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Top Tips For Building A Sustainable Subscription Service Featured

  • Written by  Glenn Taylor
Top Tips For Building A Sustainable Subscription Service

Although Unilever’s $1 billion acquisition of Dollar Shave Club may have paved the way for other industry disruptors to procure their own funding, other subscription retailers have not instilled the same confidence level in outside investors in 2016, leading to speculation that these merchants have already passed their peak value.

Overall, online traffic data suggests that this is not the case. In the U.S., the number of visitors to monthly subscription box sites jumped nearly 3,000% from January 2013 to January 2016, according to data from Hitwise. This would indicate that across the board, the sector has gotten a tremendous amount of exposure to the public, and that plenty of new players have entered the space. However, it also illustrates that there are more copycats selling similar merchandise, making it ever more difficult to craft a sustainable business that stands out from the rest.

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In taking the proper steps to build a subscription box business that can maintain a long-term relationship with shoppers, brands need to keep these lessons in mind:

  • Determine whether your brand is based on convenient delivery of commodities, or curation of personalized combinations, i.e. "discovery commerce";

  • Use subscriptions as a customer acquisition tool, but then expand offerings of products and services to retain subscribers;

  • Continuously monitor whether you are delivering enough value to justify your price points;

  • Measure your share of wallet within your category to predict drop-off and churn rates;

  • For omnichannel retailers, consider subscription boxes as a competitive weapon against pure play retailers.

Taking A Side On The Subscription Spectrum

As more boxes flood the market, newcomer brands will have to assess what kind of business they are trying to operate. Subscription retailers often come down to one of two basic types of offerings: replenishment of items that fill a tangible void, or assorted, curated items designed to appeal to a specific consumer.

“One end is: ‘Don’t screw up and make sure you’re shipping the right dog food,’” said Jill Standish, Senior Managing Director of Retail at Accenture in an interview with Retail TouchPoints. “The other one is: ‘Are you continually refining who I am and providing me a magical experience?’ You have to know where you fit on that spectrum and know what the expectations are because the consumer’s expectations are going to be changing over time.”

In both cases, there needs to be a distinct value offered, either via product differentiation or convenience, in a way that alleviates the consumer’s desire to shop elsewhere. Product differentiation aims to rekindle the novelty aspect of the business model by rewarding subscribers with surprise gifts in each monthly delivery.

On the other hand, convenience is simpler, enabling the consumer to make a purchase and receive delivery with as little effort as possible.

“If you think about Amazon Prime and how much brand loyalty there is to that component of the Amazon brand, it’s because it’s able to offer such a level of experience that many people who are subscribed to the service are never going to leave,” said Ani Collum, a Partner at retail consultancy Retail Concepts. “It fills that fundamental need of convenience. I think it’s less of an issue with the concept of subscription-model retail and more about ultimately, does your product or service fill the need for your consumer at the fundamental level? If it does, you own that consumer, unless you screw up.”

Emphasize Brand Over Product

Although product differentiation is a key driver in helping startup companies find their niche, most subscription retailers aren’t going to offer merchandise that is exclusive to their brand. This poses a challenge as they then are offering merchandise that is a commodity that can be found elsewhere. But as Dollar Shave Club illustrated through its own success story, the effectiveness of marketing a commonly sold product goes a long way in establishing how far a brand can actually resonate with intended consumers.  

“If I’m selling a commodity product, how is it that I’m going carve out my little space?” said Steve Rowen, a Managing Partner at Retail Systems Research in an interview with Retail TouchPoints. “Dollar Shave Club received a lot of credit for bringing humor into its marketing campaign, taking the focus off the product and making it more about the consumer’s establishment with the brand. Once you have that entrance point into someone’s life, you can try to sell them all the other wares you put together.”

Introducing a new set of products after creating this entrance point lends itself to building out a longer-term value proposition that may intrigue customers beyond their first few months with the retailer. Brands can get creative, complementing their main product offering by adding unique items to the box or on the web site.

‘Meal Kits’ Show Pricing Remains Key To Customer Retention

This creativity is a necessity, but retailers should examine their “meal kit” food subscription counterparts to see how far curation and convenience can take their services. While 67% of consumers who have tried kits such as Blue Apron, Hello Fresh and Plated have been very satisfied with their purchase, more than 55% cancelled their subscriptions within a year of starting the membership, according to NPD Group’s Checkout Tracking.

“The biggest reason people say they have left these services was the cost,” said Darren Seifert, Food and Beverage Industry Analyst at NPD Group. “People are typically finding that the convenience that they get might not be worth that extra cost.”

Simply put: the efforts to differentiate a subscription brand will likely mean very little in the long run if consumers aren’t accepting the price point provided.

Retailers Must Measure Shoppers’ Share Of Wallet

While customer acquisition and retention are arguably the two most important metrics in keeping a subscription business operating after early hype dies down, retailers would be wise to learn about the consumers purchasing these products. In particular, these brands should analyze factors such as share of wallet to gauge how much of a priority the business is on the customer's shopping journey.

“A lot of these businesses are focused on owning a certain category within a consumer’s spending habits,” said Chris Randall, a Managing Director in the retail practice at L.E.K. Consulting in an interview with Retail TouchPoints. “Have you effectively consolidated your best customers' spend? If I’m Fabletics, do I think I get 80% to 90% of that woman’s spend on athleisure gear, or are they still going to lululemon or Athleta and buying other products? That tells me my brand solution isn’t meeting all of their needs.”

Businesses can also hone in on consumer metrics including: activity rates/habitual participation levels, Net Promoter Scores and customer referral rates.

Birchbox Grows Too Fast For Its Own Good

Upon enduring two series of layoffs in 2016 as it still seeks to make a profit, Birchbox has shown how difficult it is for subscription boxes to remain sustainable from an income-generating standpoint.

Although the retailer was a strong example of subscription’s rise in popularity, its Co-Founder and CEO Katia Beauchamp doesn’t want the brand to be identified solely as a subscription box seller with a primary focus on sampling products. Beauchamp aims to further position Birchbox as a standard e-Commerce retailer, falling in line with the fact that it has always sold full-size beauty products.

“We always said Birchbox was an e-Commerce company with a subscription acquisition model,” Beauchamp said in a podcast with Glossy. “However, our greatest strength was also our Achilles heel. We were able to get so much traction on the subscription product, and it went far beyond our expectations. We hit our five-year sales number in seven months, and we put so many resources towards ensuring that could scale because we didn’t anticipate the volume so quickly. While we recognized that subscription was taking a great deal of our time, we saw that what was driving profitability for the company was customers who understood the full value proposition.”

In striving to catch up with this demand, Birchbox has struggled to maintain profitability, procuring $15 million in August 2016 funding from current investors after no new parties were willing to invest. Startups generating revenue in a similar environment need to gauge growth more efficiently to ensure they can improve the scalability of their business.

Subscription Boxes To Serve As Extension Of Retail Offering?  

Although startups have a decision on their hands as to how far they can scale their brand with this model, Accenture's Standish noted that the success of subscription models as a small subset of larger brands such as Target, Sephora and Starbucks may lead more struggling traditional retailers to take a chance with them as a newer customer retention and acquisition measure.

“If you can get a subscription model for items to take off a consumer’s shopping list, that may be used to compete against an online-only retailer,” Standish said. “Brick-and-mortar retailers are starting to think through how to compete in a world where there’s just a lot of brown boxes delivered to everybody’s doorstep."

Considering these brands already have higher built-in brand awareness and are already trying to bolster their omnichannel offerings, subscription boxes/selections appear to be a natural extension of services these retailers already extend to consumers.

“I think the end state of subscription services is to be part of an omnichannel solution in businesses where it makes sense,” said Randall. “There’s a lot of subscription proliferation still out there. There’s not going to be 200+ meal kits that are able to scale and be successful, but there will be growth in dollars flowing through subscription services, where it’s a well-positioned channel for the customer. At the same time, I think you’ll also see rationalization of some of the growth of the varied number of subscription service companies.”

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