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📝 Intro

When we think of subscriptions, companies like Netflix or HelloFresh usually come to mind. To access their products people must pay monthly or yearly. All or nothing.

But subscriptions come in different forms.

Many companies regularly sell their products to anyone - but also offer a paid subscription that gives access to exclusive benefits.

It’s similar to a loyalty program, but people pay to be part of it.

Take Amazon Prime. Amazon customers can choose to subscribe for an annual fee. In exchange, they get benefits such as free shipping and free video and audio content.

According to a 2017 report, Prime members in the US spent $1,300 on average compared to $700 for non-members. Other estimates found the difference to be even bigger.

How much of this increase is simply due to self-selection? (i.e. more frequent and loyal customers tend to join Prime, but they would have spent that amount anyway).

How much of it is because of the financial benefits? (i.e. the actual discounts they receive - which cost the company profits).

And finally, how much of it - if any - is due to something else? (i.e. forming a new habit, feeling part of a special community).

This new study from Wharton and Cornell found out.

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Previous insight: Cats and dogs increase sales (100+ more insights here)

Offer a paid subscription that unlocks benefits to drastically increase sales

Channels: Subscriptions | Loyalty rewards
For: B2C. Can be tested for B2B
Research date: April 2022

📈 Recommendation

Introduce a paid subscription program (e.g. $120 / year) that gives customers exclusive benefits (e.g. discounts, exclusive products, free shipping).

Members will buy more products from you - usually much more than the value of discounts you give them.

Regularly remind people they are members and have paid to be one.

🎓 Findings

• This study analyzed what happened when an (anonymous) beauty product retailer introduced a subscription program. The retailer sells both online and offline.

• The subscription program introduced cost $50 per year and gave:

  • Free shipping

  • A $50 gift card

  • $3 credit each month (to spend the same month)

  • Free samples with online purchases

  • Occasional exclusive discounts

• Controlling for other factors, the subscription increased average purchases by about $27, to $39 per month. Average sales without the subscription effect were $12 per month. That’s an increase of 225%.

  • One-third of the increase ($9/month) was due to the financial benefits of gifts and discounts

  • Two-thirds of the increase ($18/month) was due to the psychological effect of being a subscription member

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🧠 Why it works

• Being a subscription member changes us in a similar way to how loyalty programs do. For example, we:

  • Form the habit of buying from the company

  • Feel superior to other customers - that we have a higher status

  • Are more emotionally attached to the company

• But the effect of subscriptions goes further. Because we make an upfront payment to subscribe, we start buying more products to justify our investment

  • This is irrational and known as the sunk cost fallacy: just because we already spent money on something doesn’t mean we should throw more at it - but we do

✋ Limitations

• This study focused on only one company and category (beauty product retailer) without additional experiments. While the driving psychological effect is generalizable, it’s likely that part of the effect is due to unique unseen factors of the analyzed company.

• The analyzed subscription program only had a yearly payment option (for $50), which creates a sunk cost effect for at least 12 months at a time. If the subscription were monthly (e.g. $5 / month), the effect may be weaker because the amount is smaller and customers know they can leave after 1 month. This was not tested.

• We don't know how pricey the subscription should be to maximize the effect. For example, a low price of $10 / year may be accessible for more people but might not be enough to drive the optimal psychological effects. $500 / year is likely to have a strong effect, but might be too much for most people.

🏢 Companies using this

• Examples of retailers that offer subscription benefits:

  • Barnes & Noble - B&N Membership

  • Sephora - Flash (gives free shipping)

  • Alibaba - 88 VIP

⚡ Steps to implement

• Analyze whether a subscription would be a good fit for your business. For example:

  • Do customers buy from you often enough for it to be worth it for them?

  • Do you have the capacity to run the program?

  • What benefits could you offer?

• Think of the right price for your customers. It should be low enough that a significant proportion of customers will take the leap, but high enough that it generates strong positive effects.

• As with loyalty programs, try to make members feel special at every opportunity. Even small things may count (e.g. how airlines give a special welcome to frequent flier members during boarding announcements).

• Test reminding members that they paid, and how much they paid. But be careful to not be too aggressive, you don’t want them to churn when the next renewal comes up.

🔍 Study type

Market observation (analysis of 24,579 customers of an Asian retailer that sells beauty products and launched an online subscription program in December 2015)

📖 Research

The Impact of Subscription Programs on Customer Purchases. Journal of Marketing Research (April 2022).

🏫 Researchers

• Raghuram Iyengar. The Wharton School, University of Pennsylvania

• Young-Hoon Park. Samuel Curtis Johnson Graduate School of Management, Cornell University

• Qi Yu. Lee Kong Chian School of Business, Singapore Management University

Remember: This is a new scientific discovery. In the future it will probably be better understood and could even be proven wrong (that’s how science works). It may also not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.

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