| March 18, 2019
A couple of weeks ago, I posted about Direct-to-Consumer (DTC) brands and suggested that in order to scale they would eventually have to reach out beyond their social media audience to bring in new customers. In this post I want to explore the implications of the subscription model that many DTC brands have adopted.
The advantages of the subscription model to the brand are obvious: once buyers are locked in the revenue stream is stable and predictable. That should allow the brand a solid foundation on which to build, however, a concern might be that the effort involved in satisfying existing subscribers detracts from new customer acquisition. Evidence from more established categories would suggest that to grow brands must both acquire new users and maximize retention.
The general belief in those commentating on the DTC subscription model seems to be that retention is a better strategy than acquisition. Take this statement from Jean-Marc Bellaiche, the chief strategy officer at ContentSquare, quoted in Digiday,
“A few years back, digital marketing money was flowing and the idea was, ‘Let’s build traffic and buy paid traffic through search and social.’ Teams were focused on acquisition. Now we see many brands moving toward retention, UX and analytics, and building those teams with employees that work on those topics only. There’s a clear rebalance. Loyalty means a healthy business. One-time customers do not.”
Bellaiche seems to have forgotten that the empirical generalization known as Double Jeopardy finds that penetration and frequency are strongly related. But might the subscription model mean that DTC brands can buck that general principle?
Analysis by Europanel finds that about one in 10 CPG brands grew by generating more frequency (without growing penetration), proving that it is possible to grow by improving frequency alone, even when it is only habit that keeps people loyal to the brand. However, the same analysis finds that smaller brands in infrequently purchased categories lose almost 70 percent of their buyers from year to year. Even if a DTC brands reduces those losses by replacing habit with subscription, some customers will still defect.
Case in point, you may have read this post about my friend Ben signing up for Dollar Shave Club back in 2012. His love affair with the brand did not last that long and one of the reasons was the subscription model itself, he ended up receiving more product than he needed. A subscription model only ensures loyalty as long as the subscription lasts.
I believe that subscription models are likely to shift the Double Jeopardy relationship but not break it. But what do you think? Please share your thoughts.