Is there a fundamental flaw in the application of the subscription model to consumer commerce start-ups with physical goods like fashion and CPG (consumer packaged goods) companies?
There are some terrific consumer companies like Netflix and Spotify that have proved the viability of subscription models. They have innovative ideas. They create something that people want like streaming movies and music. They disrupt old-fashioned ways of doing things like having to physically go into Blockbuster to rent movies. They created markets and trends, instead of chasing the trend. But when start-ups apply this model without innovative products and branding, they sometimes rely on scams to lure customers and smoke and mirrors style PR to lead people to believe that their company is successful. In fact, you can even argue that most (with a few exceptions) consumer subscription models with physical products are flawed and unnecessary.
Initially subscriptions became popular among VCs because a subscription implied predictable, recurring revenue. Recurring revenue software businesses tend to have better valuation multiples. However, consumer commerce subscriptions with physical products generally should not. The problem is that many of these well-funded subscription start-ups engage in deceptive customer acquisition, lack focus on retention and branding, and partake in poor business practices.
Recently, the Science incubator in Los Angeles launched yet another subscription start-up, a company called ELLIE. It offers workout clothes for women with a monthly subscription service. Seriously, who buys workout clothes every month? I wonder what the people at Science do with their clothes every month. Throw them away? Don’t they do laundry like the rest of us?
Science start-ups have one thing in common: an aggressive emphasis on paid and socially-driven customer acquisition. To build a customer base quickly, ELLIE reportedly engaged in deceptive bait and switch tactics that are downright shocking and unprofessional. Prior to launching ELLIE, the founders launched a company called PvBody which offered customers two pieces of designer fitness apparel from brands like Lululemon, Nike and Under Armour for $39.99 a month. PvBody even offered a 40% promotion via popular fitness blogs like SarahFit.com to lure customers. Over 70 of Sarah Fit’s readers who signed up for the promotion complained about their less than stellar experience: everyone got a notification that PvBody was not going to be sending out the designer brands they promised, but their own brand named ELLIE.
Now, PvBody has been rebranded as ELLIE. ELLIE used the clout of leading brands like Lululemon and Nike to deceptively acquire subscribers while promising those brands instead of its own. These alleged bait and switch tactics – sometimes known as fraudulent conveyance — were used to create “traction” for ELLIE prior to the brand’s launch. Ironically, ELLIE’s scam was rewarded with $2M from three venture capital funds. (For more information about ELLIE’s bait and switch scam, read posts at: Complaint List, The Purple Giraffe and Marathon Lar.)
According to a recent Venture Beat article, “the lack of highly sophisticated tech is becoming part of the Science blueprint.” Well, Science start-ups don’t have sophisticated branding or product either. Their strategy has been to focus on unnecessary subscription start-ups with vanity customer acquisition proof points. This does not work since a subscription model isn’t a guarantee for long-term recurring revenue or customer retention. In the case of the Science portfolio company Dollar Shave Club, which raised $9.8M on an exceptionally healthy $30M pre-money valuation in their most recent round, it experienced impressive but very fleeting traction after their extensive paid customer acquisition efforts. Paid customer acquisition is useless if your brand and products cannot retain the customer. Customers will not engage or purchase after being acquired. Good brands and products are capable of organic growth with monthly churn under 4%. Good content and branding make a brand sticky. Retargeting makes a brand stickier. When you have exceptional branding, product and content, customers will discover you. Then the focus shifts to customer retention.
Just as Science’s Dollar Shave Club and Wittlebee don’t solve any problems or offer anything new, Ellie does not either. If someone is merely looking for Lululemon- style activewear at a lower price point, there are plenty of online retailers that offer lower priced workout-wear such as H&M, Gap, Athleta, even Target. Unless new start-ups are offering great products, prices and experiences, they shouldn’t even bother to try to compete with established big brands or e-tailers. What problem are they solving? What is their point of difference? Are they making the process easier? Plenty of online retailers are offering lower prices.
Subscriptions only work when the price, product, quality and user experience are great. If there is a product mix, it must be personalized or expertly curated, not random. Beauty subscription companies have a hard time satisfying customers with their one-size-fits all (non-personalized) boxes of sample products due to different skin types, customer preferences in color cosmetics and fragrance. Following the success of New Beauty and Beautylish, companies like Birchbox are now focused on content and e-commerce. New Beauty’s Test Tube, the original beauty sample subscription company which launched in 2005 (well before Birchbox’s launch in 2010), works because of its targeted focus on high performance and efficacious luxury skincare and haircare products; every month you get some of the hottest new products coupled with the latest issue of New Beauty magazine, an industry authority. Since they aren’t offering random color cosmetics or fragrances, color and scent preferences aren’t an issue and there’s a higher probability of satisfying the customer.
Birchbox’s beauty and greatest vice is that they don’t pay for products from brands. Although Birchbox, which received $11.9M in venture funding, clearly has the cash to pay for the products, it engages in dangerous business practices that jeopardize the long-term viability of their core business model. I recently interviewed Suk Chan the founder and CEO of Soukenberi, an eco-friendly home fragrance and bodycare brand. Ms. Chan said, “Birchbox requested 300,000 units of a product for free; in return, they said that could offer a conservative purchase order of 400 units for that product if it was received well by their sampling audience.” Birchbox also requested a special sample size, which Ms. Chan would need to create, that would yield at least 3 uses of the product. After Ms. Chan negotiated with them, they lowered the amount of requested free product to 75,000 and then to 50,000 units (for a more targeted customer base). Birchbox only wanted to pay for a purchase order of 400 units after receiving 50,000 units for free. Ms. Chan decided not to do business with them since it was clear she wouldn’t get even a 1% return. Beyond a very conservative purchase order, Birchbox cannot quantify a significant return to brands despite their huge subscriber base. This is a flawed, inequitable method of doing business with brands since it puts many brands in financial jeopardy. Having a large subscriber base doesn’t necessarily yield a successful business. A successful business invests in its supplier ecosystem, it doesn’t destroy it.
The sad truth is most subscription companies are NOT doing anything special and are just adding unnecessary clutter to the ecosystem and our mailboxes. That’s not to say that I don’t like any subscription models. Three fabulous consumer commerce companies with subscriptions that make sense are Barkbox, NatureBox and Lacquerous whose visions go far beyond their initial consumer-facing product.
Lacquerous is the Netflix for luxury nail polish. It offers 3 nail luxury polishes that are on trend for $18/month, which is less than the cost of 1 bottle of luxury nail polish. It’s an affordable option for women who want to experience trendy new colors from luxury brands while spending a fraction of the cost. There is no other way to do this; Lacquerous is definitely innovative and disruptive. Although they just launched a month and a half ago, they are overwhelmed with customers; at the moment, there are 5,000 people on their waiting list to become new Lacquerous members. Why does it work? Nail polish is one of the hottest consumer commerce categories right now. Customers want to discover the trendiest luxury nail polishes at a discount. Lacquerous offers nail polishes from the most premium brands like Tom Ford, Chanel and NARS. The products are on trend (focused curation), and, more importantly, its customers can choose the colors they want (personalization). It’s a business model that is a WIN for the Lacquerous team, the brands that they work with and its customers.
It’s trickier to apply the subscription model to fashion and consumer packaged goods start-ups. While many tech start-ups end up sacrificing their EBITDA to pursue future growth, future growth is often less obvious with some consumer commerce start-ups. Where can you go next if you’re Dollar Shave? For a consumer commerce subscription to work: 1) the business model must be viable, and 2) the brand, product and price must be really compelling and perhaps even addictive. It should make life easier, solve a problem or create a new market. In the case of superstar subscription companies like Spotify, they initially earned their subscribers via freemium offerings and then turned many of them into paid subscribers. They succeed because they keep evolving and creating new markets and trends. That should be the goal of every start-up!
NOTE: All l the information in this article was compiled from public information and articles online which are hyperlinked except for one interview I had with Suk Chan, Founder of Soukenberi.
This article originally appeared on Open Source Fashion, an active community of helpful innovators working in fashion, retail, and technology. Join OS Fashion on Meetup to attend future discussion series events. Open Source Fashion is holding its first “Freestyle Fashion Conference” with a great line up speakers on September 28th. The discount code for AlleyWatch readers is ALLEYWATCH.
Image credit: CC by Lefteris Heretakis