As I read over the list of companies that we’ll be visiting soon, there are many companies that stand out. Apple, Uber and Spotify all provide products and services that I use on a daily basis. As a matter of fact, there have been times where I will call an Uber on my iPhone while listening to my Spotify playlist. But there are also companies we’ve talked about that I was unfamiliar with. Namely, Madison Reed and Optimizely are companies that I hadn’t heard of prior to our discussions. I’m glad I did learn about them because of how interesting they are, and I’m excited to know more!
Did you notice anything about the businesses I just mentioned?
They all have something in common. If you use any of their products or services, you’ll know exactly what it is. Every one of them uses a subscription business model to a certain extent. Spotify and Madison Reed rely heavily on customers continuing a subscription for revenue and accurate data analysis. Apple uses a subscription-based system for cloud storage, and Uber uses a slightly different subscription model called “pay as you go”. Instead of paying monthly for rental cars like Zipcar (another subscription business), Uber charges riders per ride. This is still considered a subscription-based model because it’s not a one-time purchase for unlimited rides; rather, you “subscribe” to a ride every time you need one.
In this blog post, I want to tell you more about Madison Reed through the lens of the subscription economy. Madison Reed operates on the idea that consumers will continue to use their hair products through automatic purchases. Their subscription model has all the attributes of a successful system, so it’s appropriate to follow their approach when analyzing this strategy. This will definitely be useful to know for most of the companies we visit (if not all)!
The subscription model was traditionally used by magazines and newspapers but has recently gained traction in new industries. Over the last three years, companies using this model have increased by 800%. During the same time period, the number of subscription box sites have increased by over 3,000%. Subscription box companies include any business that delivers physical goods to customers as opposed to online services. Madison Reed and Rent the Runway are examples of this type of company.
You may be asking, why would companies stray from traditional pricing strategies? Here are some numbers that partly answer that question: subscription-based apps earn 2 to 3 times more than apps that rely on advertisement revenue or use pay-to-download models. Additionally, they tend to earn over 50% more revenue than apps that depend on on microtransactions or in-app purchases. There are many other advantages such as customer satisfaction and convenience, but I will expand on those later.
Clearly, there are major financial advantages to pricing your product or service with a subscription under certain circumstances. The underlying reasons behind the upsurge of these businesses are advancements in technology and the change of culture its produced. Salesforce, the first SaaS company, pioneered the subscription-based model in the tech industry. Salesforce is incredibly customer-oriented; as company that was built on customer relationship management, this makes sense!
It shows in every aspect of their company, including their pricing strategy. Salesforce determined that to maximize customer satisfaction, clients should have the flexibility to pay exclusively for services they use, without heavy upfront costs. Users can pick out of four plans. Two of them include Sales and Service Analytics for $75/month and Custom Einstein Analytics for $150/month. Giving users these options allowed for higher engagement levels and tighter customer relationships. Since Salesforce’s implementation, subscription pricing has seen incredible success in the SaaS market, a market poised to surpass $112.8 billion by 2019.
Madison Reed’s success can be directly linked to its use of subscriptions. To recap Julia’s blog, consumers have two choices when buying hair products: buying it once or receiving the products every six weeks. Over 70% of their revenue is generated from recurring orders, earning an average of $160 per subscriber. The following three reasons are why it’s no coincidence that Madison Reed has mastered the pricing strategy.
A key tenet of subscription models is the idea of customer flexibility. Customers prefer subscribing to services is because budget management is significantly easier and there are often discounts for long-term contracts. Charges occur regularly and consistently so consumers always know how much they will be paying. If you are unsure about committing to a subscription, you can easily purchase a box once. If you do decide on a membership, you save 20% with every box and you don’t have to pay an annual fee.
Users can also opt out at any point. Madison Reed is particularly good about this, as they emphasis the ability to opt out of a membership with them at any point. I saw it at highlighted least twice on their site when I was researching. The convenience of automatic purchasing & delivery combined with the bonuses of being a member breeds customer satisfaction. It also creates a loyal customer base that will be more likely to use Madison Reed’s products in the future.
Although maintaining users is more important to subscription companies, customer acquisition is always a priority for businesses. Madison Reed uses technology to reel in potential users. First, they use the classic technique of free shipping on a user’s first purchase. The reason this works significantly better than when most companies do it is because of the customization that Madison Reed offers.
When ‘shopping’ for my newest hair product, the site asked me 14 questions, including how often I color my hair and what color options I’m interested in (never and brown is nice). Consumers see this level of product customization and become more likely to invest in the product because of how tailored it is. Spotify uses a similar concept. Spotify will create playlists based on your preferences, enticing consumers to join for personalized goods. Consumers also are likely to commit to the company after they see the how-to guides and professional help that Madison Reed provides on their website. They provide tutorials, videos and chat options to help new users.
Developing Customer Relationships
Gaining users is the start of the battle; maintaining them is the real battle. Having members allows companies to connect with clients, assess their needs, evaluate usage and meet any gaps. Madison Reed takes full advantage of technology to make this process easy. Madi is an app that provides professional hair help 24/7. Even after ordering, you can talk to Madi and determine any changes you may need made. You can also use any of their other tools to help assess further needs, but as of right now it’s more proactive on the consumer’s part than Madison Reed’s part. Instead, the company uses data such as renewal forecasts and up-sell opportunities to determine business moves. The data analysis allows them to monetize these long-term relationships in the best way possible for the consumers.
Madison Reed implements the subscription model almost perfectly. They are the company to follow as more businesses turn to this pricing strategy. Some questions I do have though:
- How can you better the customers experience after several months/years of use?
- What features can you add to Madi to help new users and retain users?
- What is your best source of advertising, and how can it target new demographics if you do shift to men/other users?
I’m excited to meet with Madison Reed and every other company that uses this business strategy!