Subscription vs Membership: Which Should YOU Choose?
Vanilla or chocolate? Slacks or jeans? Pepperoni or (gasp) Hawaiian?
These are pretty tough choices to make. As a DTC brand, you’ve got your own tough choice: Subscription or Membership?
Both business models have the potential to be very lucrative, but they have just as much potential to be a disaster. How can you achieve the former, while avoiding the latter? Which road will lead to success?
In this post, we’ll discuss the pros and cons of each business model, as well as which types of businesses suit them best. By the end, we hope you’ll have a better idea of which is right for you: subscription or membership.
Let’s start with subscriptions.
What is a subscription service business model?
A subscription service is a business model where customers pay you on a regular basis (monthly, quarterly, or annual) in exchange for a fixed number of products or services. These products can be physical or virtual.
Why would you want a subscription service?
There are a number of reasons why a consumer would sign up for a subscription service:
- Obtain niche items that interest the consumer
- A convenient way to replenish frequently used stock items
- Access to discounts or promotions that the consumer wouldn’t normally be able to leverage
Brands, on the other hand, adopt subscription models for the following reasons:
- Predictable income
- Long-term consumer engagement
- Increased consumer delight
Both entrepreneurs and consumers clearly think a subscription service is worth pursuing. In 2019, a report from the Subscription Trade Association (SUBTA) predicted that the subscription commerce economy will experience a compound annual growth rate of 17.33% over a five-year period.
COVID-19 has not hurt that prediction in the least. According to Zuora’s Subscription Impact Report: COVID Edition, 22.5% of companies are seeing their subscription growth rate accelerate, 12.8% of companies are seeing slower but still ongoing growth, and 53.3% of companies say that COVID hasn’t had any significant negative impact on their subscriber acquisition rates at all.
Subscription service examples
HelloFresh is a German-owned meal-kit provider that sends weekly shipments of ingredients to a consumer’s home so that they can make their own tasty, healthy meals. It’s the largest such service in the US (with 3.5 million active customers) and also operates in multiple countries around the world.
Dollar Shave Club
Dollar Shave Club is a replenishment-type subscription services that made its name shipping replacement razors and razor blades to its customers either monthly or bi-monthy. They’ve since expanded their product line to include other grooming products like shaving cream, shamboo, soap, and more.
KiwiCo is a subscription service that provides at-home science projects for kids and teens (and adults, too). Their science projects cover a variety of STEAM subjects and scientific concepts, from engineering and geography to arts and crafts.
What are the risks of a subscription model?
Like any business model, Subscription services have their downsides; some dependent on the business, some universal.
Fragile consumer loyalty
While consumers will stick around for the long-term if they’re happy with your subscription service, it doesn’t take much to drive them away. A missed shipment, a lackluster product, or even the inability to pause a shipment will be enough for them to hit the “Cancel” button. Churn will happen, and it will happen often.
As much as we might wish it, not all products are subscription-friendly. They need to either be unique and varied enough to surprise them every month, or essential enough to the consumer’s daily routine that they will need a regular supply. Not all DTC brands have products that fit this bill, and yours has to be measured against this yardstick.
High fulfillment costs
When you run a subscription service using physical products, you also run a high bill for fulfilling orders. Sure, you can pass some of those costs onto the consumer and have them pay for the shipping, but you also have to figure in the cost of the packaging, as well as the warehouse costs for stocking so many products.
Now let’s look at the other side of the coin: membership.
What is a membership business model?
A Membership business model is where a CPG or DTC brand recruits people into a group based on their shared interests (usually tied to the brand). Membership to these groups can be gated or ungated.
Gated memberships require that a consumer fulfill a certain condition before being accepted, either through paying for access or being a confirmed customer of the brand.
Ungated memberships don’t hold any such limitations--simply sign up and you’re in.
Businesses can either build around the membership model entirely or use it to supplement the core business as another layer of engagement. In the latter case, brands tend to play up the exclusivity of the group to increase perceived value and create a sense of FOMO among non-members.
Why would you want a membership?
A consumer would find the membership experience valuable for the following reasons:
- Access to exclusive rewards, products, or discounts
- Interaction with other members who share the same interests
- Elevation in status for being part of a private group
As for brands, membership programs are useful because they:
- Foster a sense of community among consumers
- Strengthen consumer relationships and loyalty
- Attract new customers
- Gather valuable consumer data and insights
All of this makes membership programs a very tempting proposition. In fact, over 91% of brands have some sort of loyalty engagement or membership program in place. This is clearly something that consumers want, because according to a Bond report, 81% of consumers are more likely to stick with a brand that offers a loyalty program.
Does that make a difference to your bottom line? Why don’t you ask the 75% of companies participating in membership prorgrams who say they’ve seen a positive ROI.
If you don’t already have a membership program in place, you should probably consider it.
Membership program examples
Amazon Prime, the “premium” arm of Amazon’s online business, gives members access to everything and the kitchen sink. It’s relatively expensive, but Amazon provides a lot of value in exchange: high-speed shipping, exclusive deals, and even a “try before you buy” option for fashion items. And this doesn’t even count their digital offerings like streaming video, ebooks, and videogames.
Erewhon is a luxury supermarket chain located in California. For a $200 annual fee, members can earn points on in-store and online purchases, discounts on featured brands, complimentary drinks, free grocery deliveries, and priority access to events, new products, and in-store experiences.
Starbucks Rewards is one of the shining examples of the membership business model--and it doesn’t cost a thing to join. Consumers can collect points with every purchase (“stars” in Starbucks), as well as receive personalized offers through a complex offer optimization platform. The result? Starbucks Rewards now has over 19.3 million members and accounts for 50% of their revenue.
What are the risks of a membership model?
If you’re considering a membership model, there are a few things you need to be wary of:
Saturating the market
It seems like every brand has a membership program, from big mega-retailers to mom-and-pop shops. Your challenge would be to find some way of distinguishing your own membership experience from that of your competitors--who are most likely running membership programs of their own. It could be in how you market it, the fee you charge (if any), or the membership rewards you offer.
Speaking of which…
Membership rewards are tricky to balance
While you want to make membership rewards enticing, there is such a thing as going too far. Take the example of Tesla, whose rewards program offered six free months of supercharging for every Tesla purchase and wound up losing $23 million.
And then there’s being too conservative, such as Sephora’s Rouge program. A combination of small discounts, limited reward selection, and discontinuation of popular rewards like free unlimited makeovers made consumers feel unappreciated and ignored.
Unpredictable income and costs
With a subscription model, you know how much people are spending (courtesy of their subscription fees) and you know what you’re giving them (pre-determined orders). Membership programs, however, are very challenging to forecast. Even fee-driven membership programs can only predict membership renewals--not how much they buy. The discounts and points might encourage them to spend more, but then again, they might not.
And then you have the discounted or free rewards. As with the case of Tesla, an overly generous rewards program may end up in you losing revenue rather than gaining it.
So which do you choose?
Honestly, it depends.
Subscription services would be a great fit CPG or DTC brands with a product line that can fit into the curation or replenishment subscription models, as long as your profit margins can support the additional cost of shipping and packaging so many orders.
Membership programs are flexible enough that nearly any business should be able to start one, but rewards should be finely tuned to prevent abuse while still being an exciting draw for both loyal and new consumers.
Can I run both subscription and membership business models?
Running both models is a good way to use the strength of one to cover the weaknesses of the other.
For example, you can offer consumers free memberships to spread the word and increase your customer base, and then offer subscriptions later on when they’re more heavily invested in your brand.
Or you can do it the other way around, and offer long-time subscribers premium membership access as a way of rewarding them for their loyalty.
As long as your business has a deep enough catalog to support either type of business model, and a fulfillment infrastructure robust enough to accommodate the increased throughput, then you can mix and match offerings in every which way.
Feel free to experiment with bold combinations of items, services, and price points until you find what clicks for you and your brand. Then, test it ruthlessly to see if it’s the right fit for you and your customers.
So which is better: Subscription or Membership? With Rodeo, you don't have to choose! And with Rodeo, you can have both a membership and subscription. Rodeo lets your consumers gain the perks and rewards of membership- perks like discounts, special offers, and maintaining their subscription even if they have to pause receiving products for a bit.
Your consumers aren't just "subscribers or unsubscribers" they're members.