Checking the Five Boxes of Subscription Commerce
Sell once, get paid forever. On paper these are great businesses.
In reality, of course, they’re really hard!
Imagine you meet someone charming at a cocktail party. They tell a good joke or two, and after another drink you say, “We should grab dinner sometime!” Everyone nods, laughs. Cards are exchanged. You part ways with zero expectation your paths will cross again.
Several days later, you open your front door after a long day at work, and there they stand next to your mail pile, sporting a goofy grin. “How’s tonight for ya? “
Then repeat every month until you murder this person.
This is the challenge of subscription commerce. Unlike a digital service which can sneak by in a month of low usage (ahem, Netflix), subscription commerce thumps a cardboard box onto your welcome mat every time your bank account is debited — reminding you with every trip to the recycling bin that you are now poorer, and will be poorer still next time if you don’t call off the fling.
To put it lightly, if these boxes don’t deliver the goods, they’re toast.
The math is simple. Every cycle, these services see cancellations which they strive to minimize with great product. Through advertising and most importantly customer referrals they must add more customers than they lose or they won’t grow. If the company advertises, product margins must cover the ad expense in a short number of cycles or growth will be too expensive. Nirvana is “negative churn,” where referrals from happy customers outstrip cancellations, and the company grows before spending a single advertising dollar.
These companies live and die by the harsh light of Net Promoter Score. If the product is great, consumers stick around and tell their friends, and life is good. But any product stumble, and consumers cancel the service — and even worse, stop talking about it.
At BVP, we focus on five consumer needs that these businesses can address to maximize NPS. We feel a subscription commerce concept must hit several (if not all) of these dimensions to build a big lasting business.
The five value propositions of subscription commerce:
- Entertainment Often the initial selling point and at a small enough price-point, possibly enough to sustain a long-term relationship. Ranges from the “Christmas morning” fuzzy of opening a box of goodies to the joy of sampling new products, and often relies on the voice-driven relationship that the company builds with the customer … like an old friend stopping by for a visit. Our favorite visual here is the slobbering excitement of pooches across the country as the monthly BarkBox arrives full of canine goodies. You’re welcome, Mr. Postman.
- Enrichment Linked to entertainment — many of these services, especially those in a diverse product category, deliver on a promise of expanding our universe in some way that’s “good for us” beyond just being fun. Monthly book subscriptions provide the classic example, but recently we like NatureBox delivering healthy snacks to our door every month.
- Curation A first-world problem, but hunting for and selecting new products to buy takes time and energy that many of us don’t have to spend. Outsourcing this process to experts means consumers receive better products — often customized to individual tastes — without lifting a finger. BirchBox, launching with subscription beauty products for women, and expanding with its tagline “discover your next everything,” has curation at the heart of its value proposition. Done right, curation allows a service to monetize beyond the box, selling follow-on orders of the products it introduces.
- Cost These sub-commerce services must offer an economic value proposition if they are to avoid major churn outside of the ultra-rich. Perhaps a service is simply so cheap that compared with other entertainment options it seems like a bargain (too cheap, however, and margins may not cover acquisition costs). Other services can offer a true value proposition through bulk purchasing, or private label offerings. Dollar Shave Club has cost reduction in its name and at the heart of its pitch.
- Convenience No need to go to the store, no time spent researching and hunting for items. The purchase is effortless. This can be highly valued if the item is a recurring necessity and otherwise requires ongoing work by the customer. It’s hard to sell convenience if replenishing the product is not critical (e.g. subscription shoes). Perhaps less appreciated than all other value props, convenience can be a powerful churn mitigator if turning off the service creates a painful gap in the customer’s life. If I cancelled my subscription to BlueApron (a BVP investment that delivers all the ingredients and instructions necessary to cook great meals at home every week) and found myself circling a crowded grocery store parking lot tomorrow night instead of simply coming home to a complete delicious meal waiting to be cooked on my doorstep, I would most certainly cry.
Note: These first three “selling” value propositions are the most powerful tools used to acquire new customers. But while variety is the spice of life and lures us into the tent, the long-term health of these offerings likely depends more on the final two attributes, which determine the long-term fit with a customer’s lifestyle.
Ultimately, mastering the subscription commerce game is about nestling so snugly into the consumer’s routine — entertaining them, enriching them, but also saving them time, effort and money relative to other options — that they can’t imagine life without you. This requires building a true brand that delivers enduring value beyond just a box on the doormat. More than an occasional houseguest, a sustainable subscription commerce brand must become a member of the family. This is extremely hard to do, but when done well the resulting lifetime customer value is massive. We believe that large sustainable subscription commerce brands will be extremely rare, but that the winners in this space could be among the great consumer brands built this decade.
Kent Bennett is a partner in Bessemer Venture Partners’ Cambridge, Mass., office. He focuses primarily on investments in the “big data,” data infrastructure and communications sectors.