The Promise and Perils of Subscription Boxes –

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James Veraldi takes a hard look at subscription commerce.

So Many Boxes — the subscription commerce craze

When Birchbox first launched in 2010, it was a novel concept. This notion of paying a flat, monthly fee and getting a highly curated selection of beauty products each month. It was a completely new commerce experience, letting someone else pick the products for you and getting it delivered to your home. It was seemingly a great model for both the products and consumers in theory:

  • For brands, it was a clever way to get product sampling out to consumers at scale. In some ways, its a cost free marketing exercise simply by giving some products away for wholesale

  • For consumers, the collective retail value of the box was always much greater than the monthly price — what a deal! It was convenient, and a nice fun surprise in the mail.

  • For these early Box players, the margins were really healthy — limited COGS since the brands often gave products for free — simply shipping and customer acquisition costs, but whereas ecommerce is otherwise a typical low margin, high volume game, this was a way to do high margin and low volume and make it work.

Many followed suit. Some of the more successful early players — Loot Crate for fanboys, BarkBox for dog owners. Heck, Dollar Shave Club was in a way a subscription box too (more on this a little further down).

Fast forward 6 years, and last I checked there were over 300+ subscription businesses out there. Many are venture backed. From beauty to food to sex toys — there is a box for it all.

The growth of the industry, however, has put a squeeze on everyone.

For one, there is a threshold on subscriber count that starts to trigger a chance in the economics. Brands will play the sampling game for a while, but once you get to a certain degree of scale, the wholesale costs become a real factor and they start to demand coverage of it, at least some. Birchbox saw this first hand, prompting them to explore going retail and other routes as their box margin got squeezed.

For consumers, boxes can start to feel pretty stale and wasteful. I experienced this with BarkBox. It was fun in the beginning, but by the 3rd or 4th box, my dog was rejecting 75% of the items and I would just throw them out. It was much easier for me just to set up regular, online deliveries from my local pet store for the stuff I know she loves.

These problems get compounded in spaces with a ton of saturation — beauty in particular. Birchbox, Beautycon, Beauty Box, Ipsy, etc….sure they all have a different angle to a degree, but at the end of the day, they are all giving you sampling of cosmetics and other beauty products to a certain degree. Many choose to leverage talent and influencers to acquire subs in these saturated markets, but those talent get expensive too, further pushing down margins. And we probably aren’t far from those larger talent launching their own regular run of boxes as well!

The space reminds me a bit of the Flash Sales craze from 2007–2012. Novel commerce approach, huge spikes in valuation, everyone races in — and margins get squeezed and squeezed, nobody can get crazy volume and scale, and everyone pretty much lost in the end.

So how do we fix it?

Lets revisit Dollar Shave Club for a quick second. There are a few things they did right that stood out:

  • First of all, they are not the identical model as those referenced above, let me point out. They created their own products and simply sold it through a direct to consumer subscription model, they were not curating products from others (but this is key to point #3 below)

  • They focused on a specific niche, men’s shaving, within a larger category, men’s grooming. They got shaving right before they really started to broaden out

  • They build a brand. The focus above allowed them to do that. But they also weren’t shoving other brand products in your face. That allowed them to create affinity with their target?

  • They focused on a product that truly needs regular replacement. There is a subscription box out there for colognes. Are you kidding me? The average cologne lasts me 1.5–2 years!

  • The consumers created their own box, amongst a list of options. The consumer doing the curating can make a difference in this way.

  • They diversified to a more complete e-commerce offering.

All is not lost. Loot Crate, Ipsy, and many others have found scale and are sustaining well. But they need to diversify and find long term paths. Just growing monthly subs is going to be hard in a business that has very little MOAT or cost of entry. This isn’t Netflix — where the costs of premium content and exclusive deals make it hard for new entry to compete — these beauty brands have no issue throwing their product in the next box to pop up just like they do the current set. Maybe exclusivity is a path to MOAT for some, but truth is, so many of the products in these spaces are nearly identical.

The solution?

  • Don’t try to cover super broad categories, focus on a niche and own the expand

  • Build a brand, from the packaging to your media and social to all the ways you touch your consumers. This is hard to do when you are curating so many brands at once, something to keep in mind.

  • Make sure you have a plan for diversifying the business beyond your monthly box, as that is hard to scale long term.

  • Less is more in many cases. Don’t be wasteful.

  • Explore exclusivity with the products that perform really well.

  • Your box cadence should match the replacement needs of your items. Or you will fatigue consumers and wear them out.

  • Find ways to demonstrate value to brands in terms of media and sales lift so you can avoid paying for products as your subs scale.

 

See the original post on Medium here.