Amazon has just held another Prime Day: two days of deals, an event whose primary purpose appears to be enrolling customers in a membership they will continue paying for throughout the year.
At the same time, Netflix informed its shareholders this spring that it had lost subscribers for the first time in more than a decade. Inflation in Canada has reached levels not seen since the early 1980s, and consumers are reviewing their bank statements for forgotten monthly charges.
Subscriptions are therefore growing and being cancelled at the same time. In our assessment, recurring revenue remains the e-commerce trend that a small business can adopt now without a large budget, provided it chooses the right type of subscription.
How does recurring revenue help a small business?
It stabilizes income across the seasons. Most of the small businesses we have worked with depend heavily on seasonal cycles. Tourism businesses have a high season followed by a long, slow low season. A café in a cottage area relies on summer, with limited activity afterwards. Retail depends on December.
A subscription reduces some of this variation. If eighty customers pay every month, the business knows approximately what revenue to expect on the first of the month, even in March. Staffing and inventory can be planned, and a slow week no longer creates financial pressure.
Subscriptions also change the customer relationship. A one-time buyer may never return. A subscriber hears from the business every month, and that regular contact has considerable value in itself.
We observed the opposite situation for several years in the dive industry. Every guest was a one-time customer: a successful week, a positive review, then departure. The entire year was spent attracting new customers, since very few people book a second dive holiday with the same operator the following month. We recommend that any business able to make even a portion of its revenue recurring take steps to do so.
Which types of subscriptions suit small businesses?
Boxes and baskets
A regular delivery of a product the business already makes or sells. Coffee roasters use this model effectively, as do bakeries, cheese shops, tea shops and soap makers. In Quebec, weekly vegetable baskets from family farms have operated this way for years, well before the term subscription box came into use. Customers pay at the start of the season and pick up their basket each week. That is the model.
The main risk with boxes is repetition. If the third box resembles the first, subscribers leave. We recommend including a new or seasonal item in each box, even a small one.
Memberships
Members pay an annual or monthly fee in exchange for benefits not available to the public: a discount, early access, members-only events, free delivery or a bottle of something on their birthday. Gyms, climbing gyms, museums and wineries operate on this model, and a bookstore or yoga studio can as well.
Memberships succeed when members feel they are part of a privileged group. If the only benefit is a ten percent discount, the membership is effectively a coupon with a fee.
Service plans
This model is underused. Any service provided to a customer more than once a year can become a plan: furnace inspections twice a year, monthly garden maintenance, bicycle tune-ups each spring and fall, bookkeeping, or website updates and backups.
The customer no longer needs to remember to call, and the business gains predictable work. Both parties benefit, and the plan can be set up easily with an invoice template and a calendar.
Why should cancelling be easy?
Because it builds the trust that leads to sign-ups. We consider this point essential. Many companies make signing up a one-click process while cancelling requires a phone call, time on hold and a conversation with a "retention specialist." Customers strongly dislike this practice and remember the companies that use it.
For a small business, trust is its most important asset. When cancelling takes a single click or a courteous email, people are more willing to subscribe in the first place, because the commitment feels safe. Some also return later.
Several basic practices apply:
- State the price, the billing date and the cancellation method clearly on the sign-up page.
- Send a reminder before an annual renewal.
- Offer a pause option. Customers travelling for a month generally want a break, not a cancellation.
- When a customer cancels, ask one brief question about the reason, and make no further contact.
What keeps subscribers from leaving?
A visible delivery every cycle. Subscriptions are most often lost after a month in which nothing happens. The customer is charged, notices the line on the statement and wonders what was received in return.
Each billing cycle therefore requires a visible delivery: a box, a visit, an event or an email containing useful information. For memberships, a short monthly newsletter informing members of upcoming benefits and those already received goes a long way toward reminding them of the value of their membership.
Set the price at a level that allows proper delivery. Underpricing a subscription is more damaging than underpricing a single sale, since the business is committed to that price every month.
Which tools can be used to sell subscriptions online?
Custom software is not required. Shopify offers subscription apps in its app store. WooCommerce provides a subscriptions extension for WordPress. Stripe and Square both handle recurring billing. For service plans, a recurring invoice in the business's accounting software is often sufficient.
For a business already selling online, adding a subscription option to an existing e-commerce store is usually a modest project. For a business that is not, we recommend starting manually: enrol ten subscribers using e-transfer and a spreadsheet, and confirm that every monthly delivery can be completed reliably.
The concept is long established, as the Wikipedia article on the subscription business model shows. Newspapers and milk delivery used it long before software existed. What has changed is the low cost of setting it up. What has not changed is that customers continue paying only for what continues to deliver value.