Subscription based business models have been around for ages. Newspapers and magazines pioneered the business model and have been relying on it ever since. However, in recent times the subscription model has seen a resurgence in an unexpected manner. A subscription model makes sense for a newspaper due its perishability and the recurring nature of its demand. Products such as shaving products, food and household products are increasingly more often sold on a subscription basis. Dollar shave club, an American men’s razor company that pioneered the selling of razor blades on a subscription basis, was acquired by Unilever in 2016 for a billion dollars.
Dollar shave club was founded in January of 2011 and grew to its billion dollar valuation in merely 5,5 years. This goes to show how disruptive subscription models can be to traditional brick and mortar and click and mortar dominated industries. Part of the success of the subscription business model in industries like the shaving industry is because of the predictable and recurring demand patterns products like razors have. Established companies that sell products with similar demand patterns are quick to adapt to the disrupting trend, offering subscriptions next to their individual sales. Amazon for example sells household products on a subscription basis, and even offer a discount for those who subscribe. Gillette started its own shave club as a response to the disruptive dollar shave club, offering its range of products on a subscription basis. The big brands respond in an attempt to preserve their market share.
One major advantage of the subscription business model is the elimination of the middle man. Which, in theory, allows for undercutting the competition. Companies that have managed to sell directly to consumers have traditionally been able to offer a better value proposition to the consumer. A noteworthy example of this is computer manufacturer Dell that started selling their personal computers directly to consumers around 2007, eliminating the need for retail stores.
By subscribing a customer effectively declares intention to buy a certain product on certain dates. This makes it very easy for the supplying company to forecast demand, resulting in a lower carrying costs of inventory and, in case of a highly perishable product such as food, a lower cost due to deterioration. Predictability of demand may not sound like a noteworthy advantage, but for a company like amazon that generates close to 200 billion dollars in revenue per year inventory management is one of the biggest business challenges.
Not only does the subscription model provide predictability of demand, it also provides an increased payment safety. Many subscription services require direct debit payments. This results in a more stable and more reliable cash flow for the company. Whereas large retail companies have to devote a substantial amount of resources to the collection of revenue, sometimes going as far as establishing debt collection departments. Collecting revenue from customers that haven not paid their bill not only takes time and effort, sometimes businesses are forced to settle for less than the original amount or to completely absolve a bill. With a subscription based business model this problem is less likely to occur and the costs associated with this problem are likely less severe.
Subscription boxes with a return policy is the subscription business model 2.0?
Subscription models that offer a themed box of products with changing contents on a predetermined schedule have been around for a while. This business model has many of the same advantages for consumers as the traditional subscription business model, with the added benefit of being exposed to new products that you otherwise would have missed out on. For the subscription box provider the added benefit is that companies might be willing to provide free of highly discounted promotional products to put into the subscription box. Subscription boxes are a new but growing business. Ipsy, a beauty related subscription box has over 2.5 million paying subscribers that are paying a monthly fee to receive beauty related products.
These subscription box services operate in a very similar way as the previously mentioned subscription based services. But recently subscription box providers in the fashion industry have been offering ways to personalize the content of subscription boxes, and have been offering refund policies. The personalization of subscription boxes is an interesting development that also seems to occur outside of the fashion industry. Vinebox for example offers a questionnaire that allows customers to discover their taste in wine, and adjusts the content of the subscription box to the taste of the customer. Trunk club offers the assistance of a personal stylist to pick out fashionable clothes that fit your style and body. These attempts to personalize the subscription boxes require the cooperation and attention of the customer, the customer needs to invest time into the customization. In return there is an increased chance that the customer enjoys the content of the box.
Trunkclub also offers a return policy, that allows customers to ship back unwanted items from their subscription box. This is odd because a return policy might eliminate one if the main advantage of the subscription based business model, namely the predictability of demand. This trend is most prevalent among the fashion themed subscription boxes, which is not surprising. Trunkclub for example is owned by Nordstrom, a large retail company in the fashion industry. Returned items could potentially be sold through the retail branch of the parent company before they go out of fashion.
Sources:
https://www.reforge.com/blog/ipsy-content-influencer-growth
https://www.bloomberg.com/news/articles/2016-07-20/why-unilever-really-bought-dollar-shave-club
Consumer Value Creation 