The global economy is subject to fluctuation and downturns, and businesses must adapt to survive. Direct-to-consumer (DTC) brands are no exception. These businesses have revolutionized the way consumers shop by offering products and services directly to them, bypassing traditional retail channels. However, with the economic uncertainty caused by the COVID-19 pandemic, DTC brands face unprecedented challenges, including supply chain disruptions, shifting consumer behavior, and decreased spending.
One solution that has proven effective in helping DTC brands prepare for a recession is the use of subscription models. By offering customers the option to subscribe to their products or services, DTC brands can secure a steady stream of revenue, increase customer loyalty, and reduce customer acquisition costs.
In this blog post, we will explore the benefits of subscription models for DTC brands during a recession. We will discuss how subscription models provide predictable revenue, foster long-term customer relationships, and allow for agile business adjustments. We will also examine the challenges and potential drawbacks of implementing a subscription model and offer tips for DTC brands to overcome these hurdles.
Overall, subscription models offer a viable solution for DTC brands looking to weather economic downturns. By leveraging the power of subscription-based business models, DTC brands can continue to thrive even during challenging times.
How Can Subscriptions Strengthen My Overall Business Model?
Let’s start with the basics. The best thing you can do for your business to combat the effects of a recession is to create a reliable stream of recurring revenue. Subscriptions allow you to do just that. Not only does this model change the game on a day-to-day basis, but it also enables you to meaningfully look and plan ahead — which can be instrumental for sales forecasting. We’ve seen time and time again how our clients leverage crucial metrics (e.g., number of active subscribers, average order value, and previous churn rate) to make informed and forward-thinking decisions. Having the luxury to look ahead is no small tool in a less-than-ideal market.
A subscription model will also be your friend when it comes to securing financing, which might be a necessary move during hard times. Already having a steady stream of income is a huge plus for a business that’s seeking capital. Subscriptions have the reputation of being one of the most recession-proof models. Furthermore, the subscription e-commerce market is currently projected to grow beyond $450 billion by 2025, which is up from $15 billion in 2019. This angle is a big draw for a potential investor.
Of course, there are many different types of subscription models — e.g., standard subscribe and save, pre-paid, build-a-box, giftable, and more. There’s no one-size-fits-all solution for picking the right subscription model for your business. Think about what makes sense for your product. How often might customers need it? Will they need the same product each time or will it vary? One of our clients, Jolie, realized a sequential subscription model worked perfectly for its product: a filtering showerhead. After customers opt into the subscription (80 percent of first-time customers do), they automatically receive replacement showerhead filters every three months. This model is directly tailored to the needs of customers — and the metrics reflect that. Jolie has an impressive churn rate of just 2.5 percent annually.
Is Now a Good Time to Lean Into Retention When Customer Acquisition Costs Are So High?
There’s no better time to lean into your retention strategies. The customers you already have will always be your biggest assets — whether in a recession or otherwise. Customer acquisition costs (CAC) are currently skyrocketing and have gone up 222 percent from 2013 to 2022, which, of course, wouldn’t be sustainable in a recession. At the same time, repeat sales have increased by 36 percent, which is evidence that customers go back to buy their favorite brands. Furthermore, returning customers tend to spend an average of 67 percent more than new customers. This loyalty is incredibly meaningful, both for fostering a strong community and boosting your revenue. Loyalty has been proven to increase a customer’s worth by 22 times, and loyal customers are also significantly more likely to make purchases than new buyers.
Investing in your most loyal customers, subscribers can also be a route to increasing your AOV, something you can easily do with a subscription model. You can track your customers’ purchasing activity and organically upsell based on what they’ve liked in the past. By leveraging the trust that you’ve established, it increases the likelihood that the customer will take (and love) your recommendation — as well as creating an overall more personalized experience for your community.
Another way to leverage customer retention is through gifts, referrals,s and reward opportunities. People will continue to give gifts and make recommendations to their friends and loved ones, even in tough economic times. Leaning into this is both a smart and lucrative strategy. Referred customers have a 16 percent higher lifetime value and 37 percent higher retention rate, making them powerful additions to your brand. Additionally, of the people who were gifted a subscription box, 82 percent ended up subscribing themselves.
You can also reward these brand advocates through a subscription-led loyalty program. Give customers the chance to use their credits on discounts, free products, or whatever makes sense for your brand. We promise it will pay off. After all, 76 percent of consumers said that loyalty programs both strengthened their relationship with a business as well as caused them to spend on average 67 percent more. These customer retention strategies will be more meaningful for your business during a recession than putting your energy into customer acquisition, and a subscription model is extremely conducive to stellar customer retention for your brand.
How Can I Encourage Retention Among Price-Conscious Consumers in a Recession?
This is a big and relevant concern in any recession: how to prevent cancellations from worried consumers who are now more likely than ever to be guarding their budget. What’s the best way to shift the perception away from a guaranteed recurring cost and toward a convenient product that meets needs even in tough times? One key is flexibility. By giving the consumer full control over their subscription, you build a rapport and a sense of trust between them and your brand. No one wants to feel trapped by a costly commitment, and subscriptions definitely don’t have to be all or nothing. Give your customers a chance to scale back the number of products they get in each purchase, skip a purchase altogether, or reduce the frequency of their purchases. This empowers and entices even the most money-conscious consumer, making them more likely to stick around and ride out the recession.
Being part of a subscription program gives consumers access to subscribe-and-save discounts, and the freedom to manage these subscriptions enables them to budget and ensure they’re only getting what they absolutely need when they need it. Plus, with added perks like free shipping and tiered discounts for your loyal customers, you can increase the sense of convenience and value associated with your brand. These tactics will not only help reduce churn but will also help increase customer lifetime value (CLTV).
When it comes to recession-proofing your business, implementing a subscription model is one of the smartest tactics. Effectively leveraged subscriptions can provide your customers with flexibility and savings, boost loyalty, increase CLTV, and give your business a steady stream of recurring revenue during hard times, making this model a great investment for both businesses and consumers alike.
