The unstoppable growth of Direct-to-Consumer and the caveats and limitations of subscriptions models

DTC is growing, but are subscriptions models are already dead?

Andrea Marchiotto
Feb 22, 2018 · 7 min read
Image for post
Image for post
Direct-to-Consumer models are gaining traction, as full ownership of data and customers’ relationship allow (1) the creation of better products, tailored to customers’ needs, (2) improved customer experience, through continuous A/B testing and (3) repeated purchases and higher retention rates, especially when subscription models are adopted. But… is this enough? Or is this just a fade? Go on and read to find out…

Disclaimer: this in-depth analysis is a collection of personal thoughts, data points and quotes from experts. All info is publicly available. The content hereby written does not reflect in anyway the position of the company I work for.

The importance of Direct-to-Consumer

Dear reader,

Direct-to-Consumer (DTC) brands are products, services or “experiences” that are financed, designed, produced, marketed, distributed and sold by the same company, without the need of a retailer. They bypass the middleman and connect directly to consumers. More than 40% of brands now sell DTC[1] and are predicted to reach $130bn by 2025[2]. The potential is huge. And the trend seems unstoppable.

DTC models are becoming more and more important for the Consumer Packaged Good (CPG) industry and many other big players. Here a few examples by well-known companies:

  • Sneaker and sport apparel manufacturer , grew its DTC channel eight times faster than its wholesale business in 2016. While this channel only generated $9.1 billion of revenue, or 28% of Nike brand sales for the company in fiscal 2017, it accounted for 70% of the growth
  • ended the deal with Netflix and it’s planning to launch its own DTC subscription streaming service soon
  • has eliminated direct-store delivery for its snack division to redirect resources and efforts to direct-to-consumer marketing and increased support of e-commerce

Big companies are investing more in DTC because of consistent disintermediation: via DTC they can get a deeper understanding of their consumers and behaviours while developing agile solutions to keep pace with start-ups’ agility.

The explosion of subscription models

Image for post
Image for post

Among DTC business models, the proliferation of subscription models we are seeing in categories like Foods (and many others) is an even clearer example. A study by Hitwise (a bit dates but still valid to make my point), showed that visits to so-called “sub-box” sites has grown 3,000% in the past three years (see table above), with 21.4M visits in Jan. 2016. In comparison, visits to the top 500 online retail sites have only gone up 168%. Subscriptions also go hand in hand with the latest consumer trends mentioned here above, and other key factors:

  • Consumers increasingly urban (life in cities is forecast to grow to 66% by 2050[3]),
  • Tech-savvy and heavy mobile user (e.g. in Singles Day in China 69% of sales were made on mobile up from 43% last year[4])
  • Always online (87% of US mobile devices are used for shopping online) and
  • Looking for convenience and a hassle-free experience

Where Amazon, which set the standard with efficiency and ease, moving towards a 0-Click purchase experience in the near future[5], took some of the joy of discovery out of the picture (think Dash button[6]), subscription boxes seemed the antidote: inherently personal (most are personalized to consumer tastes or can be customized), focused mainly on curation, value and with the element of surprise built in, subscription boxes bring a bit of playfulness back to shopping.

Image for post
Image for post
Let’s not forget about our beloved millennials, which are more interested in subscription services than any other generation, being 24% more likely to have a meal kit subscription than baby boomers, 35% more likely to have a shave club subscription and 28% more likely to receive a beauty subscription box. [7]

Warning! Threats are around the corner

“Subscriptions are “over-hyped” [L2 Inc.]

“The energy has already died down” [S. Mulpuru-Kodali (Forrester)]

But threats are around the corner. Some experts are beginning to see signs of a bubble, comparing it to the Groupon model[8]. According to L2, subscriptions are “over-hyped”. For S. Mulpuru-Kodali, an analyst at Forrester, said that “the energy has already died down”. “When VCs jumped on this, there was a belief that this would be akin to the daily deal or flash-sale boom of a couple of years ago, with rapid growth and the possibility of a very lucrative exit. It’s a tough business that only appeals to about 1–5 percent of customers in the market for the given product”, said Mulpuru-Kodali. “That means the overall business opportunity just isn’t that large”.

There is also a problem of scale. Alex Lutz, head of the business strategy group at Huge, said “subscription businesses initially take off in the early stages because the cost of acquiring customers is low (once you get them, you have them). When you start to scale is when these businesses are so punishing”. That is where the cost-per-customer acquisition no longer provides enough of a margin to keep these businesses sustainable.

Finally, a problem of profitability. An extremely (an expert in brand building) clearly explains the behind the scenes of meal kits players, like Blue Apron, which is a company with a subscription model at its core. Here an extract: “Using the average revenue per customer, alongside the disclosed cost of goods, the Company makes roughly a 33% Gross Margin on its revenues (Revenues less Cost of goods, which include product and fulfillment expenses). Adjusting the quarterly revenue per customer to a monthly basis, the average monthly gross margin per customer is ~$26. (Note, at a $150 Cost per Acquisition, that implies 6 months to breakeven on a customer, which is exclusive of all of the Company’s additional expenses such as G&A, capital expenditures, etc.) If we then multiply that margin figure by the average lifetime, we get a lifetime gross margin, which when reduced by the acquisition cost, gives a lifetime contribution margin per customer. At a $150 CPA, the company is roughly making $152 per customer. […] They also have a 10% monthly churn rate, which is really high.”

“Net net, this is a tough business. The margins aren’t great, customer acquisition isn’t cheap, and retention is unlikely to jump from 10 months to 20 months in the near future” [Babak Azad]

Image for post
Image for post
Some meal kits companies might actually need first aid kits to help them fix their economics…

Is there a solution?

Maybe. A few aspects to consider:

  • Consumer vs. Scalability centric approach. US company said it had to move facilities 24 times in just three years because it could not properly forecast its own growth. In hindsight, Co-CEO Taranto says the start-up may have paid too much heed to customer demands for variety. “We in the early years tended to skew more towards being customer-centric than being focused on doing what was best for scalability”, he said. So, businesses with a scalability centric approach have higher chances to succeed
  • Diversification. That is where bigger is better, and where big brands come in, as we see an increasing number of major CPGs making moves into this space: Albertsons acquiring the meal kit company , Kellogg’s investing in and , PepsiCo teaming up with and extending its online grocery delivery business to include meal kits for the likes of Campbell’s. While subscription revenue is great, once subscription growth slows, companies find that they have little to no means to increase revenue-per-customer unless they embrace a traditional retail model (e.g. selling products, not subscriptions). One more example. One of the reasons a company like has grown and withstood the influx of competition is because it has diversified. The company pivoted from box-only to a complete “beauty company” model. It is pushing people to buy full-size makeup items via its website and also has a small but growing brick-and-mortar presence. My recommendation is to take inspirations from companies that are aiming to become a ‘360° destination’
  • Making the entire process an experience. Each aspect of the product, service and customer experience has to be meticulously designed. A good example in this sense is UK based , which focuses on extreme curation via a subscription model
Image for post
Image for post
I think making the whole customer journey a memorable experience is a key differentiation factor for companies working with a DTC model, a competitive advantage even against Amazon and Alibaba.


Subscriptions models are still important for small start-ups and large orgs, although we need to be careful in considering the right fast-growing companies or emerging concepts that have a high scalability potential in terms of distribution. Additionally, as companies with the likes of set the standards in terms of post-purchase experience, further investments are most likely to be required by these companies in building scalable customer service infrastructures, making sure they are also best-in-class quality.

That’s all folks! What do you think about these insights?


[1] [WWW Document], 13.02.15. Econsultancy.

[2] [WWW Document], 07.07.15. Kantar World Panel.

[3] UN World Urbanization Prospects 2014.

[4] Also, in the first half of the year 55% of sales through Alibaba in China were on mobile and in US, during the last Black Friday 48% of sales were done on mobile devices.

[5] A L2 2017 prediction, mentioned during the L2 Digital Leadership Academy Event held in Paris at the end of Jan. 2017.

[6] “While food brands have been laggards in adopting novel social media platforms like Instagram and Snapchat, they have been rapid adopters of retail features like the Amazon Dash button, with 12 percent of Index brands signing up to allow rapid refills since the button’s introduction last Spring”. L2’s Digital IQ Index Food 2016.

[7] According to a survey by data-driven marketing firm Fluent that was emailed to Retail Dive. the link to the full article.

[8] Ref. .

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch

Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore

Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store