance indicators (KPIs):

• Cost per acquisition: How much it costs to attract the average subscriber.
• Average order value: How much the average subscription shipment costs. Upselling and cross-selling are critical components of this metric.
• Lifetime value: How much the customer purchases in the subscription before canceling.

Focusing on these KPIs will ensure that brands’ leaders are making the best choices possible when deciding how to price their subscription offerings.

Will subscription services for traditional retail outlets become the new norm in 2018? That remains to be seen. However, more retailers will undoubtedly test the subscription waters if a few of these early brands find success. If omnichannel retailers can find the pricing sweet spot that aligns these KPIs, retail subscriptions could enter the shopping mainstream for more omnichannel and enterprise retailers across many verticals.

Georg Richter is founder and CEO of OceanX, which is reinventing the membership economy by transforming customer-brand interactions and providing a powerful engine for subscriptions.