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Subscription is best customer retention model

“Subscription commerce is healthier in comparison with other business models,” Jerry Jao told me, “but it also needs to figure out how to convert more customers.”

Jao is CEO of Retention Science, a marketing technology vendor with a specific focus not on customer acquisition, but on stemming customer churn–which also implies, as Jao says, acquiring the right type of customers in the first place. Research published by Retention Science today suggets that a subscription model is superior to retail–and far superior to deal-style “flash sales”–when it comes to customer retention.

I met Jao at Adobe’s digital marketing conference back in March, and discovered that we’re both curious about why companies plough rich resources into identifying and converting leads, but devote much less time, energy, thought and money into keeping customers. The strategy may make sense for start-ups, which need to show potential investors rapid growth, but it doesn’t seem a good long-term game plan.

Jao founded Retention Science to use customer data to build customer loyalty strategies. It has several clients with strong subscription models (Dollar Shave Club, and Honest, for example). The new research shows that 72 percent of subscription customers failed to make a repeat purchase in the 12 months following their first purchase, as opposed to 91.5 percent of regular retail customers and 93.8 percent of flash sales customers.

I had two reactions to the data. The first was that it’s not as good for subscription models as it first seems; the second that, in some ways, the results were predictable. But first reactions are not always right.

On the one hand, a subscription model which attracts repeat purchases from fewer than 30 percent of its customers looks, at first glance, quite weak. But there’s an analogy with baseball, of all things. Hitters that fail only 70 percent of the time have a shot at the Hall of Fame. A subscription model failing 70 percent of the time is doing much better than models which fail over 90 percent of the time.

As for predictability, you’d surely expect subscribers to a business to make repeat purchases. Jao would agree: subscription sales, he says, are on a “better trajectory.” One of the biggest differentiators for subscription commerce is that purchases tend to be focused on necessities–“something which needs to be replenished on a regular basis.”

Of course, that means a subscription model is better for some products–razors and diapers, for example–than others. 

The “flash sales” trend, which initially seemed to capture the imagination of the market (GroupOn, one of the best-known flash sales enables has been around since 2008) is not wearing as well as subscription. “Flash” selling may be a good strategy for products which are almost inherently impulse purchases–from weekend getaways, through yoga sessions, to cupcakes. Jao says, “It has its place in society, but is it sustainable?” “Flash sales” tend to attract customers shopping for deals rather than for specific products–let alone necessary staples.

It would be good news for “flash sales,” if any, is that it’s not doing much worse than a regular retail model, if it weren’t that “flash sales” are implicitly designed to do better than that.

Here’s an infographic illustrating the history of subscription versus “flash sales”:

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