Maybe E-Commerce Subscription Boxes Aren’t Such a Great Business Model After All

A few years ago there was a huge trend around e-commerce subscription boxes like Birchbox, Quarterly, and the like. It seemed like the perfect business model: why put in all the effort to get a customer for a single transaction when you can get ongoing revenue each week/month/quarter? If you just get x subscribers paying $y per month you’re all set! I can’t tell you how many times this was pitched to us, especially by our shipping reps. I almost felt like the implication was that we were doing e-commerce “wrong”.

Except that I knew we weren’t. I can’t speak for everyone, but we ran the numbers and there was no way that we could make a profitable business out of it. Some people were trying it in detailing, and as far as I know they all failed. We had a successful subscription business model with SportsLizard so we knew that subscriptions aren’t as simple as they seem, and that’s for software-as-a-service businesses, which I still think is a fantastic business model. When it comes to physical goods it gets murky.

Acquisition and retention costs are high with subscriptions, so you need a high margin product like software to make the model work. But to entice consumers to sign up for your physical package each month, you need to get them a great deal, which usually means sending them a product at a significant discount and shipping it for free, and that almost guarantees a low margin. You also need to curate a variety of products to keep people interested, which means constantly negotiating deals with manufacturers and convincing them that the exposure will grow their business (Groupon anyone?).

The largest problem though might be the consumer mindset. You need to get a whole lot of cool stuff and use all of that stuff to want to continue receiving the box after a few months. It becomes something you can cut easily, as opposed to your Netflix, Spotify, or Amazon subscribe-and-save items. I know when it came to detailing, we couldn’t imagine how large the market would be for people who wanted and used products each month, but weren’t serious enough to be buying in bulk. I’m sure those enthusiasts exist, but it’s a niche of a niche of a niche. Compare that with a typical e-commerce business where consumers seek out products when they want them, and I think it’s pretty clear that these are two entirely different types of businesses.

Personally, my wife and I have very much enjoyed Blue Apron, but we rarely get the box weekly and we haven’t gotten it once since our daughter was born. Speaking of Blue Apron, the idea for this post came after reading the Businessweek article Blue Apron’s Struggles Show Why It’s Tough to Make It With E-Commerce Subscriptions. The whole article is worth reading, but the key section is:

About 2,500 companies sell different kinds of subscription boxes in the U.S. alone, with the top handful generating nine-figure annual revenue. Profitability, however, is a different matter, and the past year has been littered with box companies that couldn’t work it out. The recently shuttered services have names like Treatsie (for high-end candy and other sweets), Fair Treasure (jewelry and other accessories), and Blush Box (beauty products, lingerie, and sex toys).

Now that Blue Apron has gone public, its numbers are more transparent than most. In pre-IPO filings, the company said it had spent an average of $94 in the past three years to acquire each subscriber, that each was paying an average of $236 a quarter for about 24 meals’ worth of preportioned ingredients, and that those numbers had dipped slightly since 2016. Counterintuitively, scale hurts subscription-­box makers, because getting big means they have to spend way more on marketing. (Blue Apron spent $144 million on marketing in 2016, a 182 percent increase from the year before.) Among subscription boxes in general, “the pricing is not smart given the price of acquisition being so high,” says Ross Blankenship, a venture capitalist at Angel Kings.

Customer acquisition costs tend to rise further as companies try to retain them by introducing new products, says Jay Clouse, the organizer of Startup Weekend, an industry networking company. (On the Blue Apron earnings call, CFO Dickerson noted that a smaller marketing budget would in turn mean fewer new meals later this year.) It’s become clear in the past few quarters that raising more capital to fund marketing isn’t a long-term solution, Clouse says. And while most customers don’t mind recurring payments for consistent staple services, the kinds of personal-­taste choices that subscription boxes tend to involve can turn people off, Wester says.

The e-commerce box companies managing to turn a profit have been expanding their offerings and laying off staff. Beauty-products supplier Birchbox, which has raised about $85 million in venture funding in its seven years, says it finally hit profitability in the first few months of 2017, after cutting 15 percent of its personnel in January 2016 and an additional 12 percent that June, shrinking the size of its boxes, and renegotiating shipping contracts.

2 comments on Maybe E-Commerce Subscription Boxes Aren’t Such a Great Business Model After All

  1. Rob says:

    Interesting reading. I dabbled with the idea of doing a subscription service, but the conclusion I came to was that constantly negotiating deals with suppliers would become old, fast. If you sell them on the idea of giving you stuff cheap to market themselves, it would become pretty obvious to them soon whether it was working or not and the risk of burning that relationship is not insignificant.

    A thing you could do that is subscription-esque is to work out the typical interval each consumable you offer is purchased at, and when that is 90% elapsed, email the buyer with a nudge to restock.

    I do think there’s money to be made on subscription boxes, on the SAAS side. There are a variety of subscription ecommerce services that sell wannabe entrepreneurs on the idea of doing their own box and probably do a decent job of providing the service, but them never having to mess around with physical products makes their service much more viable. Plus you’re getting other people to build their businesses on your land.

    I absolutely detest the way software is going towards subscriptions for everything. I hate “building on other people’s land” and I always look for FOSS solutions first and foremost, but if that fails I want to own the software outright, ESPECIALLY if it’s something business critical.

    Anyway, this has gone a bit off-topic and ranty, sorry.

    The other major issue I have is with the environmental impact of all these pre-portioned little sample tester bottle sized bottles of goop or single onions or whatever the hell they’re pushing travelling about individually in boxes. The carbon impact of all this must be insane compared to going to a supermarket or the local corner shop.

    I think THIS type of thing is where food prep is going to be heading in 5-10 years: https://youtu.be/lK_cdkpazjI?t=66

    • Adam McFarland says:

      Whoa, that video is creepy! But…I guess not any more creepy than our current phone use would be to someone a few decades ago?

      A thing you could do that is subscription-esque is to work out the typical interval each consumable you offer is purchased at, and when that is 90% elapsed, email the buyer with a nudge to restock.

      Yes, absolutely, this is something we have in the works. Our wholesale program is also subscription-esque in that it requires a min spend each year to stay a member, the big difference I think is that members can buy when they want to, spend however much they want, and there’s no penalty for not buying (unlike with a subscription where it’s coming at regular intervals and you’re getting charged regardless of whether you need it).

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