Companies in a low-growth market need to figure out how to drive shareholder value. Traditionally, retailers need to get shoppers back into their stores or back online to make purchases and drive growth, but subscription programs remove retailers from this unforgiving cycle. The Rundle (recurring revenue bundle) allows brands to link a portion of their business models to the clock. Gartner L2’s Digital IQ Index: Big Box features retailers including Amazon, RH, and REI that have found success applying recurring revenue models to the retail sector.
Amazon proved the impact of the subscription model to the retail sector and has entered into a recurring revenue relationship with over 100 million customers through Prime. RH, formerly Restoration Hardware, has found immense success with a similar model further proving the efficacy for the retail sector. For $100 annually, shoppers receive 25% savings on all purchases and RH reported that 95% of sales were coming from the membership program. Beyond that, the retailer drives tremendous free cash flows from the program at a very low cost. In addition to members’ purchases, RH earns an the $100 member fee annually for its roughly 400,000 members.
IKEA’s announcement to start leasing furniture creates a recurring revenue model. The retailer hopes to prolong the life cycle of its products and its customers, but what it appears to be missing are the free cash flows that Amazon earns through the $119 annual fee Prime members pay for the service or the $100 RH earns annually from its members.
IKEA is also modifying product design so single components can be replaced. For example, the cupboard doors in a kitchen can be replaced without ripping out the whole fixture. This creates a system to keep customers within the IKEA ecosystem by allowing them to easily update home fixtures, which traditionally can prove costly and cumbersome. The question is whether or not this will be compelling enough for customers to stay within the IKEA ecosystem and drive the impactful recurring revenue stream.