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As you may have seen in the news recently, Unilever have bought the UK snack business Graze, well-known for their healthy-snack subscription service. Subscription is an example of a growing trend in e-commerce and a recent Mckinsey survey found that 15% of US online shoppers have signed up to an e-commerce subscription service in the last year.

Our approach to innovation looks for three converging factors, market need, technical opportunity and alignment with business goals.  So how does this trend match up to these metrics?

The need for alternatives to simply buying products or services when you need them has been around for a long time. Those of a certain age will remember ‘pay weekly’ catalogues and record clubs promising you that essential collection. Back in 1856 the Singer sewing machine company first invented the hire-purchase plan and as a result individuals, with even meagre income, could increase their productivity, earn more money and improve their position in life.

Today, urban millennials are changing their views on the value product ownership and are seeking new and exciting experiences.  So we can see these new services emerging in four ways. 

1. In an age of almost infinite retail choice where your style is expressed instantly on social media, it is important to choose carefully.  Help is at hand as retailing and entertainment merge, with new mobile platforms providing free entertainment not paid for by adverts or subscriptions, but by retailing products featured in the shows themselves, providing instant product credibility. Meeting the same challenges are services that personalise your shopping for you.  Baskets are put together specifically to meet your profile and requirements in clothing, beauty and food sectors.

2. Most people’s lives are cluttered with products that they only need occasionally. There are several platforms where you can either hire high value products for short periods when you need them (Car2Go, Mobike). This idea has also extended to allow you to share your own car, parking space, wi-fi, or professional skills with local customers, sharing the cost of ownership.  In the B2B environment, many software companies are moving their products to renting, subscription and cloud-based services. This has certainly been successful for companies such as Adobe.

3. A development of the ‘Freemium’ model well used in software, is where discerning customers are offered subscriptions to enhanced performance of a basic service that is free.  It is adopted widely by services such as Amazon Prime, Spotify Premium, iCloud and others. Along the same trajectory are services where you can buy the ‘peace of mind’ that comes with access to expensive services that you will probably need sometime in the future. This is close to traditional insurance, but that tends to be a distress purchase, and this is not.  These are services such as premium healthcare, pet healthcare, car servicing and domestic maintenance paid for on a monthly subscription to guarantee access when you need it with no hassle. 

4. Subscription models can also be used to provide discounts that are, or appear to be, the result of economies of scale.  Wine clubs and wholesale warehouses used to work that way as groups of consumers together could access markets and prices that individually they could not. This also goes for discounts that are negotiated with chain retailers on behalf of collective subscribers. This idea has also been extended to trading your repeat business for discount prices, Amazon ‘Subscribe and Save’ being an example.  Finally, the subscription can simply avoid you having to a buy a commodity yourself, so it gets delivered automatically.  Examples are businesses suppling razor blades, diapers and entertainment.

So how has the digital revolution enabled these new approaches? One example is the rise of entertainment streaming that takes our attention for hours each day. The huge choice and convenience of streaming is a game changer, and the audience provides an opportunity to deliver other services in parallel to those multi-tasking digital natives.

Many new offers are only of interest to specific customer groups that previously were too small and expensive to access profitably.  E-commerce, highly targeted digital marketing and the distribution infrastructure it has created allows business models that are highly customised to the needs of small groups of consumers.  This ability to cost effectively exploit the ’long tail’ of consumer needs and to match locally delivered services over whole continents to many customers is also a basic enabler. 

When personalising a product or service, your history and preferences, and that of similar customers, can be used to help automate the creation and delivery of that unique experience.  Your digital footprint can allow technology such as AI to accelerate this process further, to create delightful experiences that customers value and return for.  Some digitally enabled services have low marginal costs so can be delivered immediately to the customer even if payments are gathered slowly into the future, providing an instant and fulfilling experience at the point you sign up.

Finally, the ubiquity of the smart phone has not only created a standardised access platform, but it has also created an effective interface between the digital and physical world. It can take payments, authenticate purchases, allow physical entry to entertainment venues and remote accesses to bikes and cars.

Convenience, choice and value are at the heart of the success of e-commerce, but new models such as subscription services also help to ensure repeat business and customer loyalty.  Sometimes because they enable great services, but sometimes because customers forget their bank account is being debited by a small amount each month long after the service has lost its appeal.  Entrepreneurs should watch out for a consumer backlash should too many services fail to meet expectations and fall into this category. Indeed, the McKinsey survey found that many customers were introduced to new subscription services through personal recommendation, but in some categories up to 70% of new subscribers cancelled when they found the offer did not match their expectations.  We all have experienced subscriptions that are much easier to take out than cancel, which indicates businesses that are not completely confident in the value they offer.

At CDP, our Potential Realised innovation process helps identify real customer needs and technology opportunities. We then go on to create digitally enabled products and services that can deliver real, lasting value to consumers.  Subscription based or not, we believe that creating the most appropriate solution to customers is the foundation for e-commerce success.

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