Are We Oversubscribed?
Subscription commerce, and what to consider as a brand.
Are We Oversubscribed?
Subscription commerce, and what to consider as a brand.
Recently, when on a call with a Senior Director of Innovation at P&G, I was asked about the future of DTC/subscription businesses. In presenting my thoughts, I realized my observations could be suited to a broader audience looking for insights from a VC who sees over hundreds of consumer companies a year.
We at Alpaca have almost a decade of experience with subscription brands, including: Imperfect Foods, Aloha, Monument, Classpass, Zeel, Core, Meural, Toolbx, and WheelsUp.
So, let’s set the stage and talk innovation in subscription.
First, Subscription eCommerce is Massive.
According to UnivDatos Market Insights, the subscription e-commerce market is expected to grow at a CAGR of 68% from 2019–2025 to reach $478B. The average American currently spends $237 per month on subscriptions, and has largely been trained to expect subscription commerce as a part of their spending habits.
Netflix really is the grandfather here; started in 1999, now it’s a $25B revenue business off $8.99 monthly subscriptions. Amazon has been leading the subscription charge since 2005, making it easier than almost anyone to subscribe and save. As Rex Woodbury reported, a business like the NYTimes saw its total ad revenue decline by 26% in 2020, which was offset by its subscription revenue, up 30% to 7.5M subscribers.
But what do we mean by Subscription Commerce?
To us, there are three main kinds of subscription commerce services:
1. Replenishment subscription service: provides regular, recurring deliveries of consumable products to consumers.
2. Curation subscription services: provide collections of products to individual recipients based on their unique needs and tastes.
3. Access subscription services: operate in the same way as Costco and other such “warehouse clubs,” in that customers must purchase a membership in order to have access to the company’s products.
Source: https://www.coredna.com/blogs/ecommerce-subscription-services
And what’s it to you? The benefits of Subscription Commerce
Subscription commerce has its advantages, and those include:
Potential for better customer retention
Increased engagement opportunities with your customer
The ability to forecast future cash flows and budget based on cohort growth and retention
Potentially higher valuations, since capital markets value subscription revenue more than other types of revenue
Business models have adapted as consumers have continued to sign up. Beginning in 2010, ecommerce startups like Birchbox, Dollar Shave Club, Thrive Market, and Stitchfix paved the way for a new generation of DTC companies to take advantage of their streamlined operations and copious amounts of customer data to inform their product assortment, cadence, retention strategies, and logistics. In watching the seemingly endless stream of subscription commerce companies, a few important themes emerge that brands need to get right as consumer are inundated with subscription offers.
What a DTC Needs to Get Right about Subscription:
Leverage existing hosted solutions where possible. The Shopify and hosted plugin marketplaces offer a variety of solutions for brands. ReCharge is probably the largest, allowing brands to turn on subscriptions like a light switch on the front end. Many 3PLs also support subscription and custom pick and pack.
Manage effective payback cycles against retention. The secret to scaling subscription models online is to ensure your payback period on new customers is fast and that customers do not overly churn. We’ve internally benchmarked across companies, and believe paying back on acquisition in under 3 months and seeing >50% retention after 6 months shows a best-of-breed business.
Limit voluntary and involuntary churn. Customers will naturally cancel subscriptions. Failed payments and/or expired cards account for much of the involuntary churn brands face. Between the two, churn can be close to 10% a month, according to benchmarks. Startups like Gravy and Clowte help brands manage churn down to sustainable levels.
Think through packaging. Shipping DTC, especially for key subscription categories like grocery, meal kits, beauty + cosmetics, and household, requires a lot of individual packaging. The Environmental Protection Agency estimates that plastic and other packaging waste makes up around 30 percent of total U.S. waste annually.
As reported in Fast Company, about 165 billion packages are shipped in the US each year, with the cardboard used roughly equating to more than 1 billion trees. If you look specifically at meal-kits, category leader Blue Apron sends out around 8 million meals a month, each one containing two six-pound ice packs. The freezer pack waste is about 192,000 tons per year, or, as Mother Jones noted, “the weight of nearly 100,000 cars or 2 million adult men.” Source: https://www.forbes.com/sites/jonbird1/2018/07/29/what-a-waste-online-retails-big-packaging-problem/?sh=7e6711e7371d
Consumers are growing increasingly concerned with the waste subscription ecommerce makes, and so smart brands will think through sustainable packaging, both in terms of form factor as well as fulfillment. Startups like Sway and Limeloop are trying to address this issue, but more can be done by individual brands.
There are a few folks doing really interesting things in the subscription commerce space. Below I’ve outlined a few and what’s so cool about them. (Note: I’m/Alpaca is an investor in August and Imperfect Foods)
Who’s Doing Something Interesting:
For Days: this sustainable apparel company re-invents what it means to “subscribe” by creating a closed loop refill system. For every t-shirt you purchase, you can return it for upcycling after use for a store credit toward another t-shirt. The brand touts incredible retention as a result.
Blueland: Blueland is an early leader in the refillable subscription space. Known for its good-for-you household cleaners, Blueland allows consumers to easily refill their beautiful plastic-free form factor bottles with cleaning pellets that ship easily. Similar companies include July (refillable air filters for your AC), Hai (refillable aromatherapy for your showerhead), and Evermill (refillable spices).
August: a new period care company that uses SMS for replenishment and engagement, similar to what Dirty Lemon pioneered in beverage. Gen Z and younger consumers want the convenience of mobile communication, and what could be easier than texting “refill, please!”?
Imperfect Foods: this e-grocer has gone from 2% to 10% market penetration over the pandemic, and has used its customer data smartly to stock and distribute product across its fulfillment facilities nationally.
Humming Homes: employing subscription in a category most wouldn’t think about: home maintenance. They offer a free three month subscription via real estate brokers at the closing of a home, and convert most of their subscribers after they’ve seen the convenience of their service.
OffLimits: the cultish cereal company offers a toy store where you can accrue points and trade them in for artist-made toys and rewards, just like the old Cracker Jack or ’90s cereal boxes.
A Warning: Key Considerations when Talking Subscription
Customers are oversubscribed. There’s an argument to be made that consumers are increasingly fatigued with subscriptions, with the rise of apps like Truebill (on its Series D) as evidence. As such, brands can use data to perfect delivery cadence and reduce churn. There is also a case to be made to employ opt-in replenishment commerce (asking every month if someone would like a refill) v. subscription (automatically renewing), especially via SMS.
Cross-sell, Movie Pass 2.0. As multi-SKU brands and retailers get in on the act, there is an opportunity for cross-category subscriptions or ”passes”. Bundling SKUs could provide competitive advantages for larger purveyors. Coca Cola did this successfully in Japan with a $25 drink pass.
Sustainability will be an ever-increasing factor. Consumers are increasingly sensitive to waste in terms of packaging and product, especially for subscription. Gen Z in particular. It will be important to innovate the refill of the product itself, as well as the delivery packaging.
Our Approach at Alpaca:
We take our traditional 19 factors into account when looking at a subscription business. Additionally, we think a few critical things have to go right:
Is this business fit for subscription? Is your business selling refillable razor cartridges, or are you selling custom leather couches? Some businesses are not suited for subscription models and we think that’s OK.
What do your cohorts look like? Month over month, is each customer cohort churning at a high rate (we consider high above 5–10%)? Are you retaining the vast majority of your customers month over month (as in, within 12 months are most of your customers still onboard)?
What’s your payback period? How long does it take you to pay back each customer you acquire? Is it longer than 3–6 months? Do you spend $1200 acquiring someone to net $50 in contribution 8 months later? We care about the numbers and if they make sense to scale.
Is the product really about replenishment, or discovery? Some businesses offer subscriptions, but especially for businesses that are about discovery and consistently trying new things, subscriptions are hard.
Specifically for consumer replenishment, we have a high bar for who we will invest in which boils down to whose traction, growth and retention appropriately matches valuation.
All that said, we are always looking for exciting new subscription companies who reinvent the mold. Email or reach out to us:
Find us on Twitter, @alpacavc
Find me on Twitter, @aubriepagano
email us: hello@alpaca.vc
Great considerations thanks for sharing!