Reduce churn rate in subscription box businesses with these 2 simple tips!

Shyam Ravishankar
Dec 11, 2018 · 12 min read

Introduction

What are subscription boxes? Subscription boxes are a recurring delivery of products as part of a marketing strategy and a method of product distribution. They target a wide range of consumers and cater to a variety of specific needs and interests. It is estimated that there are 400 to 600 different kinds of subscription boxes in the United States alone and more overseas.

Why is this model successful?

15 percent of online shoppers have signed up for one or more subscriptions to receive products on a recurring basis, frequently through monthly boxes. - McKinsey

Subscription boxes offer consumers an easy, individualized, and cheap way to purchase products they want and need. The subscription market has grown by more than 100 percent each year over the past five years. The largest subscription boxes generated more than $2.6 billion in sales in 2016, up from a mere $57.0 million in 2011. Part of the appeal of subscription boxes is that consumers discover products they might not have otherwise. This allows consumers to try products and brands risk-free. The increased exposure to new products helps consumers discover optimal products for their preferences and needs.

The value of the subscription box industry increased from $57m to $2.6B in just 5 years, attracting more than 3.5k would-be subscription box champions to fight for their chunk of the prize-money. - The Hustle

The subscription business now represents a sizeable chunk of the e-commerce market. For instance, Dollar Shave Club which was started in 2012 has taken nearly 7% of the shaving market share in the U.S. It also has a 30% slice of of e-commerce sales pir, annihilating market leader, P&G’s Gillette, in e-commerce. Traditional retail giants have been very quick to sit up and notice this trend. In fact, recently Sephora, Amazon and even Walmart have launched relatively successful subscription services.

The subscription economy has moved from being a fad to being a part of everyday life for many consumers. - Fast Company

What are the types of subscription boxes? Broadly, there are three types of subscription boxes, ie. replenishment, curation, and access. Replenishment boxes automate the purchase of commonly used commodities like shaving kits, soap, conditioner, etc. Curation boxes are meant to surprise the consumer with individualized experiences in diverse categories like food, apparel, beauty, etc. Last, access boxes are basically a way to get exclusive perks and products meant for members only. This may be in the apparel / food category.

As seen in the chart above, curation boxes are by far the most popular, with 55 percent of total subscriptions. This means most consumers are looking for personalized experiences. Replenishment comes next with 32 percent of the market share. This is followed by access boxes with 13 percent of the total market share.

Curation services like monthly boxes of clothes, makeup, or other products are the most popular kind of subscription. - Fast Company

Despite the rising popularity of subscription boxes, there quite a few companies have folded. While an initial boom in customer acquisition is great, renewal of these subscriptions is probably the most important metric for a subscription company. A customer who drops off after initially subscribing is called a churned customer.

Churn: The most dreaded word for a subscription service

Subscription e-commerce companies all over the world dread one word, churn.

40 percent of e-commerce subscribers have canceled their subscriptions. - McKinsey

The cost of consumer acquisition is sky high and subscription businesses depend on developing long-term relationships with their consumers to provide highly personalized experiences. Churn can not only hurt them economically but can also lower the quality of boxes as data is being collected from fewer sources. To combat this, subscription box companies need to think out of the box and provide an experience which consumers simply cannot miss out on. Even large, successful businesses are not immune to failures.

Beauty box success story Birchbox recently shut down Canadian operations, citing high exchange rate and shipping costs as the reason. - Shopify

Most subscription initially provide amazing experiences, which is why they become popular in the first place. This is because they have dedicated stylists working on curating and personalizing a few hundred boxes. While most companies would love to scale their consumer base by 10x year on year, this proves to be the undoing of subscription companies. This is because it becomes impossible for the same team of stylists to curate thousands of boxes suddenly. And it takes a lot of time to find and train new stylists. Thus, the quality of the products or the personalization of each box takes a hit. This in turn causes the first few consumers to churn as they see a visible decline and then this vicious cycle continues. This problem has affected a vast majority of subscription companies and with a steadily rising churn rate, it soon becomes impossible to offer products at the same rates, eventually spiralling into a collapse. Here’s a quick illustration of the problem of scaling.

Many consumers who churn do so quickly, which suggests that companies should be careful not to overinvest in free trials or heavy discounts. - McKinsey

Here are 3 tips for running a great subscription box business.

1. Focus on Great, Sustainable Experiences

The most successful boxes are not the cheapest ones. They are the ones that actually provide an amazing experience to their consumers. Millennials especially, go for value and experiences more often than prices.

Companies must develop great experiences (as opposed to great subscriptions) to avoid high churn rates and to accelerate both growth and profitability. -McKinsey

Instead of focussing on prices, subscription companies need to focus on the experience, the packaging and the value added to the consumer that makes them want to receive the box month after month. Subscription boxes offer one day of delight a month and in the remaining 30 days, consumers have the time to think about cancelling their subscriptions. The only other other time they are reminded about their box is through their credit card statements. This makes it even more important to make the box so good that nobody would want to miss out on unboxing.

Here’s a great quote I read on a Shopify blog.

One of the hallmarks of a great subscription box service is the beauty of the presentation.

The experience of unboxing should far outweigh the value of the subscription. Subscription companies also need to think about profitability and sustainability. A lot of companies make the mistake of deep discounting to acquire new consumers. The problem with this model is that when the discounting period expires, consumers unsubscribe.

Value is still important when it comes to boxes, but consumers are clearly looking for more. They’re looking to be delighted, discover wonderful new objects, and immerse themselves in an exciting experience whenever the box arrives at their doorstep. -Fast Company

But how is it possible to acquire consumers while still making profits?

The answer lies in what subscription boxes fundamentally are. They offer consumers the option to try out new brands and the newest products in the market without spending too much money. Subscription boxes also offer brands a way to directly reach niche market and grow their consumer base. Both new and established brands have a lot to gain from consumers directly using their products. New brands can get a foothold in a highly competitive market and established brands can experiment with new products. It is also a good way for growing their brand presence. Take the example of Birchbox, for instance.

Birchbox’s model is mainly turning free samples into subscription dollars. They went to a lot of companies and said, ‘I can get your samples to a huge consumer base.’ What company is going to say no? - Entreprenuer.com

Brands are happy to give a few free samples to subscription companies in order to reach their consumers. But if the boxes are filled with only free samples (or in other words, sponsored products), the quality of the box might be compromised.

A healthy, curated mix of full size products and samples will help keep the cost of each box low and at the same time maintain the quality of each box.

The price of each box should include the price of the price of the items inside the box, the cost of the time taken for curation, the cost of logistics to purchase the items, the cost of packaging, the cost of shipping the box and a small profit margin. Sustainability starts from the very first box and it is important to keep the price of the box constant as consumers will churn as soon as the price is hiked for profitability. Consumers are typically paying for the experience of receiving a curated collection of products and keeping up the quality of each box is a lot more important that discounting and running ads.

There are other ways to spruce up the experience of a box. For instance, Ipsy gets beauty influencers to create videos that demonstrate how to use the products in the bag. Apart from engaging existing consumers, this also gets additional ad revenue and grows the consumer base. A lifestyle magazine included in the box, based on the products inside would not only be a great way to engage with consumers but also give them a great experience. A magazine or tutorial videos boosts both brand engagement and recall, and it adds value to the product. This way, you are selling an experience and not just a couple of products.

2. Personalize the products for every single consumer

28% of subscribers say having an excellent personalized experience is the most important reason to continue their subscriptions. - Forbes

While this seems to be a fairly basic point, execution has always been a challenge, especially while companies scale. Scaling up is a challenge on all fronts, logistics, curation, quality of products, resources, timelines, etc. But it’s impact is felt the most in terms of personalization.

Showy online ads for the random sale of the week are too irrelevant and impersonal to attract the millennial consumer’s attention. -Forbes

Capturing the undivided attention and loyalty of the millennial consumer is a problem that has plagued mostStitch Fix is one of the most successful personal styling boxes in the industry. With their recent IPO, they have steadily grown since 2011 into a $3 Billion business. Over the last couple of years, Stitch Fix’s data science team has grown to 65 people, collaborates with all areas of the business. Here is what Katrina Lake, the CEO of Stitch Fix had to say about the reason for Stitch Fix’s success in her article in the Harvard Business Review.

Other apparel retailers attempt to differentiate themselves through the lowest price or the fastest shipping; we differentiate ourselves through personalization. Each Fix shipment, as we call it, is a box containing five clothing and accessory items we’ve chosen just for you. Those choices are based on information you and millions of others have given us, first in an extensive questionnaire you fill out when you sign up, and then in feedback you provide after each shipment.

Even Amazon has started a subscription box specific to fashion called the Amazon Prime wardrobe. But before this starts worrying you, here is what Forrester has to say about this.

What’s conspicuously missing from Prime Wardrobe: Personalization. That’s where StitchFix is placing its bets, creating a personalized experience for its subscribers. - Forrester

In fact, the title of this article is “Amazon Prime Wardrobe Won’t Kill Subscription Boxes: Bad Strategies Will.”

The success of Stitch Fix and the failure of multiple other fashion boxes goes on to prove how personalization can really be the difference between a wildly successful business model and a struggling business. Of course, Stitch Fix also has a lot of other great ideas. For instance, you only pay for what you like. The dresses you don’t like can be returned free of cost. But the very core of their success lies in their personalized styling algorithm.

Brendan Witcher, Senior VP & Principal Analyst of Forrester recently said in this webinar

Personalization is NOT segmentation. In fact, it is individualization

For example, a person buying yoga pants cannot be arbitrarily classified as a “soccer mom”. Each person has unique preferences and grouping consumers together is quite the opposite of individualizing the experience of each and every shopper. consumers expect a stylist who knows their visual preferences and can predict what they will like even before they confirm it. This means, they expect 1:1 personalization. It is possible for a stylist to cater to tens or even hundreds of consumers every month but when this number scales to tens of thousands, it becomes unmanageable for a human stylist.

Unlike beauty or accessories subscription boxes, fashion companies trying to tap this business model face a unique set of challenges, related to sizing, personal taste and product accumulation. - The Business of Fashion

Style is a combination of visual and non visual preferences like colors, patterns, sleeve length, brand, neck type, etc. No two people look at a product in the same way. Each of them have their own unique style that is bound to influence their decision to keep or return a product. It is possible to learn the style of each shopper from their history. For a subscription box, it is not enough for a great product to be delivered to consumers month after month, but it must also be in sync with the rest of their wardrobe for a truly personalized experience.

AI, when nurtured correctly, is your answer for automated curation

This is where technology comes in. Stitch Fix has one of the best data science teams. An article in The Business of Fashion rightly points out that

Investing in building complex algorithms, large data science divisions and teams of personal stylists is a costly investment for a young business.

Instead of building large data science teams, the first step towards personalization is building a great feedback loop, both explicitly and implicitly. This involves giving consumers an opportunity to openly tell the company what they like and what they don’t. Building on this can help predict the visual style of the consumer. But more importantly, an implicit real-time feedback loop that follows a consumer’s clickstream on a website and uses visual cues derived from the products interacted with can help personalize and curate boxes right from the start without waiting for the first few boxes.

In the box-service business, the first few deliveries establish a data feedback loop, and then machine learning algorithms can take over curation. - Forbes

After establishing a reliable feedback loop, the next step is to automate the process of curation. Stylists can be used to define the rules of curation but to have them physically curate each and every box makes the whole business dependent on the productivity of stylists. This will in turn lead to a limitation to scaling. Instead, a stylist who decides the overarching theme of the box while letting an AI-based algorithm work out the nitty gritties will find it a lot easier to deliver 1:1 personalization experiences.

With AI, you can do things on a scale impossible for a stylist. The stylist then becomes someone who’s setting the bigger tone [and] saying whether it’s right or wrong. -Forbes

Automating curation can be the difference between a non-scalable, static business and a robust business ready for growth. The success of a subscription box business model invariably boils down to its ability to scale up quickly. In fact, MIT Tech Review states:

The role of data analytics is absolutely crucial to the success of the subscription e-commerce model. The AI-based recommender systems utilized by many of these companies allow the deployment of a preference elicitation framework.

Conclusion

The subscription box trend is now one of the hottest new startup ideas that offer a convenient and individualized way to purchase products consumers want and need. Combined with an almost guaranteed recurring revenue, this is a win-win situation for both consumers as well as subscription companies. With a lot of success stories like The Dollar Shave Club, Stitch Fix, Ipsy, etc., even traditional retailers like Walmart, Amazon and Sephora have jumped on the bandwagon.

The problem of churn rates have plagued the subscription box business model right from the offset. With several companies folding due to high consumer acquisition costs and low consumer retention, this seems to be an industry-wide problem.

However, subscription companies with a strong focus on consumer experience have not just managed to stay afloat but have also been highly successful. The word of the day seems to be personalized curation with Stitch Fix serving as a perfect example of personalization done right. With the advent of AI, curation at scale is no longer a challenge. Scaling up has evolved from one of the biggest challenges to one of the biggest strengths of companies who have adopted the right technology. AI-powered subscription boxes are now really changing the game and taking over the business so don’t get left out!