The architecture of your subscription systems and operational processes are critical to your profitability. Here are some reasons why.
Most companies new to providing subscription-based offerings have two areas of focus. Their product and their marketing. Certainly, without a great product and a way to create demand, your subscription business will not get off the ground.
Managing subscription operations is complex enough when you have an intangible Netflix type product. But things get exponentially more complicated when you have a physical product e.g. inventory, packaging, shipping, returns, and warehousing to name a few pain points. And experience selling primarily through retailers may have little or no advantage when setting up a D2C channel. If you are in this ‘D2C for the first time’ physical goods camp, this blog is for you.
When it comes to systems and processes, a typical approach is to “start out with something and learn as we go.” This may start with a Google search or a personal recommendation for an e-commerce or order processing vendor.
One call leads to another until you find a platform you like, which in turn leads to other vendor recommendations (that need to work with the first platform you chose) until you have enough vendors put together to begin operations. You start with a nice web/mobile site, you have an e-commerce platform with subscription capabilities, analytics, a modest but functional fulfillment operation and a call center.
Orders begin to roll in. Your focus rapidly shifts from your product to providing services to keep up with the flow. If you are growing your subscription business out of a retail operation, perhaps you have adapted existing systems and facilities to handle your startup subscription business. When the daily orders were in the hundreds or low thousands each week, your operations were enough. But as you grow, more and more problems seem to arise.
Here is a preview of what happens next:
You notice in your reporting that revenue doesn't line up with your expected cost or ship rates. Are you losing orders somewhere along the line? Maybe. Your call center costs are rising faster than expected because you are experiencing many questions about your shipment schedules, frequency of recurring orders, about how your subscription plan works or proper product use.
You also find that orders have been held up for over a week inside the system because of supply chain issues. Perhaps it was something simple like a missing tissue or a brochure that has delayed thousands of orders from being released to the warehouse. When they do finally go out, when do you send the next shipment? On the original schedule or pushed-out a week, which throws off revenue projections? You now realize that any delays in your shipping cycles can mean revenue is lost forever (yes, there are only 52 weeks in a year).
As you start to get these problems under control, success with new orders means that your recurring shipments are now starting to kick in. But they have problems too. Are the shipping charges correct? Was the subscription engine configured to apply free shipping to every order when the intention was for the first shipment only? Is the bill of materials correct for every possible variation of orders?
After getting through a few recurring order cycles, your analytics start to show maturing data which is a bit scary. At this rate, in addition to all the unexpected costs, your business is showing signs of fraud. People are joining and then dropping out just to get your attractive start offer. Probably time to think about fraud measures. You also notice that every month perhaps 7-8% of your cards are not authorizing for your recurring shipments. Insufficient funds, expired cards, bank replacements. Time to think more about your credit processes too. As you continue to grow, you find that certain systems that you put in for the initial launch are not scaling well. Some have performance problems and can’t keep up with the order volume.
With the great knowledge gained thus far, you want to try new types of pricing and offers, moving the chess pieces around. But the systems you chose originally do not support these expanded capabilities. They are now looking “too simple.” Perhaps your e-commerce can handle the change, but your subscription engine cannot. Training in the call center lags relative to the changes and offers on the website. New inventory for that upsell takes six weeks to acquire. Product is in the wrong warehouse to optimize shipping costs.
The bottom line is that you must slow your growth to work within the capabilities you have in place while you figure out a way to retrofit. This scenario is not untypical.
Unfortunately, you are experiencing death by a thousand cuts.
It turns out, your customer satisfaction heavily relies on getting the simple things right. Such as, receiving orders on time with the expected items in an undamaged box, being charged the correct price, and easy ways to get help. All the things that your systems and processes do.
The subscription economy is a digital economy. Digital sales, automated order processing systems, shipping to the doorstep, self-service via the web and automated order generation. The rules of your business are coded into your computer systems much more so than work activities people do by hand. If your computerized rules are not correct, financial loss of some sort will occur.
Subscription operations, just like the subscription itself, is a chain of events. From the initial order capture through to the customer receiving the package, every step of the way can cause either lost revenue or increased costs. Many times, without you even knowing you are losing money. This is a literal statement, as I have personally experienced these very real situations at just about every twist and turn.
Therefore, your profitability is highly dependent on these ‘non-customer-initiated interactions’. Get your operations wrong and you will have increased churn regardless of the quality of your actual product. These key supporting elements are a necessary part of your companies’ subscription profitability planning.
Going from where you are to where you want to be:
First, improving operational processes does not always mean that you have a platform replacement ahead. Business rules, daily procedures, product packaging or even the way subscription bundles are constructed can all be contributing to your revenue loss problems that have little to do with your actual technology.
If you are just starting out with your efforts to build a subscription program for your company, please do not put this architecture component on the back burner. A successful long-term design does not need to be fully implemented on day one. But architecting your systems roadmap and operational processes so you know where you are headed is critical to help avoid slowdowns and the brand damaging scenarios described here.
If you are in one of the live production circumstances outlined above, you can (and probably should) work your way out incrementally, again providing you have a design target identified. Sure, when you get to your core processing system problems, there may be no way out but a big transition effort to a new platform but there are many in-between steps leading up to that point.
Each stage of growth allows for improvements and today is the best time to start.
We are here to help.
- Kim Terry
Founder, Subscription Systems LLC