Subscription-based marketing seems like the latest and greatest new business-building idea. With exciting startups showing the way, including companies like Ipsy and Birchbox in beauty, Blue Apron and HelloFresh in meals, Dollar Shave Club and Harry’s for men’s shaving products and Stitch Fix and Trunk Club in fashion, subscription-based marketing appears to be the ticket to grow a business with a loyal consumer base that can be counted on for a steady stream of repeat business. It is reported that The Gap, Under Armour, Walmart, P&G and Sephora are testing the concept. contributor Richard Kestenbaum studied the subscription market and concluded, “The data indicate that winners and losers are not yet chosen, the market is wide open right now for anyone with a better idea and better execution to develop their business and become a leader…Right now is a time of volatility and the players who can move faster and better will win.”

Prospects look bright, with a new study by McKinsey & Company reporting that subscription ecommerce has grown by over 100% a year over the past five years, to reach more than $2.6 billion in sales in 2016. Such rapid pace of growth makes sense considering that so many new players are piling on, in categories as diverse as beer and wine, child and baby, meal kits, pet foods, meal kits and vitamins, fashion and underwear and replenishment services for basics like contact lenses, cosmetics and men’s shaving and women’s feminine products.

Subscription marketing is hot, but you can get burned

But before jumping in with both feet, the McKinsey study reveals the painful realities of subscription marketing. Based upon a survey among more than 5,000 U.S. consumers, it finds only 15% of online shoppers have taken the plunge into the subscription lifestyle for consumer goods. Online streaming services, however, have a much higher participation rate (46%).

While awareness of subscription offerings is fairly high at 53%, actually converting those aware to subscription plans is incredibly low, with 13% saying they’ve subscribed at one time and only 8% currently subscribing. In terms of subscribers, the replenishment-style of subscription plans (e.g. Dollar Shave Club, Amazon Subscribe & Save) have higher rates of conversion, than do curation-style programs (e.g. Birchbox, Blue Apron, Stitch Fix).

 As hard as it is to get new customers, it is even harder to keep them. The McKinsey survey found that nearly 40% of subscribers cancel out of their subscriptions, with one-third canceling after only three months and over half only sticking around for six months. In particular, meal-kit programs have the highest fall off rate, with 60-70% of subscribers pulling the plug after six months.

These stats reveal the dark underside of subscription marketing.  And that reality hasn’t changed since ecommerce-fueled marketing has replaced the old direct-mail continuity and club plans of the past, explains Georg Richter, a 30-year veteran in subscription marketing.

“My whole career has been in subscription. I’ve done Book-of-the-Month Club, Doubleday Books, Columbia House Records, Scholastic. I’ve been CEO or president of these companies,” Richter shares. “That led me to Guthy Renker, one of the premier direct marketing companies that have subscriptions at its core.”

Two years ago Guthy Renker spun off a separate company called OceanX with Richter as CEO. His job, and the new company’s mission, is to guide companies into the brave new world of subscription marketing. “We help other companies get into the subscription channel. We have 12 clients right now and many more in the works with large CPG companies and retailers. It is a very hot business these days,” he says.

New world of subscription marketing

From his perspective as a leader in the subscription industry’s shift from the old model to the new, I asked Richter how things have changed. Aren’t these new plans just like the old BOM club programs disguised in sheep’s clothing?

“No, it’s very different,” he explains. “In the old world you had hard relationships, heavy late fees, and it was difficult to cancel. We used crazy promotional offers to get people in and had to be hard on the backend to make sure people stayed with the program so we could make money. It was a transactional business.”

Today, he says, the subscription programs must have a much softer relationship with customers. It depends on the marketer understanding each and every customer and meeting their individual needs. “A subscription can’t be a burden. It must be a great experience,” Richter says.

 What hasn’t changed from the old to the new subscription model is the cost of acquisition. He relates that about one-third of revenue must be set aside for new customer acquisition and that it represents the single biggest category of spending. “You constantly have to acquire new customers. It’s just part of the model,” he says.

The biggest change in customer acquisition has come about by the rapidly expanding channels through which they are acquired.  Where it used to be limited to three or so channels, such as direct mail, inserts, TV and some radio, today it requires managing at least 20 channels on various platforms including Facebook and Twitter, each with their own nuances of customer behavior demanding distinctive offers.

Watch and learn

Looking across the subscription ecosystem with new subscription programs popping up in many different segments, I asked Richter if there was a first-mover advantage, where the first company into a segment grabs the best prospects.

He says no, the first in may well be the first out. “Being the first mover is not an advantage at all. Think about Birchbox. They were the first into beauty sampling, but now Ipsy is much more successful. Or Dollar Shave Club. They were sold to Unilever, but they are not as successful as Harry’s now.”

Companies that wait behind the first movers and learn from their mistakes have the advantage of doing it better. But, Richter advises, those followers need to do something different, better and offer a new twist to the leaders’ offering.

Create forever members

Another thing that hasn’t changed from the old to new subscription model is churn. Richter says the key is to think beyond the transaction to create a relationship that goes deeper.  “We have to work toward forever memberships,” he says. “We have to think about why they quit, then add elements to the program that gives them more reasons to stay on than to get out.”

For example, every subscription package needs to include something interesting and even more engaging than the last shipment, in order to inspire and surprise the customer. Subscription packages must also include a cliffhanger that makes them hungry to get the next delivery. “It’s about inspiration, not a transaction. It’s about storytelling and feeding that customer relationship. These things will result in people staying for a long time.”

Get timing right

He goes on to advise on a critical factor unique to subscription programs: Cadence or the schedule in which new packages arrive. Each subscription program has different demands that make for the optimum cadence.

For example, for a shaving club, where a new blade is needed weekly, a monthly delivery of four razors is the right cadence. Such a cadence might be too frequent for fashion packages, which will do better on a bi-monthly or quarterly schedule.

Curate selections

The value of subscription services, ultimately, comes down to the ability of the plan to curate the experience including the product selection to the specific needs and interests of the customer.“There is too much product out there. It’s the paradox of choice,” he says. A subscription plan can be a convenient way for customers to discover wonderful things that make their lives more interesting, more fun and more fulfilling.

In conclusion, Richter believes there are opportunities in almost every consumer goods category, though he is cautious about meal-kits since they are costly to implement properly and too many things can go wrong from preparing and packaging of the kits to setting the meal on the table. He sees Albertsons with its recent acquisition of Plated better positioned for success in that arena thanks to having prep kitchens in its many grocery stores.

“Subscriptions today are about relationships, not transactions,” Richter concludes.  “This is a type of marketing that puts the person at its core, true one-on-one marketing. Too many manufacturers, CPG companies and retailers think about the product and its specs, not about the person. With subscription plans, the customer has a deeper relationship than just buying more stuff. They want to become part of something special and to belong.”

The key to success in subscription plan marketing is to build a relationship of trust with the customer and that requires understanding the underlying psychology of consumers. Richter has published a white paper, entitled Psychology of Physical Subscriptions: 12 ingredients of success, that delves more deeply into the new world of subscription marketing.