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a service of Retail 2019: The Year of the Recurring Revenue Model BRAND ADOPTION OF RELATIONSHIP COMMERCE IS THE NEW NORMAL2 EXECUTIVE SUMMARY While every retail business is unique, they all share one common trait: a desire to grow reve- nue and profits. The challenge today is that the traditional model for acquiring and retaining customers is no longer enough to keep your business growing. Consumers have more choices than ever before thanks to technology. Accordingly, their ex- pectations have changed. Their buying decisions are now driven by brand, not just price, as well as a desire for a frictionless and convenient shopping experience. Whenever and wher- ever they buy, their purchases should be part of an ongoing relationship with the retailer. To strengthen those relationships, always keeping customers at the center, many companies have developed a strategy and specific programs to encourage repeat purchase behavior. The result is a business model that creates a recurring revenue stream, while reducing customer acquisition cost (CAC) and boosting customer lifetime value (LTV). To provide insight into how retailers are fostering long-term relationships with their custom- ers, relationship commerce company Ordergroove commissioned NAPCO Research to survey retailers about the significance of recurring revenue to their business strategy, as well as their companys use of programs to drive ongoing customer relationships. The survey results shed light on the state of recurring revenue programs in retail today, as well as identify areas of opportunity for further growth.3 An overwhelming 83 percent of the retailers surveyed agreed that converting one-and-done buyers into recurring customers is “very important.” Sixty-five percent said they already offer subscription programs, and another 22 percent are considering adding them in 2019. Fifty-four percent said they expect “significant growth” in revenue in 2019 and beyond from recurring customer purchases. A majority of respondents cited benefits from recurring revenue programs such as “greater revenue” (67 percent), “greater profitability” (61 percent) and “greater revenue predictability” (50 percent). Survey respondents are leaders in their market- places, representing companies with annual reve- nues exceeding $100 million. Their answers as indicated by these results show that they take the opportunities presented by recurring revenue programs very seriously as part of their overall business strategies. In the words of one respondent, “Customers rate our programs highly, and in addition to membership increases, customers are spending more money.” The following survey results are indicative of retailers be- liefs about the value of recurring revenue programs. This reflects retailers optimism that subscription programs represent not just an area of op- portunity, but the new normal for providing a positive impact to bottom-line results. Thirty-one percent also said that “reduced customer acquisition costs” was another important factor in their support for recurring revenue programs. Given the intense level of competition in so many retail verticals, the opportunity cost of participating in a marketplace without a recurring revenue program can be high. Customers locked into another brands recurring revenue program may be hard to woo away. While it might be expected that a large percentage of retailers would recognize the business value of recurring revenue programs, what has been the impact on their customers? According to the retailers surveyed, recurring revenue can also be an important driver of customer satisfaction. 4 Eighty-six percent of retailers said that their subscribers are “more satisfied” than their non-subscribers. While Net Promoter Scores (NPS) and other internal metrics were mentioned by 57 percent as indicators of custom- er satisfaction, respondents also noted other positive impacts from recurring revenue programs. “Customers constantly say how much they love our new subscription pro- gram,” one retailer said. A happy cus- tomer is a repeat customer, one who will be loyal to a brand they trust. In a dynamic retail marketplace, improving customer satisfaction is critical to building and maintaining executive support for recurring revenue programs. The right internal resources or the right third-party partner can help you develop a lasting recurring revenue program that will surpass the competition and help keep your customers happy. Recurring revenue programs are a tool to help companies compete with each other, as well as Amazon and other marketplaces. While 65 percent of retailers said they already offer subscrip- tion/auto-replenishment programs, another 22 percent are thinking of adding them. In addition to subscription and auto-replenishment programs, other forms of recurring reve- nue programs (e.g., gift boxes, memberships) offer both retailers and customers value. TABLE OF CONTENTS Industry Adoption and Perceived Benefits of Recurring Revenue Programs .5 Recurring Revenue Programs and Customer Satisfaction .6 Program Adoption by Customers and Competitors .8 Conclusion 22 percent noted an increase in referrals. And still others noted decreases in product returns (21 percent of respon- dents) and customer service inquiries (17 percent). In an open-ended follow-up question, participants elaborated on how their customers satisfaction levels have improved as a result of recurring revenue programs. 8 Some common themes in their comments included: greater convenience (“Customers know they can get what they want without any fuss. Easy ordering.”); repeat business and upselling (“people come back for more new styles”); better customer ratings (“positive feedback and reviews from our existing customers”); social sharing (“Youtubers promoting our line”); and establishing security and trust (“customers feel part of our family and feel valued”) (“It takes the worry out of remembering”). PROGRAM ADOPTION 93% of Retailers Say: Customer Adoption of Recurring Revenue Programs is the New Norm Following the introduction of recurring revenue programs, the customer mind-set has shifted, according to respondents. Fifty-four percent of retailers reported that their customers adop- tion of programs that drive relationships has “increased significantly.” Another 39 percent agreed that it has “increased somewhat.” Only 6 percent saw no change yet in market acceptance of subscription programs. 9 Aside from participation in any marketplaces (e.g., Amazon), respon- dents were asked about their current recurring revenue programs, as well as where they saw areas of opportunity for 2019. Sixty-six percent of retailers already offer Quick-Buy/1-Click Reor- dering, and another 20 percent are thinking of adding it. Sixty-five percent said that they currently offer subscriptions/auto-replen- ishment programs, and another 22 percent are considering adding them. Furthermore, 49 percent have a gift box program in place, and another 30 percent are thinking of adding one. For retailers already using an in-house platform that may be limited in its capabilities, the growth opportunities available with recurring revenue programs make it a good time to evaluate third parties with platforms that include additional types of programs and broader channel support. Amazon, Other Marketplaces Offer Subscription Programs for Most Sellers Seventy-six percent of retailers said that Amazon and other online marketplaces offer subscrip- tions to their products 34 percent of them consider this arrangement a threat to their business, while 42 percent do not. However, 22 percent of retailers are not selling their products on Amazon. If Amazon (or another marketplace) is offering subscription service for a brands products, thats revenue and brand-building customer satisfaction thats going to Amazon instead of that company. Take the initiative and devel- op your own recurring revenue program with the help of a third-party partner, and in turn be the one enjoying the benefits of increased customer satisfaction as well as growing revenues and profits. Competitors Recurring Revenue Business Models: Whats Ahead Respondents were asked about their competitors use of different types of recurring revenue programs. The data shows that theres increasing adoption of recurring revenue programs by retailers. For example, 71 percent said that their competitors offer auto-replenishment programs, 70 percent offer quick-buy/one-click reordering, 62 percent offer market member- ships, and 59 percent have gift box programs. Recurring, predictable, profitable revenue and the brand loyalty it helps to engender goes to your competitors if you dont have these types of programs in place. 83% of Retailers Plan for Their Recurring Revenue Programs to Be Omnichannel People shop today across multiple channels, often in the same purchase journey, so recurring revenue programs must be developed to account for this behavior. Eighty-three percent of survey respondents said that their recurring revenue programs al- ready are or plan to be omnichannel in design and execution. These companies will be able to better meet the needs of omnichannel shoppers than the 17 percent of respondents that have built their recurring revenue programs for a single channel.10 CONCLUSION & RECOMMENDATIONS A recurring revenue model, and the programs that drive it, provide more than a predictable, profit- able and repeatable revenue flow. Theyve become fundamental to building a healthy retail business and satisfied customers. Recurring revenue programs enable retailers to provide better customer service and support, deliver wants as well as needs, and create customer convenience and delight. And because recurring revenue programs are becoming the industry norm, companies that dont develop them will be left behind by their competition. So knowing that recurring revenue programs are integral to future retail success, what should you be doing to successfully implement and operate a recurring revenue program? 1. Devise a relationship commerce strategy immediately. Eighty-three percent of retailers say that converting one-time customers into recurring cus- tomers is very important to their overall business strategy, and that in 2019, they expect that recurring revenue will significantly increase their companies revenues. This is the new normal. But to adopt this business model and make it your new normal, you have to make it a priority by starting your planning now. You need to define your goals, set a strategy to reach them, and identify the resources youll need or partner with a vendor that can help you. 2. Dont allow Amazon or other marketplaces to reap the benefits of a long-term customer value (LTCV) on the back of your initial customer acquisition (CAC) investment. Amazon and other online marketplaces recognize the value that recurring revenue programs can produce, and have wisely implemented them into their business models. Why let Amazon use your products and your initial customer acquisition investment to set up a successful recurring revenue program when you have the ability to do so on your own? Take control and work with a trusted third-party partner to develop your own recurring revenue programs, and enjoy the benefits that come with them. 3. Adopt subscription and reorder programs as a starting point. Subscription and reorder programs are the easiest way to get started with generating recurring revenue. Theyre proven, and again, if youre not offering them, your competition is probably doing so. Recurring revenue programs are not a fad, but a crucial part of todays retail environment. Once theyre established, you can expand your program offerings to include additional products, catego- ries, and programs like memberships and gift boxes. 4. Center the retail omnichannel experience around your customers and their satisfaction. Customer expectations and buying behaviors are changing rapidly because of a desire for inno- vation and convenience. To keep up, youll need to leverage your recurring revenue programs in new ways that make their shopping journey easier and more delightful. Think of your channels (like in-store, mobile, SMS, email, and web) as essential elements in creating a seamless and sat- isfied customer experience, rather than individual components. How quickly you can make these changes as well as incorporate emerging channels (like voice) into that experience will be critical in establishing and strengthening your customer relationships, as well as standing apart from the competition.
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