McKinsey recently released a survey in which they asked over 5,000 U.S. consumers what they look for in a subscription service.

Subscription has been a trend in publishing and media for a while. In fact, nearly half of all the consumers polled in this survey already had a subscription to a streaming media service, like Netflix. Now we’re seeing the popularity of the subscription model spill over into e-commerce.

The e-commerce subscription market has grown more than 100 percent each year over the past five years. It started with small companies disrupting various industries, and it’s since gained the attention of large corporations. We’re now seeing huge companies like Walmart launch their own membership programs or acquire those startups that threatened their tried-and-true business models.

Of the people polled by McKinsey, 15 percent of them had subscribed to at least one e-commerce service over the past year. Here, we’ll take a look at some of the results of the survey so we can better understand who these consumers are, what they’re looking for in a subscription service, and what you can do to build the most appealing subscription service possible for your business.

Who Are These Consumers?

McKinsey’s team found that the majority of those who are taking advantage of e-commerce subscription services are young adults, between the ages of 25 and 44. They live mostly in urban areas in the Northeast, and on average make between $50,000 and $100,000 per year. Sixty percent of all subscribers are women, but interestingly, the men who do participate in subscription services are more likely to subscribe to more than one service.

What Types of Services Are They Looking For?

This survey broke e-commerce subscription models down into three distinct categories:

• Replenishment: These are subscriptions for necessities that are shipped on a regular basis. Think Dollar Shave Club, which automatically ships shaving supplies every month.
• Curation: These subscriptions regularly deliver surprise items that are curated based on a profile the subscriber has provided. Think Ipsy, which delivers samples of beauty products on a monthly basis, based on the self-proclaimed interests and needs of subscribers.
• Access: These subscriptions are about access to discounts and VIP perks. Think NatureBox, which gets subscribers discounts on premium healthy snacks.

Curation services are far and away the most popular, representing 55 percent of all subscriptions. Replenishment services make up 32 percent of subscriptions, and access services 13 percent.

What Motivates Subscribers?

Now that we understand these subscribers and what kinds of services they’re most interested in, the next step is learning what motivates them to pull the trigger and subscribe.

Personalization is universally important. Of course, for a curated service, it’s important that the subscriber feels understood—the entire basis of the service is that they receive items tailored to their unique needs. But personalization has become a key component of the user experience for all businesses of late, and consumers expect it from any kind of service.

A good recommendation is also important: Most consumers choose a subscription because of strong reviews or positive word-of-mouth. Good value and a financial incentive are also a key part of the subscription puzzle, regardless of the type of service. Convenience is an important element as well, particularly for replenishment services.

What Scares Them Off?

Subscriptions offer consumers some obvious benefits, but there are some elements of the subscription model that make people hesitant to subscribe. The numbers in the survey bear this out: Only 55 percent of all people who consider a service actually end up subscribing. What could be the driver for this low conversion rate?

First off is name recognition. A lot of these subscription services are startups. If you as a consumer are going to hand your credit card information over and sign up for a monthly service, you want to be sure you can trust the brand you’re doing business with.

The long-term financial commitment is also a hurdle. Signing on to spend money each month, even if it’s a relatively low fee, can scare some people off. Plus, most consumers have a horror story about registering for a service and then having to jump through ridiculous hoops to cancel it.

Why Do They Cancel?

If you overcome the obstacles that keep people from signing up, the next big fear is that your subscribers will cancel. Unfortunately, churn is very high with subscription services. Forty percent of all subscribers end up canceling the service, and most do so within the first six months of subscribing.

For the most part, they cancel because the subscription service is not living up to their expectations. Dissatisfaction with the quality of the product or the value they’re getting as part of the subscription are two of the biggest drivers of churn.

The other cause of cancellation is a misalignment between supply and demand. If you’re offering a monthly shipment but are sending too much product in each box, subscribers end up with half-used product piling up. They may decide they’re better off just buying for themselves when they need the product.

What Steps Can You Take to Build a Successful Subscription Service?

Now you understand who these subscribers are, what they want, and what tends to scare them off. So next, what can you do to build a successful subscription service for your business? First, you’ll want to start with your whales—your most enthusiastic customers. Understanding what your whales appreciate about your business and how you uniquely address their needs can help you understand what kind of membership would best serve them.

Next, you’ll want to want to focus on building a solid product pyramid. Because there are hurdles to getting subscribers to commit to your service, structure your offerings in a way that gently guides them from one product level to the next.

Start out with some free offers at the bottom to build trust in your brand. Your introductory services might be one-off purchases rather than subscriptions. This way, you can wow them with your stellar customer experience without them having to make the longer-term subscription commitment.

Once you’ve impressed them with your initial offers, they’ll be more likely to subscribe to a low-cost, basic membership. And if you’re able to impress them there, you can move them up to your highest-tier offerings in the future.

Building a successful subscription service isn’t easy, but when you understand what consumers are looking for, it becomes less daunting. Create a smart subscription model that keeps your whales engaged, and you’ll set your business up for long-term success.

About the Sterling Woods Group, LLC

The Sterling Woods Group’s mission is to help clients make sense of their data to build deeper relationships with their best customers, launch new products and membership programs, and execute smarter marketing strategies.

We use a hypothesis-driven, data supported methodology to discover your “spin”—a simple insight that no one else is paying attention to. Then, we help you assemble the right technologies, marketing plans, and resources to seize this opportunity.

About the Author

Rob Ristagno, Founder and CEO of the Sterling Woods Group, previously served as a senior executive at several digital media and e-commerce businesses, including as COO of America’s Test Kitchen. Throughout his career, his focus has been on embracing technology and analytics to spur strategic development and growth.

At the Sterling Woods Group, he and the team are passionate about helping clients understand their best customers through data, and developing products and membership programs that exceed expectations – and generate impressive revenues.

Committed to spreading this message, Rob is the author of A Member is Worth a Thousand Visitors and is a regular keynote speaker at conferences around the world. He has been featured on ABC, NBC, CBS, Fox, and Digiday.

He holds degrees from the Harvard Business School and Dartmouth College and has taught at both Harvard and Boston College.