Pando

Subscription commerce is dead. (Except when it comes to platforms and digital goods)

By Sarah Lacy , written on June 29, 2016

From The Lessons from the Trenches Desk

Today, I became a Postmates Unlimited customer.

For $10 a month, I get free delivery on all my Postmates orders over $25. In addition my orders are instantly accepted and never “surged.” (In Postmates own email it forgot that “blitz pricing” is what it calls it, not surge pricing.)

I’ve noted before Postmates seems to be going in the opposite direction of most companies in 2016. It’s offering consumers better economics-- presumably at the expense of its own bottom line just as it’s trying to raise cash-- in a time the “grab market share” wave is crashing.

Postmates has argued-- and “leaked” -- that its economics are just fine, thank you. Now it’s trying to grow and squeeze smaller rivals.

We’ll see what happens with the current round in progress.

Meantime, Unlimited is a great deal for consumers. I order Postmates at least four times a month, sometimes even four times in one week. Saving $10 an order and saving on “blitz” pricing is well worth the $10.

You can call it the Amazon Prime-ing of an on demand service. Or you can call it something else: Subscription commerce.

I generally argue against lumping on demand services like Postmates and Uber into “ecommerce” although a lot of analysts do. I think it’s a new category that has very different attributes than what we typically think of as ecommerce, and that only skews the numbers to include it with companies that sell physical goods.

Still, subscription commerce in the broader ecommerce sphere is surging: Netflix is doing well, Spotify is the best hope the music industry has in a digital world, a former Netflix co-founder named Mitch Lowe has taken over a company that hopes to fill movie theater seats via subscription.

Meantime, journalism companies are hailing subscriptions as the latest savior. The New York Times has 1 million paying subscribers, and in tech, sites like the Information and Pando have at least stayed in business, while competitors have folded (GigaOm) or rapidly sold (Re/Code.) Thought-piece after thought-piece has hailed “subscriptions” as the answer where “paywalls” were rebuked a few years ago.

This isn’t a shock. In a time of market upswing, everyone thinks eyeballs and ads are the answer. In downturns, the allure of doing something users pay you for becomes way hotter.

And yet, meantime, “subscription commerce” as we knew it has never been, well, notter. In the grand scheme of highly valued, highly touted subscription commerce-- or things in a box-- companies, most have flamed out. Three of the pioneers appear still in contention: Honest, Fab, and Birchbox.

Fab -- from what we hear-- is doing well thanks in large part to its Fabletics line. It appears to be the only one of the LA-based “launch a jillion verticals” subscription commerce companies that has made the model work.

The other two of them have stumbled this year.

Honest is valued at north of $1 billion was touted to be an IPO candidate, but has since reportedly stumbled. And today, Birchbox had its second round of layoffs this year.

In a Medium post, CEO Katia Beauchamp clearly pointed the finger at a changing climate. When it comes to traditional ecommerce the decceleration in funding has been sharper than most sectors. And with good reason: Every single flash sales company flamed out. Only Zulily’s exited for more than it raised. Daily deals didn’t do much better. When it comes to flash sales, the odds haven’t been much better. Younger companies like Bezar were given almost no rope.

There’s two kinds of ecommerce failures: Total absolute collapse and insolvency and yunno layoffs and maybe a downround but ultimately surviving. In traditional ecommerce right now, there’s not a lot else.

That Birchbox had to cut staff and focus on profits shouldn’t be shocking, nor should it indicate that the company is going under anytime soon. But at the same time, let’s not sugar coat it: The company is having the roughest year it’s ever had.

That Birchbox is being forced to focus on profitability may be the best thing that could happen to it. We wrote last week about a surprising trend in ecommerce 2.0: Companies that didn’t have the luxury of raising too much cash (TrunkClub), chose not to take that path (Stella & Dot), or had the sands of ecommerce abruptly shift beneath them (Zappos) have in general outperfomed those who raised early, often and spent the same way.

Jason Goldberg, former CEO of Fab, has recently written a long mea culpa of some of the reasons why.

With all of these businesses it comes down to the cost of acquiring a customer and the lifetime value of that customer. With Birchbox and Honest, subscription has been a tool but both sell without subscriptions via physical stores and ecommerce. That means there are two types of “churn.” I used to subscribe to both, but I still occasionally buy Honest products in Target and I exclusively buy cosmetics at Birchbox when I need them. I haven’t set foot in a Sephora for years. I probably spend the same amount on Birchbox over the course of a year that I used to spend subscribing. But it’s a leap of faith for the company that I’ll keep doing so.

That’s a different business for the company. Less predictable and requires a different kind of marketing strategy.

Similarly, Honest is said to be doing the bulk of its revenue now at retail, not through subscriptions.

How different is this than companies like The New York Times or Spotify or Pando that sell subscriptions but doesn’t rely exclusively on them for revenues, or a company like Postmates, or Amazon Prime that layers them on later to drive more loyalty and repeat purchases?

I mean clearly the former sell access to “bits” not physical goods, and those like Amazon and Postmates that deal in atoms, mostly just facilitate their delivery. Still none of these businesses are easy to scale. The companies that seem to make subscriptions work use don’t assume they are a silver bullet. They’re just a shitload of lead bullets hitting the costs every month.

Those who rely on it too much, may wind up as remorseful as the Birchboxes of the world in future years.