SUBSCRIPTION BOXES: PRESENT AND FUTURE
Updated: Nov 4, 2019
When we talk about subscription services, the most likely is that brands such as Dollar Shave Club, Birchbox, Blue Apron or Stitch Fix may come to consumers’ minds. But the reality is that nowadays, behind a list of ~10 blockbusters, there are subscription services for almost everything else one can imagine. According to entrepreneur, as per February 2018, there are more than 7,000 subscription box companies in the world, 70% out of them in the US.
According to McKinsey research, US e-commerce subscription market in 2018 is between $12.5 billion and $15.5 billion. In 2014, subscription market was $1.2 billion.
The rate of growth of this market is so huge, with CAGR 2014-2018 above 60%, that, apart from subscription “pure players”, many big brands as Amazon with “Subscribe and Save”, Sephora with “Play!”, Nordstrom with “Trunk Club” or even Nike with its “Nike Adventure Club” have turned their heads into this revenue channel and are already offering this kind of services.
Then… what makes subscription boxes so attractive for consumers? Curiosity for novelty and uncertainty generate a positive state of mind. And, if you are only $10-monhtly-subscription-fee away to have this feeling and get a reward, then it makes sense to subscribe to a service.
Apart from this psychological motivation, subscription boxes benefit from convenience, as, first, they are delivered to your door and, second, they save you from the process of decision-making that can be a real hassle in some cases.
In the view of that, one may explain the cause of such an impressive subscription box market proliferation. But… which are the prospects for this (relatively) new revenue stream? And what is needed to succeed in a market where almost any need is already covered by many players?
Types of subscription models
According to McKinsey, there are three different types of subscriptions: replenishment, curation, and access.
Replenishment subscriptions are intended to automate the purchase of commodities or high rotation, repetitive goods. Dollar Shave Club, Harry’s, Amazon Subscribe and Save or Subscription by Nespresso are examples of this type of subscription.
Curated subscriptions are intended to surprise consumers with delightful products or experiences. Most popular categories are apparel, beauty and food but there are many niche categories. Stitch Fix, Ipsy, Birchbox, FabFitFun, Trunk Club, Frank And Oak, Blue Apron, Hello Fresh,… there is a long list of companies within this group.
Key challenges for subscription boxes
Although barriers to entry the subscription boxes business are low, as anyone with limited capital and resources can curate a selection of products and leverage an e-commerce platform to start sending boxes, the truth is that there are two challenges that will determine success:
1. From awareness to subscription: improving success rate
According to McKinsey research, only 54% of consumers know about one of the most popular “curated” subscription services. And then, only 19% of consumers are finally engaged in a subscription.
Therefore, raising not only awareness but gaining trust and making a critical mass of consumers feel the need of this type of service can be expensive and, due to inherent uncertainty behind any customer acquisition initiative, finding the optimal balance between investment and new customers is key to ensure viability.
Just as a reference, average marketing expense for CPG companies is 24% while for Retail companies is 10%. In a context of growth, with thousands of companies fighting for the consumers’ attention, one must think that marketing budgets may be high. But, as we will see in the next point, the secret to success is finding the right balance between acquisition and LTV. Therefore, marketing expense for subscription companies is within a broad range: Blue Apron marketing expense was 14.4% with an operating margin of -16% in 2018 while Stitch Fix is expected to be 10% in 2019 with an operating margin of 1%.
For more niche services, the process of finding and engaging the target customer segment can be even more complicated and with even more challenging ROI.
2. Customer retention: reducing churn rate
Subscription companies’ profitability is dependent on long-time customer engagements to secure robust revenue predictions. In other words, the higher the churn rate the more difficult to cover the high customer acquisition costs explained in the previous point.
Apart from pure financial reasons, long term customer relationships are key to improve intimacy and therefore create personalized experiences.
According to Recurly Research, subscription box churn is the highest in the subscription market, reaching +10%.
Also, McKinsey research states that nearly 40% of e-commerce subscribers have canceled their subscriptions. Most of the times, customers allege financial issues for unsubscribing, but detail research show that most reasons are related to not feeling that current experience is worth.
One probable reason for this high churn rates is the inability to deliver personalization at scale, as number of subscribers grow at such speed that it becomes difficult to manage increased number of preference segments.
So, reduced churn rates are a key lever for business viability as well as a good measure of customer satisfaction.
Finding the right balance between acquisition costs and cost of keeping customers engaged to ensure long term and profitable relationships from both sides is definitely not that easy as, on average, 35% of subscription box companies have shut down during the 2010-2017 period.
Subscription box customer profile
According to McKinsey research, men and women have different preferences and subscription patterns: while women account for the majority of subscriptions, but men are more likely to have three or more active subscriptions. As a result of that, preferred subscriptions differ.
Surprisingly, US Millennials, which are known for their preferences on experiences above goods, are particularly attracted by subscription model, with 31% already paying for them. McKinsey dives a bit deeper on consumer profiling and explains that these subscribers tend to be younger urbanites with money.
Taking a look at the table below, provided by Pitchbox research, it seems that subscription box market is reaching its maturity as number of deals and capital invested in 2019 has significantly dropped from 2018.
Most likely scenario at this point will be a progressive consolidation / reduction of the number of players in parallel to developing: 1) further geographies, especially Europe as required logistics can be easy to implement and focus on countries with higher online sales market share is high such as UK and Germany and; 2) further segments or needs within macro segments, as fashion or wellbeing to men.
Subscription models are after the holy grail of retail: securing recurrent revenues. In the view of the positive adoption amongst US consumers, with YoY growths above 100%, online subscription pure players, retailers as well as brands that plan to develop DTC have noticed its potential and are getting into this new channel.
But subscription box companies live and die based on their ability to engage a critical mass of customers and keep with them at least, a mid-term relationship. So, critical success factors are optimizing return on marketing expense for customer acquisition as well as developing the right capabilities (effort and tools) to deliver personalized experiences that make continue paying the subscription-fee worth.
With more than 7,000 subscription box offerings, it is probably time for consolidation and finding news sources of growth. Expanding their attractiveness to other geographies as well as finding ways to connect with new segments or consumer generations are the new challenges.