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3 Questions about Subscription Commerce

Like a lot of people, I think subscription commerce is one of the more interesting business model developments in the past few years. We’ve already seen a few interesting companies created, with more in the works. In looking at a number of interesting companies in the space as both a consumer and an investor, I have a few core questions about the space:

1. How much of the market will Amazon devour with Subscribe and Save? I am a very happy Amazon Prime subscriber. Amazon Prime has basically eaten into my price sensitivity around products that I can order using that channel. With Amazon’s Subscribe and Save offering, I find myself ordering a lot of consumer staple products (things I use on a very predictable basis from brands I know and trust) via Amazon. How large is the opportunity for replenishment of known-brand consumer staples outside of what Amazon can cover? For the essentials like mouthwash, toothpaste, deoderant, etc., Amazon has a pretty good offering that meets most of my needs. Seems to me that Amazon could and should be a really formidable competitor in the branded staples replenishment world.

2. How many products really work well with a subscription model? I’ve been a Netflix subscriber on and off for the past 10 years. Whenever those red packages pile up on my kitchen table, I usually unsubscribe – I just realize I’m not consuming enough of the product to warrant being a subscriber. In contrast, I’ll probably never cancel Xbox Live – I can’t imagine living life without XBL because there isn’t any real substitute for the product. Overall, I have a lot of questions about how many product categories there are out there where a subscription provides a superior customer experience over traditional retail. There are certainly opportunities for “discovery” and introducing me to new products and those are interesting. But once I’ve discovered a new brand that I like, does the allure of discovering additional brands still hold? Maybe some of those discovery-oriented services are better off striking a balance between using the monthly subscription to introduce new products but having a more traditional ecommerce storefront for replenishment or repeat purchases.

3. Is it better to be the brand or be a retail outlet for someone else’s brand? Last, I wonder how the market will shake out between companies who are retailers offering other people’s branded products will fare relative to those who sell their own branded items. The advantage of selling your own product is clear – if you are the exclusive channel and control the supply chain, you can blunt cross-channel price comparison and reap the benefits of supply chain efficiency. On the other hand, selling other people’s products and brands, especially if they are well known, is a good way to get consumers who are looking for those products in a more convenient or possibly more cost-effective way.

Curious to hear other people’s thoughts on the matter. Feel free to leave a comment below or message me on Twitter @chudson.

Comments (5) on "3 Questions about Subscription Commerce"

  1. You seem to be focused (for the purpose of this post) exclusively on consumer subscriptions, and in those situations it seems to come more down to the relationship someone has with the thing they are buying.  In other words, do you experience the thing as part of the rhythm/flow of your life, or do you experience it as a momentary indulgence/necessity. 

    In the case of something like Netflix it becomes more of a lifestyle choice to always have some entertainment you’ve chosen in advance at the ready vs. the ability to have to choose and buy a la carte. In that particular instance the subscription model was less a decision about revenue model and more a necessity for solving the original pain (late fees and trips to the video store). But, now that streaming dominates their business the question of individual purchases vs. subscription becomes more substantive of a choice.  For me, Netflix’s primary value is being able to show my kids 22 minutes of ad-free TV that I can help them select any time I want to — that has become a part of the rhythm of our life such that I can’t imagine not having some kind of subscription-based content option like it (and none of the Netflix competitors have come close from what I’ve seen in terms of ease/selection).To your point about how many areas are even suitable for subscriptions, the interesting innovations will be finding areas people never thought could be experienced as a continuous experience and turn them into that (an obvious example is the companies that have turned fashion/accessories into subscription models).  Another dimension to that is tribal membership — will there be areas where being a member of the tribe by virtue of the subscription bring additional, less tangible benefits in terms of identity/ego (Amex has long tried to create such intangible benefit up the chain of their brands).

    Also ripe for innovation is taking products that are expensive today and finding ways to build in subscriptions as a subsidy to lower the friction to initial adoption.  For instance, there has been talk for years about how to make cars more like cell phones, where creating the relationship up front generates a huge lifetime value. That happens to some extent with cars in terms of buying parts and service after the initial purchase, but this is an area we’re likely to see some big shakeups in terms of buying models.  Similarly, as more and more devices in the home become “smart” and connected these dynamics can kick in.  Seems likely Apple will soon do something with TV that is more akin to the way they sell iPhones than anyone has ever imagined with TVs — fundamentally changing the lifetime value calculation of selling a good through subscription-style relationships could change a lot of product categories where today we stop being a customer the day we bring something home.

  2. I, like yourself, think subscription commerce is one of the more interesting business models to grow in popularity over the last few years.

    There seems to be a renaissance and revitalization going on the the startup community – taking tried and true business models and putting a new spin on them…first came the revitalization of coupons with daily deals, and now subscription commerce on top of the more traditional ‘of the month’ clubs.

    The questions you pose come at a very relevant time in the evolution that is subscription commerce.

    1) Re: Amazon – It’s tough to ignore the giant elephant in the room that is Amazon, especially when it comes to purely convenience / consumables driven subcom companies. While I think these startup businesses are going to have a tough time initially competing against the big boys like Amazon Prime, if they can carve out a nice niche and following they’re going to have a much easier ability to scale, and the lifetime value of each customer will be higher than their “curated / discovery” driven cousins given the pure need vs. indulgence quality their products have in the lives of their customers.

    2) What products work well with a subscription: I think you’re dead on when you say that discovery oriented subscriptions need to strike a balance between transitioning their customers over to a more traditional e-commerce platform for replenishment and repeat purchases. Perhaps they can even take it one step further and implement a convenience driven subscription as a complement to their discovery subscription product, e.g. Thanks Birchbox for introducing me to XYZ skin care product…now I’m going to need that every 3 months!

    3) Is it better to be the brand or the retailer for someone else’s brand: Good question, but I’m not sure there’s a definitive answer to that. Your two points name the benefits from the businesses point of view, i.e. better supply chain efficiency if you are the brand, and potentially easier customer acquisition if you are the reseller of someone else’s brand. On the flip side, what approach is better for consumers?

    If you are the brand, then the subscription is really more about the product, e.g. a small artisan cheese producer vs. if you’re the reseller then it’s more about the price and service, e.g. just get me my colgate toothpaste as cheaply and as quickly as possible with the best customer service. In both cases it can appeal to a consumer, it’s just how you market to them that varies – product emphasis (quality, story of producer, etc) vs. service emphasis (price & rating for customer service, etc).

    I think subscription commerce is just at the beginning of it’s growth, and we’re going to continue to see a lot of startups get into the mix at the start with more discovery / curated models, and then more traditional e-commerce businesses implement their own convenience / consumables driven subscriptions as a complementary part of their pre-established business.

  3. On the topic of brand or retailer… I think that the onslaught of choices will swing the pendulum in favor of the retailers.  The hot branders will continue to reap huge profits, but the retailers will have greater flexibility to navigate through the changes in consumer taste.

    Although I think that the discerning factor will be based largely on trust relationships.  Families, friends, communities, nationalities, etc… are all types of trusting units.  Whichever brands and/or retailers can grow these trust relationships effectively will be successful.  The ability to recommend options based on fit (even if it’s outside of your brand/retailer) can serve as a litmus test to a true  trusting relationship.  As consumers, we want an unlimited menu of choices (ex. apps), but a trust-worthy waiter to tailor those selections to our particular taste buds.  I think I’ll have the house special!

    An excellent illustration of this was your post on face-to-face app discovery…

  4. Thanks for the great comment. My concern with being a retailer, though, is what happens if you sell Coke in Month A and then offer Pepsi in Month B – you have the risk of flipping the consumer that your previous partner just acquired. And, if you’re a retailer and I can get Coke or Pepsi cheaper through another online channel, how do you win? Competing with Amazon on price feels like competing with Walmart on price.

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