Dollar Shave Club has come a long way since its 2012 video. Under the new stewardship of Unilever, DSC is still growing, despite competition from Harry’s, Gillette, and others. In 2018, DSC hit 4 million subscribers, and it has expanded its product offering beyond razors to offer toothpaste, hair gel, body wash, shave butters, and more. Harry’s, DSC’s closest competitor, has experienced a similar life cycle: in 2019, it sold to Edgewell Personal Care, owner of Schick and Wilkinson brands, for $1.37 billion.
Both are classic examples of disruption: long-established incumbents in a traditional industry are pushed aside by value-driven innovators who tackle customer frustrations and pain points, rather than focusing on unnecessary product enhancements. Dollar Shave was bolstered by incredibly creative marketing and storytelling, which fueled the first innings of organic sign-ups, free press, and revenue. But, ultimately, the long-standing success of Dollar Shave Club—and other direct-to-customer subscription commerce companies that followed—was a result of a firm commitment to building loyalty through a superior customer experience.
As of mid-2019, the surge of subscription-based businesses has continued, among start-ups and established brands alike—and the trend isn’t slowing. Strong performance has prompted established brands, such as Nike, Banana Republic, and Bloom-ingdale’s, to create new subscription offerings. Sephora’s Play!, and Walmart’s Beauty, Kids, and Grooming boxes, are growing. Macy’s has also indicated that it’s coming to market with a new beauty box in late 2019. Recent estimates point to about 3,500 subscription-box companies operating in the U.S. alone.1 On the SaaS side, Gartner predicts that by 2020, all new enterprise software companies and 80 percent of existing providers will have shifted to subscription-based models. Most of the prominent software players, including Microsoft, HubSpot, and Salesforce, are already there.
Finding the right subscription category fit is a good first step in assessing whether or not a business has subscription potential. Personal care, pet food, and vitamins, to name a few, are perfectly conducive to subscriptions. As we’ve seen with Harry’s and Dollar Shave Club, razors, for instance, are lightweight, easily packaged, and purchased frequently. This consumption and replenishment cycle fits neatly into the model.
Crossing over into other popular subscription categories, we see similar themes. Products like coffee (e.g., Blue Bottle), diapers (e.g., Honest Company), and snacks (e.g., Graze) make for great offerings. Beauty products, too, are generally lightweight, novel, and frequently purchased—and, as a result, we see companies like IPSY, Birchbox, GlossyBox, and BoxyCharm taking advantage.
Yet not all product categories fit the mold. Companies selling shoes, watches, or handbags, for example, will have a hard time coming up with a compelling subscription offering. Fashion apparel, while successful in certain instances, is also difficult to execute because of the importance of data science and personalized merchandising. Some clothing companies, like The Gap, that have attempted subscription apparel offerings have faltered in the absence of these important capabilities.
The success of companies like Stitch Fix, which have built their business around data and personalization, reveals another important generalization here—subscription businesses gather data on their customers at a much faster pace than a more traditional business model. The continuity component of subscriptions means consistent touchpoints with the consumer. Data from those touchpoints compounds, and can then be used to optimize subsequent offerings. Stitch Fix has nailed this data optimization game. Dollar Shave Club is now aiming to adhere to customer needs and up the shopping experience by offering product trial kits, a fun-sized combo of grooming goods. IPSY and Birchbox are leveraging data from their sample boxes to optimize subsequent shipments so they’re more in tune with consumer preferences.
While customer acquisition is crucial, arbitrage opportunities exist for brands savvy enough to focus equally hard on customer retention. Robust customer service teams that catch potential subscription cancellations before they happen, thereby retaining a subscriber for an extra month or more, stand to improve both lifetime value and churn; we’ve seen firsthand, through upstarts like Oatbox and Gentlemen’s Box and giants like Amazon and Salesforce, how this type of customer-centric rigor can lead to massive retention.
As the number of subscription businesses tick upward in 2020 and beyond, not all new entrants will be winners. Common pitfalls like lack of category fit, market timing, and competition will plague many who introduce new offerings. But perhaps the biggest chunk of the failures will come from those whose customer-service infrastructure cannot match what the new online customer demands. While we see customer acquisition as an important part of any scaling business, subscription demands a more intense focus on the customer once they sign up (in other words, on customer retention). Columbia House and Fabletics missed the memo, and more recently, so did Starbucks Coffee—which, in 2015, launched its fresh-delivery subscription, giving online customers access to its line of premium small-lot coffees, only to pull the program two years later. Customer complaint levels played a role in the decision to abandon subscription, and e-commerce in general. While the coffee giant’s in-store experience is still second to none, the company couldn’t replicate it online.
Despite the beauty of subscription models, there are challenges to navigate. The importance of Facebook to direct-to-consumer brands cannot be overstated. As competition increases, companies will battle for eyeballs on Facebook and Instagram, where the bulk of ad dollars are being spent. The ever-changing marketing landscape means higher customer acquisition costs are inevitable, putting even more pressure on the cash flows of upstarts. Companies like Hubble Contacts, a budding subscription contact-lens company out of New York City, has already begun spreading funds across other sources like podcasts, direct mail, Pinterest, Snap, and Google to hedge against the increasing CPC and CPM rates on the social media platform. Notwithstanding the diversification efforts, Jesse Horwitz, the company’s co-founder, told me his team still relies heavily on Facebook, above all, for customer acquisition.2
The success of Prime has prompted many established brands to rethink the structure of their existing loyalty programs, revisiting and revamping them along the way. While points-based loyalty programs still seem to be ubiquitous, moving forward, loyalty programs will look a lot more Prime-like, rooted in VIP-style subscriptions.
With more than 500,000 customers and approximately $2 billion in revenue as of 2018, Instacart is building loyalty and engagement via its fee-4-VIP subscription-based Instacart Express program. And, the numbers look promising—the average Instacart shopper spends about $95 an order, twice a month (roughly $2,300 a year); Instacart Express customers, on the other hand, who pay $99 a year for free deliveries (a Prime-like strategy), order twice as often, and spend about $5,000 a year.3
GNC revamped its old Gold Card Rewards program, launching myGNC PRO Access in early 2017. For $39.99 per year, PRO Access members receive benefits like free shipping, quarterly member-only sales days, monthly customized PRO boxes (which contain samples, coupons, and new products that are tailored to their lifestyles and goals), and more. PRO members purchase twice as often and spend significantly more than regular non-PRO customers. Bed Bath & Beyond has a similar loyalty program called BEYOND+, which also runs $39.99 a year. It offers members 20 percent off purchases along with free shipping, and other benefits such as 50 percent off decor design services, exclusive offers, and member-only shopping events. While BB&B continues to struggle, the one bright spot is the revamped loyalty program—BEYOND+ members shop 2.5 times more than the retailer’s average customer and generate four times more revenue. Restoration Hardware’s RH Member program, at $100 a year, gives members 25 percent off and other perks like interior design consultation. As of Spring 2018, RH CEO Gary Friedman reported that 95 percent of Restoration Hardware’s business is driven by its nearly 400,000 members, saying, “We can confidently declare our move from a promotional to membership model a success. Membership has enhanced our brand, streamlined our operations, and vastly improved the customer experience.”4 Other brands that have moved in this subscription direction include Overstock.com, Barnes & Noble, AMC Theatres, and Chinese e-commerce giant Alibaba—whose 88 VIP program functions as a super-subscription that extends benefits to a wide array of services beyond its core e-commerce platforms.
Points-based loyalty was long in vogue, from Air Miles to Amex. But the next chapter of loyalty will be driven by fee-4-VIP subscription programs as brands chase higher customer lifetime value, order frequency, loyalty, and engagement. Why? Paid subscriptions provide brands with a more predictable source of recurring revenue, which can be used to subsidize more loyalty program benefits like free shipping, coupons, and exclusive events. In turn, customers receive more value, and thus become more engaged, use the programs more frequently, and ultimately spend more money. From Prime to Instacart to GNC, the numbers back it up.
Points-based loyalty programs simply don’t see the same customer engagement. The average breakage rate (number of points not spent divided by number of points issued) for points-based loyalty programs is a whopping 80 percent, a key indicator that while customers are collecting points, they are not redeeming them and may not see them as valuable.5 While free points-based programs sound good on the surface, long redemption times, poor awareness and understanding of the benefits, and overall lack of usage (high breakage) means we are about to see the death of points programs.
As we head toward a new phase of consumerism propelled by the burgeoning subscription-based economy, progressive strategists and thought leaders are imagining a future in which the business model provides a fully automated shopping experience. A future where the majority of consumer goods are purchased by subscribing, selecting a frequency of delivery, and checking out is not far away. The combination of smart technology, predictive data, and sophisticated software can determine what goods are delivered when and to which household.
Global Market Insights estimates the market for smart speakers is roughly $4.5 billion. That number is expected to leap to $30 billion by 2024. As a result, companies are betting big on voice, pouring a ton of money into the category. Estimates suggest Apple, Google, Facebook, and Microsoft are spending roughly 10 percent of their annual research budgets on voice recognition technology.6 This isn’t going to be a cute fad. We’re headed into a world where voice recognition becomes the most common way to interact with the internet.
Gartner predicts that soon three-quarters of homes will have smart speakers like Amazon Alexa or Google Home.
Source: Bret Kinsella, “Gartner Predicts 75% of US Households will Have Smart Speakers by 2020,” Voicebot.ai, April 14, 2017, https://voicebot.ai/2017/04/14/gartner-predicts-75-us-households-will-smart-speakers-2020/.
Consider Amazon’s big bet on AI and smart tech. Although not the first to invent voice recognition—Apple’s Siri and Google’s Assistant predated Alexa by a few years—Amazon, which holds 42 percent of the global market for connected smart speakers, is likely to dominate the smart home devices market. When Echo was introduced in November of 2014, at first the technology seemed like a cool nice-to-have. But, some 47 million-plus sold later, Echo, in combination with Alexa voice recognition, makes this combination of AI and voice a likely mainstay in household kitchens, bedrooms, and bathrooms in the next five years. Google’s combo of Google Home powered by Google Assistant won’t be far behind.
Amazon is about to make shopping incredibly convenient. Sure, it has the goal of getting you hooked on Prime. But having Alexa in your kitchen and bathroom means a quick shout-out to the virtual assistant when you’re out of milk or toothpaste. A confirmation from Alexa, and your carton of 2 percent and tube of Colgate will be delivered next day—oh, and Alexa will ask if you’d like to automate recurring deliveries of both via Subscribe and Save for a discount. As a treasure trove of data rolls in on how Amazon shoppers use Alexa, Bezos and company get to make the software even more useful. The better Alexa becomes at understanding what you want, the more effective it gets at making suggestions as to how Amazon can get it to you, be it a case of Coke, a new pair of jeans, or a new book. A future with AI in combination with subscription is inching closer, thanks to Amazon’s ability to ship anything, anywhere in just a couple of days. Mix in a little Alexa, and we’re headed for a new era of automated “shopping” experiences.
Great digital companies are sprouting up everywhere, building new consumer offerings that are compelling and extraordinary. We’ve covered many of them in this book. Successful companies in the next phase of consumerism will be those who do a great job of providing superior customer experiences and service, while focusing on building intimate customer relationships. The rest will let transaction- and customer-acquisition greed seep in, like most fledgling retailers who haven’t gotten the message. We’re entering the next wave of commerce—where customer relationships trump transactions. See you on the other side.