The UN-Subscription of Boxes

TLDR: Subscription models are more than just signing up customers for monthly payments, they're about fitting into consumer lifestyles and daily habits

The full post with pictures is here: https://wp.me/p9BDUt-4L

I'm almost sure it's obvious to everyone at this point: subscription boxes are EVERYWHERE. The concept caught mainstream fire when Blue Apron got big and since then, you can basically find a subscription plan to any consumer good: Soups in a bottle (Zupa Noma), Men's Health Magazine box, Vitamins (Vitamin Packs)

If subscriptions are such a popular option, it must be a proven successful concept right? Unfortunately not really so. There are notable examples of successes like Dollar Shave Club and Home Chef (acquired by Kroger) but also a growing graveyard trail, with meal kit startup Chef'd being a recent tragedy.

Even companies that have been able to scale and keep their lights on can be considered unsuccessful. A good example is actually Birchbox. Despite the fact that their inventory is basically provided for FREE by beauty brands and that pricing is a very affordable $10/month, they've struggled in finding ways to further monetize their customer base. The core reason why I don't label Birchbox a success though is because the company survives today due to a recent funding round that ended up wiping out a bunch of investors. In other words, the original investors of this company lost almost their entire investment. Another example is Blue Apron which has seen its customer count fall by 24%!

So what's the rationale behind all these companies offering subscriptions? As much as I've been bagging on it, there are merits behind the concept. For one, you tie the customer to the idea that they should be using your product on a regular basis. If he/she stays as a committed consumer, you have a steady stream of cash. Second, you get to control the entire consumer experience. Selling products on retail shelves pits your goods against your competition and the retailer gets to determine how it wants to present your product. With subscription boxes, the consumer experiences your goods on a more focused, intimate level, thereby increasing the likelihood of brand loyalty. Having a subscription offering no doubt has merits but over-saturation in the market has me questioning the value behind it for many consumer products, especially when you consider 3 main headwinds:

1. Rising CAC/VC Funding

• Given that subscription boxes are mainly direct-to-consumer businesses, they become reliant on digital advertising (FB, IG) to acquire customers. However, the capabilities with data, customization, and targeting is making digital advertising more and more of a popular advertising option, thereby driving up competition and the cost of acquiring customers. I expect this trend to only continue. Digital advertising is one of the few areas where marketers can directly tie advertising spend to tangible results and insights. Marketing spend share will only continue to shift to digital as traditional avenues like TV and newspaper lose relevance and effectiveness.

• There is also a catch-22 situation when it comes to customer acquisition cost (CAC) and your industry becoming a hot bed for VC investment. The more VC's are pouring money into your space, the more vicious the competition is for the same set of customers. The problem with this is that being well-funded is offset by the fact that your competition is likely well-funded too, so the dollars are being burned fighting for the same customer set at the same time. This situation can be a boom for consumers but spell doom for subscription companies. You've likely seen the conundrum in the meal kit space among friends who hop between subscriptions based on who has a better deal or is offering free meals. In an environment like that, meal kit companies are spending more but creating an environment where consumer lifetime value is less because they just end up deal-hopping.

2. Habits of use

• Another important aspect to consider is that maybe certain goods are meant to be bought on discretion rather than a monthly routine. Take hair care subscription boxes for example. These products tend to come with a shampoo, conditioner, and another hair product. The problem is that usage of these products are incredibly inconsistent: you might not run out of shampoo at the end of the month and even if you did, you might not finish the conditioner or the other hair product at the same time! Your next shipment comes in and you realize you're starting to accumulate excess inventory within 2 months. Consumers in those situations are likely to delay the subscription or unsubscribe, cutting their lifetime value to the company short.

3. Psychology behind physical subscriptions

• I am personally of the view that digital subscription services fare far better than physical subscriptions because of a major psychological aspect. With services like Netflix or Spotify, consumers rarely know whether or not they're getting the value they're paying for. It's very easy to forget money is being spent monthly on their services because you aren't notified how much you're using them.
• With physical subscription boxes, consumers are reminded on a regular basis that they're paying for something so questions arise as to the value of every delivery that comes to their door. Worse yet, if the consumer hasn't finished the inventory of the first shipment but still receive the second one, it's an obvious and physical signal that money is being wasted.

Despite these headwinds, I do see significant value in subscription boxes when positioned correctly:

1. Omni-channel experience

• It remains to-be-determined as to whether or not subscription meal kits can be a standalone business model but significant value does exist in a grocery giant adding that to their offering. If a consumer can have ease of access to meal kits of their choice whether it be through the local grocer or online, that adds major conveniences. Likewise, a major beauty company with a wide variety of products can further engage their consumers by offering sample boxes delivered on a regular basis. In both models, the subscription box is not the end-all-be-all in the value chain but an enhancer to an entire ecosystem.

2. Daily necessity

• Dollar Shave Club is a perfect example of where physical subscriptions make total sense. The company disrupted a traditional business model and offers competitive prices on top of major convenience. Moreover, there are people who have to shave every day as a necessity so monthly razor packages are bound to run out by the end of the month.