Subscription Commerce is Not Plug and Play

by Scott - 10 Comments

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Just because you can put cool items people want inside of a box does not mean a viable subscription commerce business exists. After the success of Birchbox, so many people are trying to find ways to emulate the coveted subscription commerce model. Why? My guess is because it’s an attractive, easy to understand model.

Over the past 8 months, I’ve heard the “Birchbox” for x countless times. The problem is that this model is not plug and play. I feel comfortable saying this because I tried to start a subscription commerce company not too long ago. 

Like many, I gravitated toward the idea of emulating Birchbox in another vertical. From the sidelines, the model just seemed so attractive. So I set out to to study, understand, and find a way to emulate Birchbox in a different vertical. My initial assumptions about a few of the core conditions when selecting a vertical were as follows:

  • Sampling had to be a built-in best practice
  • There were a vast array of products that dynamically change on a yearly basis
  • Products had to be somewhat lightweight

After taking these into consideration, I came to conclusion that performance supplements were a perfect fit. As a collegiate athlete, I was constantly trying to get an edge on the field (legally of course). But I hated having to pay $40 for a month supply of a supplement before I even knew whether I liked it.

Just to prove out some assumptions, I contacted a few brands letting them know my idea and asked for samples. Before I knew it I had 1000+ samples in my bedroom.  

Okay. This was really a possibility.  

I did some soul-searching and realized that as much as I thought (and still do) there was an opportunity there, I didn’t want my legacy on this world to be pushing products where there were potentially harmful long-term health effects on the people that used them.  Let’s be real, this is an extremely opaque, immature industry and even experts just don’t know what the long-term side effects of many of the supplements in GNC are.  

Given this, I decided to keep looking. By the way, if someone wants to build this, go for it. Personally, being a millionaire doesn’t mean crap to me if I feel like I might knowingly have a detrimental effect on others. 

So I did a bit more digging and found another vertical that seemed to make sense in an industry I had some expertise in. Full disclosure there are multiple companies who are currently attacking this vertical so I’m not going to disclose it; sorry folks, not in the business of crushing dreams.

The long and the short is that I spent some time with with my partner trying to make this business work. I learned a ton in the process, but ultimately decided to shelf this one after realizing building a  subscription commerce business is only appropriate under very specific conditions that did not fit this vertical. Here are the primary, less obvious things I learned:

Shipping Is Everything

Unfortunately, shipping products today is still very expensive, especially when you haven’t reached scale. There is a 13oz threshold that Birchbox is uniquely positioned to take advantage of. If a bundle of goods is under 13oz you can ship them at a U.S. parcel rate which costs just under $3. Once you exceed this threshold you’re looking at anywhere from $5-8 depending upon where you’re shipping to and from.

Think about this for a second. Unless you’re shipping something extremely lightweight, you’re on average starting $6.50 in the hole before you’ve even done anything. For non-luxury goods, that’s a lot of ground you need to make up in order to be in the black.

Scalable Sampling and Product Margin

At first glance, the vertical I looked at made sense because sampling was a built-in best practice. The problem was that within this vertical brands’ ability to sample was not scalable. Sure they could give away 3,000 free products, but to be a big business I wanted to feel comfortable that 30,000 (ideally 300k) would be no sweat off their back.

As I a scrambled to try and fit a square peg in a round hole, my partner and I looked diligently at buying the products at wholesale prices. With all the players in the value chain, we were looking at an average purchasing cost of about 3/5 the retail price. The wholesale prices were high because the goods simply did not have a high margin. This is the same reason brands within this vertical aren’t able to sample at scale. Compare this with make-up or high-end fashion where brand equity, more so than the cost of ingredients or production, have a greater influence on pricing and its clear why Birchbox, Shoedazzle, and TrunkClub are in unique positions to take advantage of this model.

When you’re actually purchasing the products and the margins are low, you run into an issue with perceived consumer value. Think about this: if I buy 5 products that retail for $3 at half price consumers are perceiving a value of $15. Assuming the average shipping cost of $6.50, this puts me at a fixed cost of $14 before variables such as the cost of box (< .50), inserts and branding, and acquiring customers are taken into consideration. Even if I add a few extra dollars on the price of the box for the “surprise” or “novelty” factor, my profit margins are still extremely slim (this is where having some subscription analytics can be crucial). And sorry folks, most players in this space will not be able to acquire customers at the low cost that Birchbox has (content is king!)

Scalabilty and Coordination

Even if you assume that you find products where the unit economics make sense, there is still a huge scalability assumption…yes folks, even for Birchbox still. Can brands accommodate giving products away for free or discounted rates at scale? Are you able to coordinate this with companies that determine their sampling budgets over a year in advance? And when you do, can you show an ROI on their investment to continue the relationship? These are all challenges which must be met.

A final point is that just because some of these businesses are doing well and turning a profit does not mean that they’re necessarily “big businesses.” For these models to really scale there has to be a decent conversion on the ancillary marketplaces. I’m not sure this is happening and it’s tough to compete with the likes of Amazon as their scale enables them to work on razor thin margins.

Parting Advice

Before you decide that you want to create the Birchbox for “x” you must determine if the market conditions are appropriate for your target vertical. Outside the obvious considerations like whether people want these products in the mail every month, I’d start with product weight (shipping), margin, and the nuances of sampling/scalability within that industry. If the unit economics make sense then attempt to assess whether it’s amazon proof, there is a broken buying process, if potential product overlap exists, whether you can actually target your customer,  and most importantly if in fact you’re solving a problem vs. just throwing cool things in a box.

If anyone is looking at the space and wants to talk, happy to offer some insight. I’m anxious to see how this space plays out.

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