So what do healthy snacks, razors, jewelry, and underwear have in common? If you answered: “All can be mailed to you on a recurring basis!” you’d be correct. Subscription e-commerce, or Subcom, has exploded onto the startup scene as the next big thing. You can’t go a day without reading about another subcom startup attacking a new vertical (condoms anyone?). At Launch Capital, the room for e-commerce growth something we’re particularly interested in (only drives 4.9% of overall retail), so we have done deep dives into many companies in the subcom space, but have yet to pull the trigger. After looking into many of these companies, I have identified some patterns and characteristics that I believe that the big winners in subcom will possess.
The subcom space is eerily similar to the proliferation of flash sale and daily deal sites a couple years ago. Where deals were the hook to drive customer adoption and eventually build e-commerce platforms (see Gilt), subscriptions are a similar hook. The issue is that people tire of daily deal emails and are not going to have 15 different monthly subscriptions. So these companies need to scale, and scale fast. So what does a winner look like?
1) Initially a discovery/distribution channel for new brands – While this isn’t absolutely necessary, I believe it’s the best way to grow a new subcom quickly. Brands get exposure to a targeted userbase, are initially willing to provide sample inventory at a discount or free (keeps costs low) and it provides an online channel that most smaller brands can’t do themselves – win/win for everyone.
2) Long-term goal is e-commerce platform – In the long-term, platforms have to convert subscribers to repeat purchasers through the site. As I mentioned before, I believe subscriptions are a way to acquire customers but aren’t sustainable over the long-term. Companies need to give users the ability to buy sample products they liked through the platform to drive significant revenue.
3) Sell essentials – This is the big one. Products need to be something that people use everyday, because otherwise why would you need a monthly subscription? Many subcom companies fall into the “gifting” trap, offering cool, nichey items that are perfect for gifts. Gifts, however, are inherently one time purchases and you don’t need a monthly subscription for them. Categories that I think work are: entertainment, makeup, razors, baby products, food could work in certain aspects (non-perishable), clothes work but have a major fit issue, and I think accessories/jewelry are much more essential for women than men.
4) Price point needs to be under $40 – I think $20 is close to optimal. People don’t like seeing line items on their credit card statement for $50+ for non-essentials. Especially when subcom companies are fighting rent/mortgage payments, cable bills, phone bills, insurance, etc. already happening on a recurring basis.
5) Personalization/curation – Collect data and develop some type of personalization algorithm that can help curate items for different customer segments. See Amazon, Netflix.
6) Opt-in/Opt-out – While you lose a bit of the surprise factor here, I think it’s better for both the customer and the company to let users see what they’re getting beforehand and give them the option to opt-out of the box or items they don’t want (Frank&Oak’s Hunt Club and Bespoke Post do a good job with this). It solves the returns issue for the company and is a way to gather more information on your users to see what they like/don’t like.
I think Birchbox is quickly becoming the major player in subcom. They figured out beauty products are essential items that people like to sample/discover, have kept a low subscription price point, and are quickly becoming a true e-commerce platform as 40% of their subscribers have purchased a product through their site.