Subscription Commerce Isn't a Revolutionary Business Model, It's a Smoke Screen
"We get pitched on a new 'something in a box' every day."
That's a top commerce VC, who was quick to add that every day he says no. It's a theme we've heard repeated over and over asking around about the explosion of subscription commerce startups in the market.
We feel the VCs' pain -- our inboxes are overflowing with new twists on the subscription commerce business model. But the thing is, subscription commerce is already a twist on the standard ecommerce business model. It's no more a "revolution" to ecommerce than was the now-dead "revolution" in daily deals. Ecommerce isn't an easy business to be in, and slapping a subscription onto your model doesn't suddenly lead to magical, never-ending guaranteed streams of revenue.
Maybe we're just talking to negatrons who don't know a good revolution when they see one. Maybe the subscription commerce bulls will have a good laugh at our expense when, five years from now, Jam of the Month eclipses Amazon in sales. There are some companies who are doing it well. Birchbox and JustFab are in that category and we'll explain why below.
If VCs and reporters are experiencing subscription fatigue, there’s no reason to think consumers are any different. Once the novelty has worn off, each of these sites becomes just another ecommerce portal forced to compete on selection, price, and service. It’s looking more and more like we’ve reached that turning point.
ShoeDazzle is the Godfather of modern subscription commerce with a few years of experience on the companies pitching themselves now. It has ten million members and almost two million Facebook fans. A year ago, it was doing $5 million a month in sales. If that company took a hard look at its numbers and decided to ditch subscriptions, then I'd say best of luck to the followers.
ShoeDazzle will say its move away from subscriptions isn't a move away from subscriptions. The company is very careful to characterize its current state as merely further down on the "spectrum" of subscription ecommerce. The site still sends a monthly personalized "showroom" of new items to its members.
CEO Bill Strauss explained to me that the difference now is that the company doesn't force members to actively skip a month each time they don't see something they want to buy. Strauss said it was more about clearing up the confusion people had around the process of buying, skipping, or if they did neither by the fifth of the month, taking a $40 charge for store credit. But all that says to me is that a lot of members were being forced to skip months. Probably more than ShoeDazzle expected, or at least wanted.
Crosstown competitor JustFab, on the other hand, is sticking to its subscription guns. This could be denial or genius. Its model is similar to that of ShoeDazzle with the option to skip a month by viewing a showroom prior to the fifth of the month. With six million members, it is on pace to generate $100 million in revenue this year, up from $28 million last year.
JustFab says its members come to check in on their showrooms 30 times per year, more than double what’s required based on their subscription. As many as 45 percent of these members buy something each month. They point to the 24/7 availability of fashion consultants, as well as overall great selection and service, as the keys to this engagement.
The beauty of the "sub-com" model in the eyes of investors and would-be copycats is the recurring revenue stream and the ability to pay out to acquire customers. It is easy to justify spending big sums of cash on marketing, when it means the customers you recruit will shop often. At relatively low price points and healthy margins, they typically become profitable to the company in six months to a year.
It almost turns the economics of a consumer ecommerce business into those of enterprise software. The keyword here is "almost." Companies subscribe to SalesForce, because it's efficient and mission-critical. Four inch stilettos or chandelier earrings? Delightful, but not efficient or mission-critical.
Many of these companies think they have a subscription business, because they've convinced people to sign up. They bake in an annuity stream, extrapolating that two-month subscribers will still be subscribers in 12 months. The problem is that this hinges on whether people are just sticking around because they can't figure out how to cancel. There will be churn, and once there is, those customers don't necessarily migrate to traditional ecommerce.
Launched in January, Wittlebee factors in an estimated total customer lifespan of six months. This seems short, but in the rapidly changing world of children’s clothes, it also seems smart. Each Wittlebee customer becomes profitable after 1.5 months of subscription.
Often times it just comes down to human behavior. Companies like Five Four, the men's apparel retailer, argue that their male, shopping-averse customers love the convenience of dress clothes picked out for them. For Birchbox, it's that beauty products are expensive and women love to the opportunity to sample before they buy. The subscriptions include hard-to-find products and encourage ecommerce sales through the site. For Dollar Shave Club, it’s (once again) convenience for shopping-averse men. Every company has an answer to this question; it's hard to know which will be the exception.
There's also the very simple opposition: people don't want subscriptions, or daily deals, or any novel way to get their goods. They just want the goods, and they want good merchandising.
There's a difference between what's happening here and what happened last year with daily deals. At least, like ShoeDazzle, subscription companies can go back to the e-commerce drawing board. They can rely on their merchandising and brand, their celebrity endorsers, or their low price points as a selling point. And that's more than the "cute email" companies, now struggling for share of inbox, can say.
“Subscription itself won’t make a company successful,” says JustFab CEO Adam Goldenberg. “The same is true of celebrity endorsement. It all comes down to having a good product and excellent service.” The rest is just a marketing and distribution wrapper.
(Image via Shutterstock)
Update: A prior version of this story listed Shoedazzle's membership at six million members; the site has 10 million members.