On the Value of Subscription Models for Online Grocery Retail

Abstract

Omnichannel retailers are increasingly introducing subscription-based delivery services. By subscribing to this service and paying fees upfront, customers are entitled to have orders delivered to their home for a given period without paying any extra delivery charge. We analyze the resulting changes in customer behavior from two perspectives:(i) ordering behavior and (ii) delivery preferences. The model is estimated from the online transactional data of a grocery retailer and combines matching and difference-in-differences approaches. We confirm that subscription customers spend more per month and purchase more frequently online than customers without subscriptions. However, this outcome is compromised by shifts towards narrower time slots in the mornings and at night, where slots are requested with less advance notice. When weighing the increased revenue and higher operational costs, we show that subscriptions have a negative impact on a retailer’s incremental profit. This remains valid for a wide range of assumptions about (i) the cannibalisation of sales from the retailer’s offline business, (ii) picking cost and (iii) delivery cost. To mitigate the impact of subscriptions on retailer profits, we develop a data-driven algorithm that predicts whether certain customers should receive promotions for the subscription plan, rather than it being advertised to all customers. As an extension, we also study whether the addition of a minimum order threshold to subscription plans changes consumer behaviour. We find that this introduction encourages customers to seek more variety and increase their basket size, but does not reduce their order frequency, a phenomena which may be ascribed to cross-selling.