The makings of a successful subscription ecommerce business

By February 14, 2013 7 Comments

Subscription ecommerce has become quite a hot business model over the past couple of years, perhaps reaching peak hotness 6-12 months ago. Notable examples of companies in this market include our portfolio company Lovefilm (acquired by Amazon for a rumoured £200m), our portfolio company Graze that sells healthy snacks, shoe subscription businesses ShoeDazzle and StylistPick, and startup coffee subscription business Kopi.

Phil Wilkinson, the founder of Kopi, is an old friend and we were discussing characteristics of good ecommerce subscription businesses over lunch yesterday. This is the list that we came up with:

  • Product that is well curated and premium, different, or hard to get elsewhere
  • Large number of potential subscribers (often hard to establish this at the beginning – who knows how many people will want to subscribe to DVDs, food boxes, shoes or coffee?)
  • Gross margins of 30%+
  • Manageable churn
  • Attractive customer acquisition dynamics (for high value services this could just be paid search and TV , for lower value services member get member campaigns and other low cost channels are likely to be important)
  • Form factor that allows for convenient delivery (in the UK that means fitting through a standard letterbox)
  • A customer acquisition model that makes customers comfortable with taking on the commitment of a subscription (e.g. free first month, option to purchase before subscribing)
  • Content strategy that educates the customer and takes the customer on a journey

It isn’t (of course) necessary for a business to have all of these characteristics in order to be successful, but high potential ecommerce subscription businesses will have most of them. If you can think of any others that should be on the list please let me know in the comments.