Should You Launch a Subscription-Commerce Business?
Foreign snacks, pet products and underwear are among the stranger startups currently attempting to achieve Birchbox-level success in subscription commerce.
The business model is simple: customers pay a subscription fee (monthly, annually, etc.,) and they receive a product delivered to them on a recurring schedule. Since its recent popularization, the business model has seen booming success for niche and convenient recurring services such as Dollar Shave Club, Manpacks and ShoeDazzle. In 2013, subscription commerce businesses received $300 million in venture capital funding, a 65 percent increase from 2012.
Despite technology’s recent love affair, subscription commerce is nothing new, so why the recent resurgence? Ecommerce efficiencies make it cheaper and easier to get started than ever before with nearly unlimited reach into markets. But, it's not all low startup costs and easy revenue -- there are pros and cons of the business model like any other.
- Low capital. It’s cheap and easy to get started selling subscriptions. All you need is a website and the ability to process payments. In many cases, the actual product you’re selling can be minimally stocked or not stocked at all to get started.
- Low overhead. Unlike the days you needed a fleet of sales people, all you really need to get up and running is a little cloud hosting and some dusty, rented warehouse space. Employees, offices and inventory can be kept to a minimum.
- Predictable demand. How much should we stock, in what sizes and colors? With a subscription model, these inventory discussions are easy. An advance order schedule reduces costs and makes it less likely you’ll need to liquidate unwanted inventory.
- Built-in customer retention. At least on paper, you’ve got hassle-free income every month. Your customers are there until they cancel, but be careful of giving them a reason to doubt your subscription’s value.
- Recurring payments requires recurring value. At some point your customers are going to question the value of your service, and if it doesn’t stack up, you’re toast. Novelty subscriptions will only last so long. You’ve got to create lasting value.
- Low barrier of entry. The same “ease to get going” that made the business appealing in the first place can be a thorn in your side as your company matures. It’s easy for competitors to come out of the woodwork if you find a profitable niche.
- Built-in market cap. For whatever product or service you’re looking to sell, only a fraction of that market wants to buy it with a subscription. The rest are looking to buy with conventional methods.
Making it sustainable. The subscription commerce business model is sustainable, but to do it, you’ve got to get a few things right. Here are a few tips to set you in the right direction:
- Create recurring value. So many startups make the mistake of focusing entirely on the hook to bring in new revenue and forget that ongoing business requires a continually delivering value to the customer. Deliver lasting value and you’ll create a lasting business.
- Experiment with membership options. Do your customers want the product every month, every week? Would a free month entice them to subscribe longer than a lower price? Nothing answers these questions like real sales data. Make sure you experiment to find what works for your company.
- Avoid contracts. Nothing scares potential customers away faster than long-term commitment. Services that are easy to start and free to cancel are going to acquire more customers than those that rely on contracts.
- Diversify your offerings. Don’t be afraid to diversify away from subscriptions to include single product sales. Audible, Rent The Runway and Love With Food all make a killing off a hybrid subscription model.
Although subscriptions are getting zanier by the month, there is real potential in well-developed models that prove legitimate recurring value. In case you haven't seen the numbers, Birchbox claims 400,000 subscribers with more than five million packages shipped. Dollar Shave Club has raised a total of $22.8 million in funding and caters to roughly 200,000 subscribers.
Remember, the recent subscription explosion is merely a revival of an older, trusted business model. Focus on providing a convenient service at reasonable prices and a loyal customer base will follow, credit card in hand.