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The Ecommerce Subscription Model: Is It Working?

Posted by Meg N. on May 25, 2017

Subscriptions to newspapers, magazines, wine or other consumables have been around for decades. Many may also remember the Columbia House Record and Tape Club.  After an almost too-good-to-be-true offer, you would receive a new record or tape in your mail box each month, for a monthly fee.  It's the standard across all things digital including software, music and video entertainment but Dollar Shave Club set the bar for success when it was acquired for more than $1 billion by Unilever.

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Sometimes marketed as a club membership or derived from a loyalty program, the ecommerce subscription model may be reaching a bubble, but has found traction in the apparel and beauty industries.

Ecommerce Subscription Leaders

1. Birchbox

Birchbox was one of the first movers in this space, starting their service in late 2010. The company was founded on the idea that finding the right beauty products was difficult. There are endless options available and they tend to be expensive, making it challenging to try a broad selection of products without going broke. Birchbox curates a beauty box based around your needs, wants, skin and hair type, allowing you to try a full range of products to find what works best for you. The company was valued at $485 million in 2014, and hit a million subscribers in 2015.

2. Mac & Mia

Mac & Mia, takes a slightly different angle by focusing on the value of their expertise. The delivery frequency is up to the member. There is a $20 stylist fee and, if the user wants every item in the box, there is a 15% discount. Otherwise, the consumer can pay for each item in the box they want to keep. The unique concept behind this subscription is that it is geared towards children’s clothing, allowing busy parents a break from the headache that can so easily come from taking a child shopping. The company was founded in 2014 and has raised $4 million in funding. The company sent 20 thousand parents over 200 thousand pieces of clothing in 2016 and expect to double their workforce this year.

3. Ipsy

Ipsy is another $10 per month beauty box subscription. The founder, Michelle Phan, started out on YouTube as a beauty vlogger. Phan and her business partners tested out the subscription idea for a year and then launched the company in 2012. The unique aspect of this service is that it not only sends out products, but it also encourages the subscribers to upload their own beauty vlogs of their experiences with the products. By 2016, about 10 thousand vloggers were submitting at least one video every month about their Ipsy box. The YouTube channel has nearly 2 million subscribers and the company is worth $800 million. Ipsy, unlike Birchbox, does not pay for the samples it sends out. Companies provide those for free in exchange for the advertising they get through the YouTube vlogs.

4. Le Tote

Le Tote's service is unique in that the items sent in each box are provided as a rental for the monthly fee until you decide to return them, similar to the original Netflix model. The monthly charge ranges between $39 and $69. If subscribers want to keep any of the items, they can at a discounted rate. The company launched in 2012. By 2015, they had raised $30 million in funding.

Why Ecommerce Subscription Models Work

Bricks and mortar retailers like Sephora along with traditional content companies like Conde Nast getting into the business. Here are some of the advantages.

Continuity & Branding: Retention is always a big challenge with apparel and beauty brands as customers typically buy only a few times a year. With subscription options, a brand can reach the customer more frequently, in their home across multiple product verticals.  Being more top of mind can have intangible benefits to branding as new items are shared with others through word of mouth and on social media.Scott Cook on Word of Mouth.png

Higher Margins: Generally, subscription programs allow the retailer to turn product at a higher frequency, minimizing inventory and markdowns. For beauty brands or influencers (like Ipsy) with a built-in audience, brands may provide preferential or even no-cost product in exchange for promotion.  

Certainty: Membership models also bring deep insights into their customers' sizes and preferences to enable intelligent decisions about what to design and how much to manufacture, maximizing sell-through and reducing return rates. From a company valuation point of view, there is a clear understanding of future revenue, growth and churn. 

Better Customer Understanding: Club members are the ultimate focus group.  Instead of only engaging with a customer when they are transacting or when there is something wrong, successful subscription models encourage ongoing customer communication.  Onboarding typically involves discovery of detailed customer preferences while future behavior can measure changes in trends and fit.  Activewear brand Fabletics places immense value on their curation algorithms resulting in return rates that are far below apparel industry averages.

Subscription Model Challenges

While there are upsides to subscription models, they can be very expensive to reach a critical mass that makes manufacturing or purchasing at scale affordable for the seller and customer.  

The first potential downside is a subscription fatigue that can accompany any subscription model. The majority of people do not have a strong sentiment about subscription models—they don’t hate them, but they also don’t love them. If the product isn't overwhelmingly innovative, there's an inherent skepticism from the customer that it will be a good experience.  If a delivery or customer service experience fails to live up to a high standard, there's a risk of cancellation. With the customer acquisition cost already high, any uptick in churn could be deadly.

The second potential downside is that subscription models are susceptible to supply chain issues. If new stock doesn’t arrive on time, the proportion of your clientele that is at risk of a bad experience is much greater than it would be if shelves were a little light for a week or two in the traditional retail model.

Finally, some companies, including Fabletics and lingerie club Adore Me have been scrutinized for having unclear billing policies.  Make sure that your marketing is in line with your "fine print" and that customer service can address any dissatisfaction immediately, before it gets escalated to the Better Business Bureau or social media.  Subscriptions mean relationships, so retailers who keep customers in focus can find significant success once they reach scale.

 

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Onestop Internet is an end-to-end ecommerce solutions provider for omnichannel brands at the forefront of retail technology. Contact us to see how we can help your ecommerce business grow.

Topics: subscription, Beauty, Apparel, Ecommerce

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