The ingredients of a successful subscription business

Everything from bacon to boxers is available via subscription... why?

by Arun Kakar
Last Updated: 21 Dec 2017
Also in:
Future Business

Once largely the domain of magazines, utilities and b2b services, subscriptions are now everywhere. Bagels? Pet treats? DIY craft kits?  Yep, all covered by a regular plan.

The subscription economy has grown by 200% annually since 2011. In the US for instance, there are over 2,000 subscription businesses and 11 million subscribers, with seasoned folk like Warren Buffett even getting in on the action.

Catching the consumer

The rise in subscription businesses has mostly been attributed to a change in consumer habits, itself partly driven by technology. Think Netflix vs video rental: it’s more convenient to stream than go to the store, and it’s actually quite fun to binge on box sets, now that you come to mention it.

‘As a subscriber, I’m looking to personalize my product, to make it mine, the way we set up our own Spotify accounts,’ said Tien Tzuo, CEO of enterprise software company Zuora. ‘I also want it to improve itself over time [...] As a subscriber, I want outcomes, not asset management, and If I don’t find them, I drop you.’

The most successful subscription businesses revolve around products and services that consumers use regularly, but they also add something extra. Harry’s Razors for instance was able to pair a high quality shaving product with a manageable service that customers could tailor to their own shaving preferences. The key is in offering flexibility through different payment plans, options, contracts, and of course, a good product.

Novel know-how

One of the reasons for the huge number of subscription businesses is that many serve a particular niche or novelty category. This is where we’re talking about your sex toy and ‘mason jar monthly’ offerings.

The challenge for the novelty brands isn’t so much getting people on board in the first place (buying a friend a prank box subscription for example makes for a nice quirky gift) but keeping customers committed.

Some have managed to hit the ‘mail’ on the head. 

Loot Crate, which offers geek themed deliveries of comics, merchandise and pop culture oddities every month, has over 650,000 subscribers. It was named the fastest growing company in the US last November by Deloitte, largely due to its ability to cash in on a loyal fan market hungry for novelty and collectible items.

To work as a novelty brand, the best companies are focussed on markets that have a predilection for open mindedness. Examples include Naturebox, an all natural snack business which has raised over $21m and makeup sample mailer Birchbox, which has raised over $71m.

A tricky model

The key for all subscription businesses is retention – and that means making sure that the subscriber isn’t paying for something that they don’t use. That’s easier said than done in a competitive market, however. The cost to acquire new customers through introductory offers and marketing campaigns are high, drop off patterns are difficult to predict, and new companies are popping up rapidly encouraging consumer promiscuity with cheap introductory offers (the fiends).

Valuations and share prices have proved volatile as a result. US meal kit delivery service Blue Apron listed at a $3bn valuation in June but has since lost over half of its market value, for instance, while Netflix is trading at 20 times what it was in 2011.

Picking winners may be difficult, but the model is here to stay, with big brands like Fruit of the Loom and Disney looking to get in on the action. In a time when there’s too much choice, having a simple and easy catch-all payment just makes sense. 

Image Credit: Guillermo Fernandes/ Flickr

Tags:

Find this article useful?

Get more great articles like this in your inbox every lunchtime