Sunday, February 26, 2012

The rise of the subscription model

It seems like there there is a new E-Commerce website with a subscription model on Tech Crunch every week! Just one week ago, Lost Crates expanded their subscription model to includes verticals other than what they had started with first: boutique stationery goods. There is a pretty good list of subscription services here. I started wondering: what is behind this new trend?

Let's first consider what job customers hire these websites to do? In one word - curation. Consider the example of Bespoke Post, launched by my Kellogg classmates, Rishi and Steve.

Bespoke Post sends you hand-picked goods, which enable you to 'Turn into a gentleman. One box at a time.'  And they send you a new box of 'Awesome'. Their marketing message is simple and brilliant. Their persona seems to be - wait for it - 'Barney Stinson.' For people who do not watch the show 'How I met your mother,' Barney is his early thirties and almost always wears a suit. He picks up women - all the time. And always has an opinion. And uses the word Awesome and Legendary a lot! Hence Bespoke Post's marketing message reads (at least to me) if you are a classy gentleman who like the fine things in life, subscribe to our service, and we will send you products that help you maintain your classiness. And it's all curated by us, so there is no effort on your part. And by the way, their products are super awesome!

Next let's consider, what is behind the rise of so many subscription model E-Commerce businesses?

1. Subscription models have been around forever; these businesses are online versions of traditional subscription businesses.Wine of the month club comes to mind.

2. Such businesses can start producing revenue quicker than let's say a marketplace. What do you need to get started? A cool concept, a good website and some amount of inventory and a clear value proposition. Layer on the marketing on top.

3. There is a good amount of predictability. Only order a little more than you think you need for that month - since you are seeing numbers month to month, you can predict the demand for next month to a reasonable degree. If you under order - back order the goods, please the order with the supplier, and have them shipped out a little later.

4. Most of them are buying from small suppliers, so they have enough negotiating power to get good margins, and also shift some of the risk over to the suppliers

5. The cost of customer acquisition is lower in this new era of social media marketing. And then there is affiliate marketing - just offer your customers $10 off for very friend that signs up, and you have another channel going

6.  As the number of such businesses will show, there are enough number of niches to be filled

7. On the customer side, another value proposition is surprise. As an example, Birchbox sends 4-5 samples/month for $10. What the samples would be? That's a surprise that's eagerly awaited by customers

8. The perceived price from a customer's perspective is lower; Psychologically speaking, $19.95/month seems much lower than $240/year.

9. I think the biggest factor is that these businesses give the founders a chance to share something they are passionate about. For example another friend Gautam, from the same Startup Leadership Program batch as I, launched Naturebox, which sends healthy Snacks daily. He passionate about healthy food, and the startup enables him to share this with his customers.Read this excerpt from his blog:

"As a co-founder of NatureBox, I’m especially pleased to introduce you to our company and thank you for your visit. The NatureBox mission of helping you eat healthier without changing your daily routine, has great personal meaning to me. I grew up overweight – weighing more than 200 pounds at the age of 12 – and struggled with obesity for most of my life. As a child, I would come home from school and spend hours eating junk food. My weight struggles were preventable if I had healthier options and better eating habits. Through hard work and dedication, I lost weight by focusing on healthy foods. Now I am dedicating my life to helping others discover a healthier you."

But as the number of these business rise, what will enable each one to be successful?

1. Scale - is the market big enough? Probably boutique stationary goods is not!

2. A clear marketing message - as in what do you provide, and who do you provide it for? Can the customer easily recognize that the service is ideal for them?

2. Trust - do your customers trust that you will send high quality items? Startups often prove this by showcasing examples of things they have sent before

4. Additional revenue sources - even with a large number of customers, the business model might not support a large company. Additional revenue sources come in handy here. A prime example is Birchbox's marketplace - if you like the samples they send, you can purchase a full size version of the product right from their website.

So go on, find the subscription service right for you now!

1 comment:

  1. I like the BesPok Post Concept ! 

    very "pop" !