Nearly 40% of subscribers ultimately cancel services

Dive Brief:

Just 55% of consumers who consider a subscription service ultimately subscribe, with replenishment services enjoying a 65% conversion rate (driven by a more staid motivation than those considering a curation service, with 52% conversion, or an access style service, with a 51% conversation rate), according to a study from McKinsey and Co. emailed to Retail Dive.
Compared with the general U.S. population, e-commerce subscribers are more likely to be 25 to 44 years old, to earn between $50,000 to $100,000 and to live in urban environments in the Northeast. Women are 60% of subscribers but men (42%) are more likely than women (28%) to have three or more active subscriptions, according to the survey, which polled 5,093 consumers between Nov. 8-12 2017.
Nearly 40% of subscribers of any service type cancel, according to the report. More than a third cancel in less than three months, and over half cancel within six, including between 60% and 70% of meal-kit subscribers. Some 45% of replenishment subscribers stay for at least a year. The longest-term rates are found at Amazon Subscribe & Save, Dollar Shave Club, Ipsy, JustFab fashion and Loot Crate, McKinsey found.

Dive Insight:

Subscription services took retail by storm a few years ago, especially in consumer goods markets ripe for disruption. Birchbox, founded in 2010, launched at a time when beauty sales were almost unheard of online. And men’s grooming brands Harry’s (co-founded in 2013 by a Warby Parker founder) and Dollar Shave Club (founded in 2011) took advantage of consumers’ frustration with the expense of drugstore razor offerings to go direct to the consumer, complete with a replenishment program.

Of course the idea wasn’t really new. Mail order clubs like Columbia House (founded in 1955) and the Book-of-the-Month Club (founded in 1926) got there first. But as an extension of e-commerce, it took flight as a way to log regular orders and sticky customers.

McKinsey's report neatly outlines the challenges in the space. Most difficult is high churn, making it hard to cover acquisition costs and scale revenues, according to report authors Tony Chen, Ken Fenyo, Sylvia Yang and Jessica Zhang. "Consumers are quick to cancel services that don’t deliver a superior experience — for example, because of poor product quality, dissatisfaction with the assortment or a lack of perceived value," they write. "Curation and access subscribers also cancel when they don’t feel that they are getting value for the money, probably because these services offer more discretionary products. A key challenge for all subscription e-commerce providers is matching supply and demand."

That's even true in the stickier replenishment category. "The subscription sounds convenient, but the consumer experience of a subscription can be frustrating and feel like control of purchase decisions has been lost," Luke Starbuck, vice president of marketing at customer care automation firm Linc, told Retail Dive in an email. "Worse yet, customers end up with back-stock of product in the cupboard. And that’s why customers cancel."

The requirement to sign up for a recurring purchase can dampen demand and make it harder to acquire customers, according McKinsey. Subscribers want a "great end-to-end experience" and automated purchasing must give them tangible benefits — lower costs or increased personalization, McKinsey said. "Consumers do not have an inherent love of subscriptions," the authors said.

Still, there's opportunity in the space as long as companies can deliver the benefits along with the goods.