The world of subscription commerce (or Subcom) is continuing its inexorable expansion into new, often unexpected realms. Subscription commerce is clearly here to stay. As the industry continues to mature, the space continues to get more evolved and sophisticated.
To help you stay ahead of the trends, the team at Recurly has put together six smart predictions for subscription commerce in 2020 and beyond.
Financial services in general—and the payments industry in particular—involve vast amounts of data, real-time transactions, and a high monetary impact on decision-making. Under the subscription model, the amount of data is greater than under a one-time purchase model. This is because subscription businesses have a relationship with subscribers that is ongoing, with new data related to marketing, payment and customer lifecycle generated regularly, at each new billing cycle.
Payment processing involves inherent patterns that relate to successful and failed transactions. The whole process is dynamic and ever-changing because of the way gateways, processors, and card issuers come together in a unique collaboration to identify and respond to risk. Credit card transactions fail for a variety of reasons. These reasons change over time. This constant change creates a huge opportunity for machine learning and artificial intelligence to be applied to better understand the environment in which we operate. This is one of the most practical and proactive applications of machine learning to manage declined transactions.
AI and ML can also be applied to the optimization of free trial conversions. Streaming media companies are leading the pack when it comes to this. Take for example, the way Hindi News uses predictive customer analytics to recommend the Cricket Channel when you sign up for their news package. This catalogue driven up sell expands their share of wallet and delivers more value to the subscriber. By proactively identifying activation triggers to optimize the free trial experience they are able to suggest content that’s highly engaging and hooks the subscriber early on, so they have a greater propensity to convert to a paid subscription. It’s a win-win for both the company and subscriber.
Given all of these elements, subscription commerce is clearly an industry that’s significantly benefiting from the application of artificial intelligence and machine learning to address payments and other challenges related to recurring billing.
We believe the ongoing benefits of AI and ML in the billing and payments industry will only grow stronger—in fact, they will soon become an absolute necessity if a business wants to offer highly relevant services and remain competitive.
In 2020 and beyond, subscription businesses will pursue payments as a strategic advantage along with related data and analytics that can help to illuminate trends and other elements of this increasingly complex aspect of subscription commerce.
One example of the kind of data that is invaluable relates to gateway performance. Different gateways return different transaction success rates depending on the details of the payment, such as currency, payment type, time zone, country of origin, etc. Knowing which gateway performs best enables subscription businesses to optimize their payments by sending certain transactions to the gateway that is more likely to complete those transaction types.
Different gateways also charge different fees to process transactions, so choosing the most economical gateway (after considering performance) can lower your expenses, especially if your business processes a high volume of transactions.
A gateway’s performance is also indicated by a measure of their processing speeds, uptime, and number of outages or issues that prevent the successful completion of payments. These issues can have a huge impact on a subscription business’ revenue, and knowing immediately when a problem is detected allows the merchant to switch over, either manually or through an automated feature, to a different gateway so that transactions can still be processed.
Within the world of subscriptions, hybrid commerce refers to businesses that have both a recurring line of business and sell one-time items. Most often, these businesses began as either a subscription business or as a more ‘traditional’ venture, and then expanded their offerings to include an additional revenue stream. This is hybrid commerce, and you’ll be seeing it more and more.
Why? Because the world of e-commerce is ever-evolving and increasingly fluid. Subscription merchants are finding that offering one-time purchases of goods or services that complement their recurring component can increase subscribers’ usage and enjoyment of their subscription product or service while providing additional sales opportunities.
For businesses, adding a subscription option is one way to provide customers with convenience and access, via a pay-as-you-go model. Subscriptions also generate a predictable recurring revenue stream, which results in a more loyal customer base compared to one-time commerce. And recurring revenue and activity also provide ongoing insights from the data generated each month from the convergence of subscriber, billing, and marketing events—insights not so easily gained from a one-time commerce model.
Under this model, an optimized customer experience is one in which both types of purchases can be completed within the same transaction, a process that is more complex than it may seem and one which requires the right subscription management platform.
Our next prediction involves the Direct-to-Consumer (D2C) channel which will gain further market share in 2020 and beyond. By promoting and selling their product or service directly to consumers, D2C subscription businesses cut out the middleman (i.e., retailers), which allows them more control over the entire end-to-end process and brand experience and a bigger slice of the resulting revenue. This strategy can lower costs, enables the manufacturer to collect customer data, directly address issues that arise, and control all other aspects of customer communications and support.
As the number and variety of businesses that utilize the D2C channel rises, the increasing popularity of this strategy is not only rapidly changing the business landscape as a whole, it’s also a disruptor. D2C has changed how consumers buy a number of products, from razors to diapers to feminine care, to a multitude of other household goods. And many of these disruptive and iconic brands use the subscription model as a means of selling directly to their target audience.
D2C is also particularly popular with Millennials who have put several prominent D2C brands (you might recognize brands Allbirds, Warby Parker and Glossier) on everyone’s radar. According to research by Fundera, Millennial shoppers spend $600 billion each year in the US, and amongst all consumers, 81% will buy from a D2C brand in the next five years.
But this model is also starting to show its age. Some unprofitable brands with big valuations are struggling to find buyers and exit strategies for some seem to be fading into the distance. Meanwhile, a plethora of up-and-coming direct-to-consumer brands ripe with venture capital funds continue to flock to Instagram to target users with ads to acquire new subscribers at a lightning pace. D2C remains a model to watch in 2020 and beyond.
As more and more companies embrace the subscription commerce model as a way to acquire customers and generate predictable, recurring revenue, we’ve seen a new battlefront emerge. The battlefront for subscriptions. We’ve witnessed traditional brick-and-mortar retailers like Urban Outfitters jump on board with the launch of Nuuly and are seeing more and more education-related brands coming on the scene like Codeacademy.
As this battle wages, brands are also using subscriptions as a defense mechanism. Think of Uber and Lyft. When there are two big players in a space, consumers will usually choose one over the other. Both of these ridesharing apps have gone head-to-head to try to acquire the most subscribers and ensure when you need a ride, you select their app over the other guy. If you’re in a tug of war with competitor you have to ensure your customers choose you. The subscription model is helping to do that.
The last front in the battle for subscriptions is the battle for customer retention. Savvy brands like Cinemark are making sure they’re on point. The Cinemark Movie Club offers a ton of value to subscribers but one of the key value drivers is that movie credits rollover. The use it or lose it mentality doesn’t play here. This subscription feature keeps subscribers happy, loyal and coming back again and again.
And to determine who wins this battle, we’ll see more and more CMOs being measured on subscription-based KPIs like frequency of interaction and share of wallet as subscriptions become the new norm across industries and business types.
What was initially confined to software, the software as a service model (or SaaS) has taken root in new industries. Dubbed “everything as a service,” or XaaS, this model will continue to gain momentum in 2020, particularly in sectors not traditionally enabled as a service, such as hardware-driven industries. For example, Hewlett Packard Enterprise announced they would offer everything in their portfolio as a service by 2022, as reported in Forbes. Many other on-premise providers may also be moving in this direction, with 2020 the year Forbes projects that XaaS “goes completely mainstream.”
We’ve seen the automobile industry embrace XaaS as companies like Porsche, with their Porsche Passport, an all-inclusive, monthly vehicle subscription, or Volvo, create their own subscriptions. This is a smart business tactic as more and more Millennials dismiss the traditional notion of leases, not wanting to get locked into a long-term commitment, and embrace new, more flexible models that allow them the flexibility they desire.
What does this mean for subscription businesses trying to anticipate and strategize around 2020 trends? Well, the “as a service” model customarily relies on subscriptions to monetize the service and provide customers with access to either the service itself or to the related data. As more and more industries discover that subscription commerce offers a convenient, economical, and often personalized way for both businesses and consumers to acquire goods and services, the recurring revenue model thereby evolves and expands.
Indeed, research firm McKinsey has provided some very compelling facts about the subscription e-commerce market, including:
Fifteen percent of online shoppers have signed up for one or more subscription services.
The market has grown by more than 100 percent a year over the past five years
And, it generated more than $2.6 billion in sales in 2016
The subscription model is truly transforming commerce, allowing for access over ownership, a pay-as-you-go option, improved customer loyalty, and a wealth of data to better align products and services with subscribers’ expectations.
Take a look back at the success of our industry, customers, company and people in Recurly's Year in Review.
While continually evolving, the world of subscription billing and commerce is nonetheless complex. We built Recurly’s subscription management platform so your billing wouldn't be. To learn more about our platform, visit our website.
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