Beauty (Pt 2): Subscription 1.0, 2.0, 3.0… this time it’s personal
In part 1 of this series we dug into the macro trends that will underpin the next wave of beauty business models. The 8 covered were: Cocooning; Self Love; Sustainability; Gen Zpend; Affordable Luxury; Diversity and Inclusion; Hyper Personalisation; and Clean Beauty.
Next up, we’re exploring what this means for the next wave of business models in the beauty space. Originally, I was going to keep this as a 2 part series, but honestly… there’s just too much to say on beauty- so let’s break it down.
Today in, part 2, we’re looking specifically at the evolution of the subscription model.
Next, Part 3 will look at “No Waste” or sustainably focussed business models; Part 4 will explore diversity focussed startups, and the direct to consumer Model; Part 5 will dig into the beauty buyer club model; and Part 6 will ask when we’ll be ready for beauty Resale.
So first up… everyone’s favourite business model: Subscription.
Subscription V. 1.0: Discovery
The first beauty subscription services, emerging back in 2010, were all about finding new and exciting products. Examples include Birchbox (founded 2010), Glossybox (founded 2011), and Ipsy (founded 2011). They expose you to new brands and help you discover things you never knew you needed. Heavily targeting millennial and Gen Z audiences, they capitalise heavily on the trends of self-love and cocooning.
How it works
Typically, brands balance the cost of creating the box by including lots of free samples they get through their brand partnerships, with 1–2 full size items to keep the quality high.
The challenges
Over the past decade, this has become a busy space, and subscription beauty has become hard to differentiate. Meanwhile, consumers are quick to get bored. For a low margin business, this is even more dangerous.
Afterall, the number one thing that will kill a subscription business model? Not customer acquisition costs, but churn.
Birchbox shows the impact of these struggles. Founded in 2010, they are now active in six countries with more than 1 million subscribers and 500 brand partnerships. However, as competition increased from magazines to beauty stores, demand dropped, and by February 2020, Birchbox was forced to cut 25% of its global staff.
Meanwhile, in April 2020, Sephora lost faith in the subscription model entirely, announcing that they were dropping their Play! box. In its place they introduced their “Luxe Box”. Each box includes six deluxe samples from three categories, but Sephora have strongly emphasised that it’s no longer a subscription model. It’s essentially sampling as a standalone product.
However, for brands that have stuck with subscription, Covid seems to have given the model a much needed, if temporary, uptick. For Birchbox, the move towards “cocooning” or treating yourself at home has made acquisition much easier, without a corresponding increase in churn:
“We didn’t see a spike in cancellations. Cancellations were stable and acquisition was higher.” says Alex Valbona, President of Birchbox Europe
Birchbox, also attribute their recent success to retargeting to focus on “the casual consumer”. This is someone who wants to take care of and treat themselves, but doesn’t really know where to start. So they’re looking for expertise and inspiration.
However, there’s increasing competition to serve and educate this audience: particularly from influencers (think TikTok, YouTube and Instagram). Beauty education is now incredibly easy, and increasingly entertaining, to access. Customers can discover new products and new looks from those they really trust simply by scrolling through their feeds. For me, the winner in this space will be whoever creates the most compelling and valuable content - and it’s a battle influencers will win hands down.
More compelling, are Birchboxes’ hints that they’re moving towards services like prescription beauty and their own play in the D2C space, to help them differentiate with their own brands.
“We make the market bigger by bringing a customer, ready to spend more in the category, and have her raise her spend pairing samples, content, and prescription,” Valbona says.
Owning your own products, which can then be promoted via influencer marketing seems the only real route to lock-in customers and increase their lifetime value. If Birchbox can capitalise on data from their current subscription box service to identify and plug gaps in the market, or quickly identify the most successful cult products and brands, they may have higher chance of success here.
Version 2: Replenishment
Hot on the heels of v.1, subscription 2.0 emerged in 2011. Now, the value proposition was all about convenience and cost. No frivolous spending here, new entrants like dollar shave club (2011) and Harry’s (2012) were about utility. Don’t overpay and don’t worry about replenishment. Even Amazon prime are now in on the action. When you go to buy a product that expires, or is likely to run out, you’ll typically see a “subscribe and save” option promoted.
Winners in this space originally stayed incredibly focussed: one use case means you can really engineer an incredible customer experience.
Dollar shave club was one of the first to launch their razor subscription in 2011. 5 years later they were acquired by Unilever for $1bn ,having taken $200m in annual sales, from the $3bn men’s razor industry. with 3.6million subscribers. Their launch video has over 27 million views on youtube, and is still well worth a watch. Today, they’ve expanded from Razors, to cover the whole of the male regime: from hair care, to toothbrushes and pastes, to soaps and skincare,
How it works
Take products that “run out” and offer a simple service delivering refills/replacements at a cadence that matches the use as closely as possible.
Often, there’s one component that lasts (maybe the razor handle, or the soap/shampoo bottle). The idea here is to get some additional lock-in or loyalty. Some brands have pushed this further with personalisation of this first product often offered “free” as a customer acquisition tactic. The thought is that customers then feel the need to keep buying from that provider because “my engraved razor handle only works with their razor heads”.
The challenges
A while ago, subscription was thought to offer higher lock-in because customers would “forget” to cancel and just keep using. But, let’s be honest, as soon as you’re not delivering incredible value, and real convenience, your customer is going to quit. Relying on the laziness or forgetfulness of a consumer is an incredibly lazy business model. So, as this great article outlines, subscription on FMCGs is incredibly hard, even when you provide a “necessary” product, rather than “discovery” of new products. This is because brands have to get the cadence/spacing of deliveries exactly right. Under deliver and you’re canceled instantly and your customer orders elsewhere. Over-deliver and you may get an extra month or two, but then you still end up canceled. And we already know churn is the biggest killer of the subscription startup.
That said, there are new brands still entering the space, and they are still managing to raise money- for example, Estrid.
Estrid is a Swedish razor company, founded in 2019. In December 2020 they raised $18 million based on $1million worth of sales in 2019.
But really, most replenishment beauty services are now commoditised, leaving little room for new players offering a fundamentally new product. Until do-it-yourself botox becomes a thing of course. New competitors are therefore really just competing on price. Yes, Estrid is Vegan, and yes, they look super Scandi and stylish, but look at their website, and the first value proposition in the list: “nearly half the price of the competition”.
Startups that win here are therefore stuck trying to undercut incumbents: can they make production cheaper, lower their customer acquisition cost through influencer and social media marketing, or improve retention to increase customer life time value (harder when others are offering introductory offers left, right and centre to try to win your customers).
It’s also telling that the winners in this space are no longer relying solely on subscription or digital sales. In April 2019 Harry’s entered offline as it launched in Boots, followed by Sainsbury’s in November.
Interestingly, these startups may also see challenges in how they exit, signalled in February 2020 as Edgewell (owner of Wilkinson Razors) were blocked by the Federal Trade Commission from their acquisition of Harry’s, as it would harm competition in the shaving market in the US.
This also highlights why large corporates may need a new mechanism to build or acquire their future business models earlier. Though, in markets like razors, where acquiring a startup like Harry’s would already cost $1.37 billion, and where Unilever acquired Dollar Shave club nearly half a decade ago, it may already be too late.
Version 3.0: subscribe to inform
As monthly shaving kits have quickly been commoditized and beauty boxes brought into question, the next wave of startups are focussed on retention the right way…
How can your subscription add more value to your customer the longer they use it?
How it works?
These are subscriptions which use the data they collect on their customers to increase the level of personalisation, and only get more effective the longer you use the subscription.
It goes far beyond just letting users pause or change the frequency of their subscription. In this model, the product or service should get smarter with more use.
The Challenges
The data you gather has to be clearly linked to the value add you provide your customer. We’re all far more aware of the data being collected and held by companies we spend with. And frankly, lots aren’t a fan. But when you can show the customer how you’re using their data, to know them better, not to market to them harder, you can still win here.
Startups to watch:
1.Skin+Me: solutions for skin problems that can’t be solved with over the counter creams. Founded in in 2018, Skin+Me creates a personalised prescription, with their in house dermatologist. Neatly dosed so that you will need a refill each month, Skin+Me keeps you wanting to replenish regularly, with their proprietary formula further driving retention, and check-ups keep your regime freshly personalised. They’re also solving a range of complaints that really do need prescription solutions for more efficacious results (Acne, hyper-pigmentation, fine lines) so the customer pain is real. So far they’ve raised £8.3m at seed stage and already been through one rebrand from their original “Gleam”.
2. DuoLab: The Nespresso machine of skincare, and, like Nespresso, founded by a corporate: L’Occitane Group. Because skin changes hormonally, in the weather, or even from what you eat; what you need day to day let alone month to month, will differ hugely. Rather than sticking to the same routine, with DuoLab you upload a photo and write a description of your skin in the app, before using their at-home lab to mix customized skincare every day. For £132 a month you get a machine to do the mixing, and your supply of “pods”; which combine to create different solutions based on your skin’s changing needs. While the hardware might offer some initial lock-in, there are a couple of challenges here. First, the price tag definitely cuts out the mass market, and secondly, there’s little to stop other brands building out their own pods for DuoLab’s mixer if they did reach market dominance (just as Nespresso have seen with their machines). For a long-term win in this space, DuoLab will need to get smarter with how they use the daily photographic data to make sure users get increasingly personalised and effective regimes the longer they use the app.
3. Renude: A telehealth startup launched in March 2020, who reached 10,000 customers by September. Renude offers personalised and affordable skincare recommendations at £20 for a video consultation. As dermatology appointments can set you back £120–200, it’s opening the market up to capitalise on the Gen Z and Millenial markets. Today, they offer 200 products from 25 brands and can tailor their recommendation based on budget, any allergies, and whether you’re vegan or not. However, they will still have to answer questions about retention. As they don’t have their own products, what’s to stop customer’s buying one assessment and then going direct to the brands to fulfill it. Creating their own product lines may be an option, particularly if they can use the data they’re gathering to identify areas where customers are underserved and existing products fall short.
4.Clue: not technically a beauty startup… yet. But, there’s still a tonne beauty startups can learn from Clue about how data is used and positioned. Founded in Berlin in 2012, Clue is a hormonal tracking app, created by women, for women. So far they’ve raised $29.7m in funding. They pledge to never sell your data, or use it to show you personalised ads, but they do use everyone’s data to improve their recommendations; and your data to personalise what you see. The more you track each day and month, the more value you get from the app, and the less likely you are to leave; because they not only have your historic data, but have proven they use it ethically and only to improve the customer experience and value. I would also argue that tracking apps like Clue are perfectly placed to partner with beauty companies or introduce their own personalised regimes, to match your hormonal changes. This wouldn't be a new business model, but could be a new revenue stream, or value add feature for Clue’s customers — all from the data they already have. If I were Skin+Me, I’d be looking for a partnership and technical integration.
5. Function of Beauty: from personalised haircare to skincare, this is one I’m intrigued to see evolve. Founded in 2015, and with $162.2 million raised, this Series B startup has absolutely capitalised on the first wave of personalisation. From a beauty quiz, they create your own, blended products. You can even name them (and see it on the bottle), pick the fragrance and update your formula as your needs change. Aligned with the Clean Beauty trend, you won’t find any parabens, sulfates or animal products in sight. The custom nature of the formulas already gives great lock-in; as long as you love the results, this is the brand you have to keep coming back to. But I’m intrigued to see whether this startup will move beyond the “quiz” to gather deeper data on their customers’ needs and how effective the products really are.
6. Strands: moving beyond the beauty quiz, Strands is a personalised haircare brand which actually tests a sample of your hair in the lab, before creating a custom formula. Launched in April 2020, it feels the most futuristic of the beauty plays here. But, I think there’s still a balance to be found between Function of Beauty and Strands. While quizzes end up falling short of true “personalisation”, cutting and sending a hair sample feels too long and too complex for the mass market. As the quality of phone cameras continues to improve, is this a simpler way to gather data and really personalise? However, I do think this is still a startup worth watching to see just how far this trend will go.
What other subscription startups are you watching? And is there a 4.0 you already see coming? I’d love to hear your take in the comments below!
Also, watch this space for Beauty: Pt 3, exploring sustainable business models and the “No Waste” movement!
In the meantime, if you’re curious to see what other trends and business models we uncover, you can join our studio newsletter to stay in the loop with new venture opportunities and market trends on Substack.
