From the December 2013 issue of Entrepreneur

Ecommerce

Healthful snacks. Underwear. Software. More types of businesses are employing e-commerce subscription models.

Led by pioneers such as Birchbox, the cosmetics service that claims some 400,000 subscribers, the model is being embraced at a rapid pace by consumers and the venture capital community. Zuora, a software-as-a-service company that enables subscription commerce and billing, announced in September that it had raised $50 million in a round of financing that brings its total capital to $132.5 million.

Dan Burkhart, CEO and co-founder of Recurly, a San Francisco outfit that helps companies launch subscription services, says the main benefit of the model is regularly recurring income with the option to upsell at will. "These business models essentially trade on the attractiveness of annuity revenue and annuity economics," Burkhart says. "For businesses, it's peace of mind; for customers, it's a reprieve from worrying about this stuff themselves."

Birchbox, which says e-commerce sales are on track to triple this year, cites impressive sales of full-size products after customers are sent samples as part of their subscriptions.

As an example, one eye-shadow palette had a conversion rate of 11.2 percent, which Birchbox contends is more than 10 times the industry standard.

The entrepreneurs who are behind some new companies say they appreciate the flexibility the model delivers, as well as the deeper customer relationships they can develop. Meredith Lantz and Joe Barwin, founders of Bitters + Bottles, an upscale liquor store in south San Francisco, have both a physical storefront and a subscription service offering monthly shipments of rare spirits and classic cocktails. "The nice thing with a subscription is to space it out and spend some time getting familiar with one thing at a time," Lantz says. "We can be whatever our customers decide they want us to be that day."

Subscription models are also a way to cultivate loyalty. Such was the case for Aihui Ong, founder and CEO of Love With Food. Starting at $9.95 per month, the Santa Clara, Calif.-based service delivers subscribers a box of organic or all-natural snacks; with every order the company also donates a meal via a national food bank. "Between the sense of discovery and the notion of doing good, we want to make people feel good about shopping with us," Ong says. "When they feel good, they come back for more."

Digital companies, too, are moving in the direction of subscription services. Adobe essentially discontinued its popular out-of-the-box Photoshop product and now offers a cloud-based subscription service, the Adobe Creative Cloud. Scott Morris, senior director of product marketing for Adobe's new approach, says the move came as part of a broad effort to lower costs for customers and maximize efficiency.

"Our engineering teams no longer need to wait 12 to 24 months to ship their next features--which is the old model, when we would hold all of our new features that were ready until we had enough of them to justify creating and shipping [something] that customers would pay for," Morris says. "Now we can stop 'chasing the upgrade' and just focus on delivering a constant stream of innovation."


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