Subscription commerce: thinking inside the box

Every once in a while, a new business idea gets copied and replicated into new verticals everywhere. A few years ago it was Groupon and the promise of daily deals website. Now subscription commerce is all the rage.

Subscription commerce is a twist on the traditional ecommerce model: instead of paying for an item when you need it or want it, you pay a periodic fee (typically monthly) to get a box of goods delivered right to your home. Today there is a subscription box for literally everything:cosmetics, shoes, condoms,coffees, razors, clothes, pet goodies, flowers, etc. Is subscription the future of online retail or just a fad?

The subscription business model is of course not new. As a kid, many of us subscribed to magazines and we remember the excitement of receiving something new every week or month. What is new here is the type of goods that those companies want us to subscribe to. The growing popularity of the subscription model has been very much in line with the digitization of goods such as books, music and movies, etc. As those goods became digital and moved to “the cloud”, accessing them has become more important than owning them and therefore a subscription makes sense. As investor Fred Wilson explained in a blog post, over the last two decades, the subscription business model has been adopted in other industries like software and content.

In comparison, the consumption of tangible goods like the ones that are delivered in a box has not really changed. Therefore, the sustainability of the subscription business model to sell physical products has yet to be proven.

Describing its startup as a “Netflix or Spotify for cosmetics” might be a catchy elevator pitch but it doesn’t tell the full story.

The challenges of selling tangible goods through a subscription model

It’s widely recognized that the number one rule for a successful subscription business is to have a low churn rate (= number of people who cancel their subscription). In other words your customers have to commit to your product/service for a very long time. The best way to achieve this is to develop a strong value proposition as well as a powerful brand.

Value proposition

As Kevin Kelly explained in one of his visionary post, subscription is a bit like renting: you’re paying a fee for something you don’t want to own. On Spotify, you pay a subscription because you want to access your music immediately whenever you want, wherever you are.

In the case of subscription commerce, a consumer is paying a monthly fee to receive (and own) tangible goods. Every month corresponds to a new purchasing decision and the objective of the subscription is to have the pain once (when you subscribe) and then to enjoy the product on a regular basis. In order to prevent the customer from questioning the value of the product or service every month, you need to keep customer satisfaction high. That’s where it becomes interesting to make a distinction between two types of boxes:

• The curated box: help the customer to discover something new (it can involve the use of sampling). Example: Birchbox = hand-picked beauty samples for $10/month
• The convenient box: deliver usable goods that are consumed on a regular basis. Example: Dollar Shave Club = quality blades sent to your door for $1/month

Discovery is great for the consumer but is difficult to satisfy in the long run; as quality fluctuates, people can get frustrated and then unsubscribe. People who subscribe to a box for convenience are easier to satisfy because they know what they will get.

Perceived consumer value

What helped software and digital content companies like Dropbox and Netflix to scale is the nature of their product. They are selling non-subtractable goods, which means that one customer using the service does not exclude another customer and at scale the marginal cost becomes close to zero. As a result, for a fixed amount, these companies often offer an unlimited use of their service. In comparison, tangible goods are by nature rival goods; the consumption by one customer prevents the consumption by another. It seems obvious but each customer needs to receive his or her own box and each box has the same cost. Moreover since the box is delivered physically, the shipping fees increase the price of the box compared to what the customer would pay at the retail store. Birchbox has solved this by going into a vertical where sampling is a common practice. They probably don’t pay for the content of their box because the brands are happy to give them for free.

Customer acquisition

We all know that customer acquisition is one the biggest (if not the biggest) challenge of web startups and the cost of it can make or break a startup. Subscription commerce companies are no exception and since most of them are in a low margin – high volume business, they need a very large customer base before turning a profit. Leveraging social media and producing great content is definitely the route to go but not everyone will be able to replicate the success of Dollar Shave Club. Their (fantastic) launch video went viral in a couple of hours, crashed their server but they eventually got 12,000 orders in their first two days.

The subscription model in itself is a great customer retention tool. Delivering a box to your customer on a monthly basis is a fantastic way to keep consumer mindshare.

Subscription based business are attractive to both entrepreneurs and investors because when successful they offer recurring revenues and predictability. Dropbox, Mailchimp, Netflix , are all great examples of companies that have successfully built a subscription business. In the case of online retailers, the subscription model can help those with a compelling value proposition and a great brand to grow by attracting and retaining customers. In the long term, however, subscription commerce is likely to be more a marketing technique than a scalable business mode