Beauty Pt 5: Buyer Clubs
In this series we’ve looked at a range of different business models: from the evolution of the subscription business model, to the circular economy and sustainability, to direct to consumer; as well and the key macro trends startups are capitalising on for all of them.
Today we’re exploring another model, though arguably a less popular one. So far in the beauty space, there’s only one big player who’s taken the buyer club route. But it is a model well worth watching; that one brand has already built a huge following, and arguably a more defensible business model.
What is a Buyer Club
Sometimes known as a warehouse or wholesale club too.
Customers pay to join a club, whose collective buying power can equal that of a large brand. This allows them to benefit from economies of scale in manufacture. By cutting costs on the packaging, and cutting out middlemen, the collective also saves money, and that saving is passed onto its members.
It’s based on the old idea of the co-operative. However, unlike cooperatives, buyer’s clubs aren’t local, so they still have to build their own brand, and the sales do still turn a profit, which goes to the business, not the members.
Today, the business model capitalises on the rise of social media as it builds a community and membership who become active advocates of its products online.
It’s an evolution of the Direct to Consumer model, focused on membership for revenue and retention. Unlike other direct to consumer subscription services, members of these clubs don’t receive monthly products automatically (either for discovery or replenishment), they choose all their items and the cadence at which they shop. They’re simply paying for ongoing access to the store to secure its lower prices.
Key Advantages
- Lock-in and increased spend. As members have already paid a fee they’re more likely to shop with the club than other brands. This is the same logic Amazon prime uses, and also the strategy behind moves like Deliveroo’s delivery subscription. Prime members in the US spend more than 2x what a casual Amazon shopper spends. Even more impressively, Prime has an incredible 93% retention rate after the first year and 98% after two years.
- Clear value proposition. Like other D2C plays, by cutting costs they can deliver a clear value proposition to customers: higher quality at affordable prices, without the brand markup.
- Positive cash flow. Members pay upfront each month, and then shop. This means the business has working capital to fund manufacturing, even before specific orders are placed. This can be a game-changer for how the startup can grow. If you want to look at this more, there’s a great article on how important positive cash flow was for Gym shark’s growth. Though not a buyer club, the example does highlight how big a competitive advantage this can be.
- No in-house product design. Buyer clubs aren’t creating their own products, they’re just buying what the manufacturer already has to offer. This means you can launch a buyer club without in-house labs or product design capability, cutting your costs, and reducing your key activities.
Challenges
- All about the manufacturer network. Because they don’t have their own brand to play-off, or their own products to patent, buyer clubs depend entirely on the quality of their manufacturers. Not only do they need them to create products worthy of a cult following, but they rely on their manufacturer to assure and showcase the quality of their goods… e.g. “ we use the same manufacturers as Joe Malone or Prada”. The business needs these manufacturers to let them “borrow” these brand names and must ensure quality keeps pace with these competitors, or they risk underdelivering on the value proposition to their customers.
- Fighting brand loyalty. Capturing part of a makeup bag is a lot easier than capturing the whole thing. Customers may be loyal to Urban Decay for their mascara, MAC for their Eyeshadow, Glossier for their perfume and Fenty Beauty for their Foundation and Concealer. Beauty buyer clubs rely on the fact that the more a customer spends, the more they save against their membership. As such, they need to win as much of that wallet as possible. And though they do have the manufacturer brands to pull on, each product is “new” to the market, so they have to still be exceptionally good at marketing to turn their own wares into cult products that can compete with both big brands directly, and also the beauty aggregators. One reason Amazon Prime can secure such big baskets is that customers can shop from multiple brands at once. When they win customer loyalty, buyer clubs do typically have high retention, but they have to win their customers over on multiple products and lines first.
- Education. Some customers will need to be educated about what they spend already. A while ago a friend of mine suggested “makeup insurance” as a startup idea. The idea was that if you lose your makeup bag and have to restock from scratch, it can add up scarily fast. However, how many of us actually know what that value is? For buyer clubs, I’d love to see startups offer a savings calculator to quickly tally how much you can save in the average year. Yes, they already show you the “average market price” for their products, compared to their member’s pricing, but it may be time to bust some of the naivety we all enjoy on what we actually spend on beauty each year and shock customers into a different approach. This is just a marketing tactic really, but to go mainstream, these alternatives will have to help educate the masses on how much they pay for the label on their luxury products.
Beauty Startup to Watch: Beauty Pie
Background
Beauty Pie was founded in 2016 by serial entrepreneur Marcia Kilgore. Marcia already had deep knowledge and connections in the beauty industry from her previous startups: Bliss Spa and Soap and Glory. When you dig into her background (bonus content on this at the end of the post for avid readers), she’s always been one to watch for the next wave of innovation.
Having previously partnered with Boots for Soap and Glory, Beauty Pie may seem a big step away from the traditional beauty value chain Marcia was used to. But it capitalises on key trends of self-care and affordable luxury which matched well with Marcia’s history of ensuring high product-quality, but cutting the luxury price tag.
How does it work?
With Beauty Pie, customers pay a monthly subscription for their membership. This subscription opens up lower member pricing, and early access to new product drops. It also gives them a spending allowance tied to their subscription tier. If you think about this in terms of manufacturing it makes complete sense- after all, manufacturers offer a lower cost per unit the more units you buy. In theory, it also limits some of the potential damage of customers clubbing together behind the scenes and sharing a membership. If they want to share a membership, they’d have to share a spending limit, and in that case, maybe more likely to buy a more expensive package.
Wins
Just 2 months after launching they reportedly had 10,000 members, of whom 3,000 were monthly subscribers, and were seeing a 40% month on month growth rate. They’ve also built a strong social media following: with 213k Instagram followers.
While Marcia keeps the current sales figures under wraps, we know the pandemic has only propelled growth. In 2020’s first lockdown, membership more than doubled, as access to buy-in store was blocked, and everyone felt more strain on their wallets, while simultaneously wanting to pamper themselves and forget the pandemic with a bit of self care. All their best sellers were focused on at home pampering. For instance, the aromatherapy Soul Providers bath and shower range for some easy indulgence.
We also know they’ve built a cult around the brand already- with multiple product drops selling out within seconds.
Their £5 a month entry-level pricing isn’t high, and it may help users spread the cost of purchases- especially when you factor in the saving they’re making if they’ve moved over from luxury brands. Customers also get a breakdown of manufacturing costs for each product so they know what they’re paying for packaging, warehousing, safety, and testing.
Challenges
I can see why they’ve applied a spending limit and tiered pricing approach- but when it comes to the user experience, it does add friction.
On Beauty Pie, the spend limit isn’t tied to the actual checkout cost. It’s tied to what the value the items would be *without* the member discount. So though their basic £150 monthly cap sounds incredibly generous, depending on the discount (up to 80%)- that could be £30 of real spend.
It makes it a bit clunky from a user experience perspective. And that’s even after a full website overhaul. When the brand first started out, customers were struggling to navigate through the buying journey. Marcia hired a UX designer around a year after launching who found only 1/11 were able to work the site out. Today there’s a handy pop-up to show how close customers are to their spending limit.
Unused spending does roll over, and shoppers can pay extra to increase their limit if they need to one month. But for a cost-conscious customer, that’s potentially not appealing. What if you’re caught short and need a new mascara this month, but then don’t plan to buy anything next month. Do customers have to carefully space out and plan purchases?
You may ask why they don’t just streamline the experience by setting the spending limit to… well the actual spend. Italic, a comparable startup running the same model in the fashion and homeware space, haven’t set any spending limit, and has just one subscription tier. But, my guess is they want customers to actively notice what they would be spending without their membership. They can’t just focus on today’s shop and forget the delta, they’re constantly reminded of what they’re saving. It keeps the value proposition front of mind.
They also appear to be small frictions their current members are willing to put up with. They seem to be building a loyal and large cult following. Founder Marcia Kilgore has already seen 2 of her startups acquired, so we may also start wondering who would want to acquire or build their own version of her latest business? Perhaps less likely to be an existing beauty reseller like Boots; but could a luxury brand owner like LVMH be a candidate, or perhaps a high street beauty brand looking to expand into luxury like L’Oreal? Or, will it be another player in the beauty supply chain- moving closer to the manufacturers themselves?
Inspiration beyond the beauty space
If you’re looking for inspiration from other industries for the buyer club model here are three to watch:
1 Costco. Ok, not a startup any-more but showing just how long the model has been around, Costco was founded in 1983. Today, shoppers pay for membership ($60 for a basic annual package) and can then shop at a discount in-store for… well anything really. They have groceries, tyres, coffins and most other things you could dream of. The packaging is a lot simpler than standard grocery stores, and the store itself is really just a giant warehouse. But, the savings are passed onto a consumer who is happy to sacrifice what is rarely a glamorous experience anyway. In 2019, Costco reported net income of $149n, up 8% from 2018… so clearly the model has legs.
2 Fabletics- an athleisure wear company founded in 2013 by Kate Hudson. They were valued at $250 million within 3 years, and by 2018 they were exceeding $300m in annual revenue. They’ve pursued a dual approach so far: shoppers can either pay full price or join the members club for heavy discounts. They have both online and their own physical stores too. Now, they’re expanding into men’s fashion and are targeting $75–100 million in sales in 2021 for Fabletics Menswear alone. This will be its first full year for the line.
3 Italic. A US-based company claiming to go one step further than direct to consumer players by truly cutting out the brand to bring offer high-quality products, from the same suppliers of luxury brands like Prada, Miu Miu, and more, at a fraction of the price. Unlike Beauty Pie, they just have one membership fee and no cap on spending. It costs $120 a year, paid upfront. That gives access to the products at cost price. So far, they have raised $13m funding since they were founded in 2018 and 97% of members recommend the site to their friends. Not surprising when 93% break even on their first order, and orders will cost on average 64% less than the branded version. So far they’re only in the US, and I for one would love to see a UK competitor soon. So far, they offer clothing, footwear, and homeware, but there’s still time for them to expand into beauty.
* Bonus Section: More on Marcia Kilgore…
Because I can never resist the background of an incredible founder, let alone a female founder, here’s more on Marcia Kilgore for anyone interested…
Her first startup was Bliss Spa. Having suffered acne herself as a teenager, Marcia had huge empathy for fellow sufferers and channeled this passion into qualifying as a beautician and quickly growing her own spa empire. Opening her first location in 1993 at just 26, Marcia’s new wave of spas was a huge part of the mid-1990s spa boom, making them more accessible and less elitist. They even sold spa products to recreate the experience at home, a trend we’re leaning heavily into again with Cocooning in Covid. In 1999 she sold the majority stake to LVMH for a reported $30 million.
Her second startup, Fitflop also grew out of personal pain. As well as her skincare smarts, Marcia was also a qualified personal trainer, but now in her 30s, with children and an incredibly successful career, she was struggling to stay in shape. Walking was about the only exercise she could find consistent time for, so she decided to make a fit for purpose flip flop to help make the most of the workout. Founded in 2007, by 2008 they were already selling 12 million pairs and in 2018 saw turnover of £125m.
Next up, an idea for a beauty brand sparked: “I realized some years ago that the ultimate guilty pleasure for a woman would be a tabloid magazine mixed with a bubble bath”. This led to Soap and Glory which Marcia created in 2006. It was subsequently acquired by Boots in 2014 for £50 million.
It seemed like her third success may be enough… but in 2016 Marcia launched Beauty Pie. I can’t wait to see what she does next.
Still to Come
In the final installment of the beauty series, Part 6, we’ll explore beauty Resale, a huge trend in Japan, to ask when other markets may be ready.
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.
