E-commerce companies take the subscription model to build business

A loyal set of customers is every enterprises' ultimate goal. More so in case of consumer-facing internet businesses where the number of buyers is small though growing. Internet startups are toying with various ideas to build a committed base of customers and many of them have chosen subscriptions as a model to achieve this goal. Though not a new concept, it is being adopted by many startups and in some cases with much success.

The subscription model has its biggest endorsers in e-commerce company Amazon and cab-aggregator Ola. Amazon runs a "Subscribe & Save" service, where users can schedule deliveries for articles such as food items and household supplies, among others, on a monthly basis and also avail of discounts. It is also piloting a variant of its Amazon Pantry service, which tries to replicate the deliveries of bulk orders of household essentials on a weekly or monthly basis from neighborhood kiranas.

Ola recently renewed its Ola Select service, which allows customers to get cabs on a priority basis even during the peak times if they subscribe to the service. On paying a fee upfront, the service also offers customers exemption from surge pricing and also, in-cab wifi.

Does it work?

Traditional subscription-led services in India were limited to cable and satellite or direct-to-home service providers or newspaper readers. Startups, however, are using it for selling everything from educational toys to medicines.

"Beauty boxes, food tasting boxes, chocolates, snacks, health food, medicine are all categories with great potential for subscription-led services," says Krish Subramanian, co-founder and CEO of Chargebee, a Chennai-based SaaS startup that automates recurring payments. However, there are some surprise winners in this segment as well. "Not all businesses can be subscriptions led. For example, who would subscribe to a different color of phone skin each month? There are hundreds of such dreadful ideas. And there are also surprisingly successful ones - like premium watch rentals," adds Subramanian.

"For goods that are consumed daily, or at fixed intervals, the subscription model of ecommerce is very sensible," says angel investor Ajeet Khurana, who is also an investor for grocery delivery startup RainCan.

Child development portal Flintobox and Jaipur-based subscription pharmacy LifCare are two startups that recognised the opportunity in using subscriptions services for products other than consumer goods.

"More than category, it's about whether the offering is valuable to the customers or not which decides the success. In the case of educational toys and activities, parents spend a significant amount of time searching for the right tools to engage their kids every month," says Arun Prasad, co-founder of Flintobox. Flintobox aims to solve this by curating the products for their customers.

Krishna Killa of LifCare believes that subscriptions are a need in case of medicine deliveries, as for most people with chronic diseases, subscriptions are naturally the best way to regularise medication.

"For people with diabetes or hypertension or cardiac issues, who need to take medicines regularly, it makes a lot of sense if someone could give them medicines on a monthly basis. With subscriptions, we also provide a lot of ancillary services around disease management, such as tests, diet counselling, and doctor consultation, among others," says Killa.

Path to profitability

Subscriptions also help ecommerce companies in planning their inventories better and manage logistics.

"While ecommerce may be a one-off or an as-and-when-needed purchase, habitual purchases are the backbone of business models like ours. On the business side, the guaranteed payments ease working capital constraints and we are one of the few ecommerce companies with a positive working capital position," says Vineeta Singh, co-founder of Fab Bag, the beauty and grooming discovery services platform.

Subscriptions also help in bringing costs down. "Since subscriptions generate consumption predictability, logistics becomes cheaper and accurate," says Khurana.

Subscriptions are also a great way to attain unit economics by cashing in on bulk orders. Grocery and household supplies delivery startup GetNow experimented with subscriptions in December 2015. Shailesh Deshpande, founder of GetNow, however, realised that the unit economics of delivering small-ticket orders on demand was not sustainable.

"Most families have a buying cycle where they get their groceries at the beginning of the month. Also, 70% of these orders remained constant, like rice, flour, oil, etc. So this monthly cycle lent itself very well to subscriptions. Moreover, once the customer signed up, there was no need to acquire him again and again," says Deshpande. The average ticket size Rs 2200 per basket in subscriptions, whereas it was Rs 200-300 in on-demand.

Subscriptions for discovery

Many startups are also experimenting with subscription as a way of introducing their customers with the wide range of their products. Online tea store Teabox, for instance, gives its customers a monthly personalised box of tea of different varities.

"The main reason why we use subscription as a service, is to introduce the customers to various kinds of tea," says Kaushal Dugar, CEO of Teabox. Subscription brings in about 30% of the revenues for Teabox, but Dugar feels that it has a high potential for growth. "10% of our subscribers also end up buying a larger quantity of the tea they like from the monthly box separately, while continuing to be on the subscription list," he adds.

Fab Bag, too, is employing subscriptions for discovery. It, in fact, gets 70% of its revenues from subscriptions while the rest comes from individual orders. The platform gives its consumers a selection of premium cosmetics every month.

The hiccups in the subscription model

While subscriptions might seem like the best way to cash in on high ticket orders and create a steady stream of both consumers and revenue, friction in payments is one hindrance it faces.

"The RBI guidelines mandate that businesses don't store credit card details, so you are prompted to pay every month or quarter or year using cash on demand or net banking or a payment wallet," said Subramanian.

"Contrary to the US, there are currently no options to automate recurring debiting on Indian credit cards or Indian bank accounts," said Louis-Vincent Ledoux, director of customer experience of RecurRex, a startup that automates this process with its SMS-2-Pay facility.

Marketing subscriptions

However, selling subscription can be much more difficult than one-time purchases, as it involves making the customer commit to your service for a longer period of time.

"Marketing subscriptions is different from marketing one-time purchases. Consumers know that their commitment to subscribe is worth more than a one-time transaction, so you need to give something in return, such as discounts, rewards, and most importantly added value," said Ledoux.

Ledoux believes that in order to make it easier for the consumer to opt for the subscription, it might be a better idea to go for a freemium or a trial period before transitioning to subscriptions. "The key is to provide just enough value so that customers will experience the advantages, without giving them all up without them subscribing," he adds.

Killa agrees that the Indian market is still warming up to the concept of subscriptions, and there is still time before consumers are comfortable paying upfront and committing to a service for the long term, making it necessary to market them well. "Indians are not very comfortable with the subscription regime. Even when you take traditional subscription businesses such as Tata Sky, there also people prefer prepaid or month on month payments instead of paying annually upfront. Shifting subscription plans to annual plans will take some time," he adds.

Like this report? Sign up for our daily newsletter to get our top reports.