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Think Tank: Why Established Retailers Will Continue Adopting Subscription Models

Think Tank: Why Established Retailers Will Continue Adopting Subscription Models
From WWD - February 9, 2018

Its not easy for many beauty and fashion retailers to change course and test new sales channels. But in this day and age, when retailers must compete with Amazon and easy-to-launch digital-first brands, it has never been more important for large, established retailers to find new ways to connect with consumers.

Subscriptions and membership programs are one avenue that retailers from The Gap to Under Armour to Sephora have started to test in 2017, and we expect that trend to continue and expand to new categories in 2018.

It is not easy for any large retailer to get started in the subscription business. Executives tend to stick with what they know, especially when budgets and long-term plans are involved. But sticking with tradition isnt always the best approach. Bricks-and-mortar fashion retailers such asRue21have shuttered hundreds of stores in the past year, and others likeWet Sealhave closed entirely.

While bricks-and-mortar establishments are facing challenges, subscriptions are undergoing a renaissance, and many businesses are looking to hop on the bandwagon. Zuoras Subscription Economy Index reveals that revenue from subscriptionshas grown to 17.6 percentfrom a meager 2.2 percent six years ago. Some of that growth can be attributed to retail sales, although much of it stems from the digital (think Netflix) and software (think Adobe) subscription booms.

How Is a Subscription Model Different?

Companies across more industries are starting to recognizethat subscriptions work, largely thanks to the stream of recurring revenue that subscriptions create. Unlike retail, which focuses on single transactions and average order value, a subscription-based business model revolves around cultivating long-term customer relationships with a focus on lifetime value.

While both models incur a cost to acquire new customers, in a recurring model, many of those costs are offset by the long-term nature of the established relationship. Executives hesitant to dive into the subscription business generally have two main concerns. At first, business leaders might consider switching to a new business model intimidating. But the up-front investment in media and low introductory offers are similar to the costs of opening a new store.

The second concern executives tend to have about starting a subscription is how to actually achieve success. Examples and mentors abound in the retail space, but subscription services and expertiseare still new, leavingfar fewer people to turn to for help.

What Do Subscriptions Offer Large Omnichannel Retailers?

Incorporating subscription into a retail business model doesnt have to be overwhelming; in fact, the two channels complement each other nicely. Retail, whether it is bricks-and-mortar, e-commerce, or true omnichannel retail, is here to stay, and subscriptions are useful for generating revenue and retaining customers. The future is undoubtedly omnichannel, with store pick-up, returns and exchanges becoming the new normal. Companies such asJulep,Rent the Runway, DailyLook, andBespoke Postalready allow some form of this model.

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