Thoughts on #Subcom (Subscription eCommerce)

Subscription Commerce Subscriptions Are Like Getting Presents Every Month

There’s an interesting trend going in subscription ecommerce – where people order goods on quarterly or monthly subscription basis. This is a new reinvention of a very old idea, and lots of cool companies – from Shoedazzle to Guyhaus – are emerging in this market. In this post, I’ll share some thoughts about the nature of the #subcom market and the opportunities it creates.

For background, check out this infographic from KISSMetrics & Sean Percival:

The Rise of Subscription Commerce
Source: Box It Up – The Rise of Subscription Commerce

Curation versus Personalization

The most important part of the customer experience is the box and its contents. Every week when subscribers get their box in the mail, they must be absolutely delighted.

It seems that these companies are taking one of two approaches – either have experts curate the contents of the box, or enable users to select what goes in the box, often suggesting other items later.

There are major historical precedents for both of these models succeeding in media – the book of the month club, which became a huge business in the 1920s and 30s. The other model – of selection with computer aided personalization – helped NetFlix rise to prominence and millions of subscribers.

After a brief analysis of the market, it seems that services targeting a value proposition around deals tend to go with a curation-based model – companies like ShoeDazzle, Birchbox, and Stylemint deliver their value this way. By contrast, companies with a value proposition focused more around value and convenience tend to pick personalization – Manpacks and GuyHaus are examples of these companies.

Both of these models have consequences. With curation-based customer delight, companies have to source and deliver great merchandise that delights the customer. This merchandising skill is the main driver against churn – which is one of the biggest problems subscription commerce companies face.

By contrast, the personalization companies need to execute incredibly and are playing a game based on margins. This makes them vulnerable to players like Amazon.com, who can drive economies of scale with their size.

One Box to Rule Them All

There are a tremendous number of small players in this market, and a few larger ones like ShoeDazzle and Birchbox that are scaling. I imagine there are a number of large companies – both ecommerce companies like Amazon and BlueNile – and traditional companies – like Sephora and Walmart – that are watching this space with baited breath.

However, this sector creates great opportunities for consolidation and exits. I don’t see consumers subscribing to a large number of boxes – it seems like it would be easier for a company like ShoeDazzle to intrude into Birchbox’s territory, and create one box to rule them all. Similarly, I wouldn’t sign up for a subscription from GuyHaus, Manpacks, and a company that delivers razors – I would simply order all of them from one vendor.

Capital Intensity and the VC Opportunity

Subscription ecommerce businesses require inventory and massive subscriber acquisition to scale, neither of which are cheap. While these companies are inexpensive to start (especially if you store inventory, and pack and ship out of a spare room), they’re very expensive to scale.

This creates a major opportunity for venture capital investors to add value. While web companies are getting cheaper to start and scale due to the growth of open source software and free distribution platforms like Google, Facebook, and Twitter, these subscription ecommerce companies are still costly to grow.

Expect to see some major venture wins in this space as ShoeDazzle and others get acquired by forward thinking retailers, or become large retailers themselves.

Economic Sensitivity

It seems to me that these companies as a whole are very vulnerable to the economic environment, and the onset of a double-dip recession in the United States could really hit this whole category. I don’t see people keeping a $40/month shoe subscription through tough economic times.

What Do You Think About Subscription Commerce?

 
(Image of Present Courtesy Fazen Under the Creative Commons License)

Comments

  1. Magesh Kumar says:

    Hey Matt, Very interesting article indeed. Infact, I have been researching Sub Com space for a while now and have had opportunity to talk to several businesses to find out their needs to scale to the next level. Some of the pain points face by these companies are a) marketing capabilities using the digital mediums like social networks, and viral marketing. b) managing the entire subscription business to scale the business and effectively manage customer accounts, billing, shipping, invoicing, payments, accounting integration, taxes (especially in case of physical goods) etc. c) creative pricing models – most companies end up conventional pricing due to the fear of handling operational hassle for coming up with flexible pricing strategies based on market conditions – Pricing models are key for success here especially when people are looking at options in Subscription Commerce to just name few of them.

    I particularly liked your comment on the Economic Sensitivity and their vulnerability to economic environment. It is true in the short-term, but my thoughts are that in long-run, these companies will thrive because they offer subscription flexibility to customers and help them save monies in difficult times and then switch back when required. Its win-win for both (provider and customer) in the long term and Sub Com is all about the flexibility that it offers to customers to try their offering.

  2. Matt says:

    Hi Magesh,
    Great comment.
    As far as pain points in these businesses, I’d add actively managing churn would be the first thing on my mind if I woke up tomorrow and ran one of these businesses. I guess churn is so intricately connected to merchandising and customer experience as to make it a problem for someone with a conventional merchandising background, but that is without a doubt the biggest obstacle to operational execution of this model.
    thanks
    matt

  3. Shughes says:

    HI Matt,
    Are you able to elaborate more on the start up of the subscription business model? ie: does the start up buy these samples at wholesale prices or are the companies paying the subscription service providers to market their products through their boxes? Any feedback would be great. Thanks.

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