When Amazon launched its Prime subscription service in 2005, many thought founder Jeff Bezos had lost the plot because of a potential loss of hundreds of millions of dollars through offering unlimited shipping for a modest $79 (£63) a year.
The move delivered a welcome recurring revenue stream but the big question among many – including Amazon senior executives – was whether the annual subscription fee would offset the loss of all the postage payments.
This didn’t concern Bezos because he was more interested in whether Prime would achieve his primary objective of hooking people into an Amazon ecosystem whereby free unlimited delivery would ultimately drive significant additional revenue. Amazon needn’t have worried because Prime has been remarkably successful and attracts more than 150 million subscribers around the world who now pay the equivalent of $119 a year.
It has been so successful, massive US-based retailer Walmart recently announced it would launch a subscription service to rival Prime in yet another example of businesses looking to create a recurring revenue stream. The lure has led many retailers to build their operations around locking people into a subscription model, including vegetable box schemes, snack boxes, razor blades and beauty products.
The problem with most of these sellers is they face debilitating customer churn. They have to constantly chase new customers – at great cost – to offset the fall-off of their subscriber base, which invariably suffers fatigue or boredom. That’s why these companies have sought to drive extra revenue beyond subscription fees. Hence the likes of Graze sell a variety of products in major supermarkets, while subscription shaving firm Harry’s has expanded its range with its goods now found in Boots and Superdrug.
These companies have all found it tough to adapt their models, no doubt because such moves have largely been an afterthought compared with Amazon, where additional revenue was always the primary objective of the subscription exercise. That’s why it’s interesting to see a potentially revolutionary move by US food chain Panera Bread to introduce a coffee subscription service for $8.99 a month.
This enables members to have one free drink every two hours. By a simple calculation this means it takes a mere four visits before the subscription has paid for itself each month. On that basis it sounds madness but looks a similar situation to the one Bezos faced – Panera’s aim is unlimited coffee will drive additional revenues in its restaurants.
Having got customers over the threshold to pick up their free coffee, Panera’s management hopes they will spend money on other items. The company has cleverly focused on coffee as it represents only 3% of its total sales and is a repeat purchase item as well as complementing Panera’s core offer of sandwiches and other food-to-go items.
I’d be surprised if this competitively priced subscription offer fails to tempt customers away from other coffee providers and it will be down to Panera to get them to make additional purchases. The foodservice company will be helped by having customers’ details, which will enable it to market to them if they skip into its restaurants solely for free coffee.
It’s hard to believe such subscription programmes can’t be applied to many other food and beverage businesses. I expect to see a lot more of these innovative models introduced as long as they aren’t brought in purely to drive subscription revenues because, as Bezos proved, the eye has to be on the much bigger prize.
Glynn Davis, editor of Retail Insider
This piece was originally published on Propel Info where Glynn Davis writes a regular Friday opinion piece. Retail Insider would like to thank Propel for allowing the reproduction of this column.