The makings of a successful subscription ecommerce business

By February 14, 2013Uncategorized

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.

  • @h4ryb is another VC with a great analytical mind when it comes to this. At Seedcamp Week 2012 he said he has not seen successful subscription businesses unless they have either a differentiated product (e.g. Sky, your first bullet in the post above) or are price competitive (e.g. LoveFilm, Dollar Shave), which I don’t believe you have mentioned above. What do you think?

    Another interesting thing is I think it is much harder to achieve negative churn in ecommerce subscription than in SAAS, and I wonder if any companies are doing this well. A great example in the SAAS world is Mailchimp – the larger your list grows, the more you use the service, the higher the charge. Tiered subscriptions in ecommerce don’t really offer the same advantage as negative churn in SAAS.

  • Philip Wilkinson

    Price competitive is always going to be difficult especially if you start hitting the lower end price points. You can never compete with the supermarkets or amazon in that respect and the margins will be terrible. Lovefilm didn’t focus on price initially but more “no late fees” as their lead message – giving people a better experience. It’s still a new “experimental space” but I think the differentiation is the most valuable here.

  • Focusing too much on price doesn’t sound attractive to me. Unless there is something else compelling about the service the competition is likely to be formidable, as you say.
    To your second point – in all the ecommerce subscription businesses I’ve seen churn has been an issue and managing churn a key focus for management. Businesses can continue to use services like Mailchimp for years and become hooked on them, but the dynamic for consumers is different. Novelty has value and subscription services suffer as they become part of the furniture.

  • Guillaume_Goujon

    Regarding the bullet “Form factor that allows for convenient delivery (i.e. fitting through a standard letterbox)”. Yes, in principle this is a requirement, but I am wondering if there could be categories of products that would not need to fit this format and would be suited to delivery at the workplace. Such products would benefit from people opening their package at work and showing off the product to their colleagues – potentially unleashing viral growth of the service

  • Workplace delivery is a great idea. Graze has benefited from the viral dynamic in the workplace that you describe.

  • Chris Padfield

    The hardest part of these companies is managing churn – LTV is so dependent upon how long people subscribe (and thus affects how much you can spend to acquire a customer which feeds into how big your addressable market is). So you need products people are not going to be bored by; it’s that “magic product” that is a mix of something people want regularly but changes enough that people are interested in subscribing for the long term – particularly if you are essentially subscribing to a curation service.

    The most successful companies in the space seem to be selling relatively generic products (shoes, snacks, dvds, coffee etc) that people regularly want but the supplier can provide long term variety which prevents boredom; my guess is boredom is still the biggest reason for people cancelling subscriptions though.

    This does not apply to “necessities”; Amazon has been pushing their subscription models for household cleaning products and the like; but I can’t see how they can ever be price competitive with supermarkets on these types of deliveries though without bundling – which does not really work as people use household products at unpredictable rates.

  • Thanks Chris. Your notion of a ‘magic product’ is spot on.