Box it Up – The rise of subscription Commerce

Blog 6 minutes read March 2015

Just as we saw the proliferation of flash sale sites around 2010 and daily deal sites around 2012, there are now subscription offerings for men’s apparel, food and even toilet paper.

As most investors, we like the concept of repeatable revenue, but with high churn rates and the ability to skip deliveries, retention may be mostly a function of how hard sites make it to cancel. To understand which subscription models might succeed we look closer at three elements: Type of subscription model, category of purchase and merchandising strategy.

There are three different types of subscription models, each with a unique value proposition.

First, there are those that offer a better price on a product because someone is committing to a recurring purchase relationship. Do you remember the short-lived direct-distribution CD subscription business? OMG, why did customers sign up? They’re lured by a bargain price and the reassurance that they can cancel/skip anytime in the future. Businesses know that negative opt-out will drive some repeat purchase and increase the Lifetime Value (LTV) of customers. Consumers are not fools and the model won’t be sustainable.

The second model for subscription commerce is sampling. Merchants pick items they think you will like, and send them to you. Birchbox pioneered this model with a combination of beauty and lifestyle products all offered for a couple of bucks per month. This is great for brands looking to drive new customer awareness and consumers looking for a little something fresh and different. Consumer packaged-goods companies tend to be forced into either video commercials or in-store displays. Sampling offers an alternative way to reach the customer, while providing deeper insight along the way. If the price point is low enough, customers will stick through months of poor selection in the hope that next month is better. While curation is key in all these models, this is the only one where the merchant tends to have 100 percent liberty to send you what they have available. This is helpful, because some of these vendors are limited in the supply they can direct toward samples. For them, variety is key to sustainable growth.

The final model is specifically focused on consumable products: Flowers, diapers and, yes, even toilet paper. For the right category, this model makes the most sense. Not only do consumers receive a discount by buying the product direct, they also should receive more just as they’re running out. This model has been around for decades through mail-order prescriptions and diet plans, but only in the last couple years has the supply chain become specifically catered towards online distribution.

All in all, the different subscription models are not what’s most important. Subscription is based on the idea of repeat purchases, but what determines the repeat purchase rate? It is certainly not dependent on the stated business model.

Lets take a deeper look what factors determines repeat purchases. We believe factors are (a) category of product, (b) curation and (c) personalization.

Category of product

Predictability consumption

The more predictable consumption patterns are the better. As flowers wither after 10-14 days, you know that every customer is open to a new shipment. Many subscription models have a challenge here. The customer gets asked a new mission and becomes saturated or frustrated, or too late.

Frustration during traditional purchasing process

Does an online subscription ‘solve’ frustration? Buying a bouquet of flowers always gives hassle and affects the quality / lifetime. A traditional shop model such as Fleurop requires you to go through a order process each time you want to place an order.

Word of mouth content

A subscription becomes much more accessible when you encounter it elsewhere (Facebook) or get it recommended. Everybody loves Raymond and flowers. This allows for many referrals. A product like razor blades, toilet rolls or diapers carries less emotion.

A dedicated delivery time

It is a competitive asset if you knock (on a recurring basis) by someone at the door, at a time that suits the customer. Flowers have a positive surprise moment every time the door, you build loyalty with personal contact and can eventually expand your portfolio. Subscription models with articles delivered by mail or package are easier to copy and therefore more of a commodity in our view.

Curation

Birchbox made its name for providing samples of makeup and beauty products that its subscribers may have never discovered or bought for themselves. Foodzie was launched with the hope of introducing specialty food brands that aren’t available on store shelves to consumers.

In each case, what’s at the center of the service is the act of curation. For the services themselves, that means creating a level of trust and loyalty with subscribers, of offering up thoughtful packages of products that they might not have known about. And for the consumer, there’s an element of discovery with each new monthly shipment.

The service is sort of like getting a birthday present every month. That means sourcing items that probably aren’t available in the stores that consumers shop in. Love With Food, for instance, actually turned down a major brand of snack chips because they were too mainstream, knowing that its subscribers probably already knew and had tried them.

For other subscription-based startups, curation means sourcing materials and creating a new experience around them. Mountain View-based Kiwi Crate aims to make science fun, with monthly “crates” priced at $19.99 that