To Subscribe Or Not Subscribe? That Is The eCommerce Question

Editor’s note: Phineas Barnes is a partner at First Round Capital, worked at AND 1 from “day 2″ and founded a fitness video game company.

According to my twitter feed subscription commerce is an overblown, shark jumping smoke screen and the companies that created the model are abandoning it left and right.

The comparison to the flash sale model and to group buying seems to fit because the subscription commerce category has a few leaders and a ton of “me too” companies. On the surface it looks like all of them are just putting shit in a box and money in the bank but this is pattern matching gone wrong.

Data from Custora suggests that Customer Lifetime Value of repeat customers in commerce businesses is over 6x that of one-time buyers. Finding new ways to increase the “conversion” of one-time shoppers into repeat buyers offers tremendous upside. The most successful tactics go beyond simple discounting and build loyalty via increased touch points and better service — subscription services deliver here.

Let’s not point to jumping sharks just because there are a lot of fish in the water. When I think about the fundamentals of the subscription model and what makes it work, I see a massive opportunity to change the way consumers discover and engage with brands. The real question we should be asking about subscription businesses is are they more like the milkman or your favorite magazine?

The ShoeDazzle Mirage

Some say ShoeDazzle invented subscription commerce and has thrown away the model. Not True. ShoeDazzle is a great company, but it was never a subscription commerce business.

It has been reported that ShoeDazzle has over 10 million subscribers signed up to purchase $40 shoes each month and that the business now does over $5m a month in revenue indicating a 1.25% monthly conversion rate. But the key metric in successful subscription commerce businesses is not monthly conversion — it is initial conversion and percent of monthly revenue retained each month (aka churn.) If monthly conversion is your most important metric, you may have a great business, but you are no more subscription commerce than every traditional eCommerce company with a monthly newsletter.

RIP Milkmen – Replenishment is commoditized

I have also read that replenishment models hold the most promise in the subscription commerce space. I believe competing on convenience and price in a commodity, consumable category is suicide.

In these categories (food, razors and diapers etc) the consumer often knows exactly what they want and 9 times out of 10 it is more of the same thing they had last month except cheaper. It is true that people tend to consume these products at a steady rate and they do enjoy the convenience of not having to go to the store to replenish the medicine cabinet or the fridge when supplies get low. But, it is also true that companies like OrderGroove are making it possible for any eCommerce site to offer best in class “subscribe to it” replenishment on any item in their catalog as a retention tool. Also, Amazon does a better job delivering a new shipment just as the consumer is running out of an item than any subscription commerce company ever could. Amazon Prime is no joke when it comes to replenishment. I can have any consumable commodity item at the lowest possible price on my doorstep in 2 days and with the mobile app and one-click ordering, it is hard to beat Bezos and company on the convenience axis either.

Re-Imagine Publishing – Discovery is essential

They say sampling is all about merchandising and once the novelty wears off, these sites will face massive consumer churn and supplier fatigue. I say there is no better way to connect consumers with brands than through the magic of discovery. The best subscription commerce offerings could also be described as discovery commerce.

The key to the sampling subscription model is picking a market where the value proposition will work. This model does not work in every space. Entrepreneurs should look for markets with discerning customers who want to learn about their options and who value guidance in their choices. In verticals with lots of brands (fractured supplier base) driven by consumer trends (frequent new product introduction) the subscription commerce model is magic. If the products themselves can be experienced in a way that delivers immediate results (dog treats >; vitamins) you get even more leverage out of moving the experience of a product up to the top of the purchase decision funnel and surrounding it with high quality content.

Less burn per churn

The mission critical metric in subscription commerce is percent of revenue dollars retained per month (aka subscriber churn). Opt-in models like ShoeDazzle can not be managed to this metric and this is why they should not be considered subscription commerce offerings. For both replenishment and discovery models, some percentage of subscribers will cancel each month until you reach the floor of value where the remaining pool of customers believe the price, service and selection meet their needs over the long-term.

But, discovery commerce has a huge advantage when it comes to monthly revenue retention: Demand creation and capture.

Discovery commerce services help the consumer discover products and brands through curated samples and they create content to give customers the confidence to fall in love. Done right, the sampling service delivers the surprise and delight that generates loyalty (reduced subscriber churn), motivates engagement that drives social/viral distribution and (lowers customer acquisition costs) and creates demand for the products that are sampled. Businesses that capture the demand they create are on to something.

Some percentage of revenue is lost each month due to subscriber churn, but with modest conversion numbers the purchase activity of the subscriber base can can actually drive the average monthly value of a customer well above the price of the subscription – even net of churn. For example, let’s assume a discovery service offers a monthly subscription for $15 and the average basket size in their traditional eCommerce offering is $50. If churn is 10% per month and eCommerce conversion is just over 3% after 1 month, revenue retention for that month is 100%. In this example, conversion rates north of 3% deliver monthly revenue growth net of churn.

Curated subscribers convert better

As months go by churn will continue in the subscriber base, but the ability to create and capture demand can more than offset the financial impact of subscriber churn. Each month the remaining customers in a cohort skew further toward the most passionate people who are most loyal and most willing to buy. Each month, the company gathers incremental subscriber profile data and improves the personalization of the offer, builds trust in the brand voice and maximize demand creation by delivering discovery.

Subscription commerce is not a new model, and has always been about turning a single purchase decision into repeat purchase behavior. If the motivation to make a repeat purchase is price or convenience, you are going to see margin compression and lots of competition from traditional eCommerce players. Trying to compete on price is simply a race to the bottom. If you are moving the experience of a product up in the consumer decision funnel with a curated experience and capturing the demand you create through a traditional eCommerce offering, you are a discovery commerce company and you have a ton of opportunity ahead of you.