Great ResignationClimate ChangeLeadershipInflationUkraine Invasion

This Big Retailer Could Kill Your Subscription Startup

December 14, 2015, 8:02 PM UTC
Courtesy: Birchbox

Some of you might be old enough to remember the milkman – the person who delivered dairy products to your home every few days. Or you might recall the Columbia Record Club, which regularly brought music to mailboxes. And then there’s the venerable and still-going Book of the Month Club, which keeps subscribers abreast of trends in literature.

Let’s keep that history in mind as we consider the soaring popularity of subscription services in which boxes of products or food or goodies appear regularly at your door. Companies like Birchbox, Blue Apron, Club W, OwlCrate, BarkBox, and Bespoke Post are among those leading the way in services that let consumers sample beauty products or exotic food or young adult books or other specialty items without leaving the house. “Best of” suggestions for subscription boxes are also popping up this season as hot items on numerous holiday gift guides – which would certainly lighten Santa’s sleigh.

Yet the basic concept is as old as the cheerful man in white who left bottles of milk in the box on your front step. What’s new about subscription boxes is their use of Internet technology, in which consumers can order subscriptions online, customize the items they want in some cases, and record and upload their reactions to social media. And then there’s the emotional effect that the milkman didn’t spark – the experience of opening the box, that anticipation of the surprises inside and the sense of gift giving … to yourself. It’s like Christmas every month without the standard rejoinder of: “Oh, you shouldn’t have.”

It’s a powerful draw but before entrepreneurs rush into the subscription box space, they should take heed of a number of factors, including an overloaded market and the entry of big players. And there’s always the issue of retention – will subscribers become loyal fans or does the box require a stream of new customers eager to try a new thing?

There’s no question that subscription boxes are seeing explosive growth. Liz Cadman of My Subscription Addiction says her site lists 1,500 subscription boxes as of November 2015. This includes all types of categories and price ranges: pure subscriptions, limited editions and hybrid models, which have both subscriptions and a physical retail space.

Boxes span the spectrum from “mass customization” such as with snack service Graze to “same box” for all its subscribers. Bespoke sends the same box to all customers each month but allows customers to skip boxes they are not interested in. Stitchfix offers fashion and Quarterly access to boxes curated by celebrities. Some boxes cost as little as $10 to $20 a month; the Opulent Box costs $25,000 per quarter for those who want to open a box of luxury jewelry by name brands.

Boxes may allow consumers to sample products before they buy and thus could be a great vehicle for manufactures who wish to encourage consumers to try a product before they buy a full-size product. Some box services, however, mostly those focusing on food, are not particularly economical. Consumers would likely pay less if they were to buy the individual items in a grocery store. But consumers are often looking for convenience and are overwhelmed by too much variety; with a subscription box, someone is managing that for you. So box subscribers are motivated by a combination of rational choices and affective emotional responses.

Most importantly, a company must develop deep relationships and customer loyalty. Over the long term, it is not customer acquisition but rather customer retention that will separate the box subscriptions that thrive from those that flounder.

Which is why big players, such as Walmart (WMT) and Amazon (AMZN) – which have started tip-toeing into this space – could be formidable competitors. They already know how to do this – they have the data, the logistics and the infrastructure. Amazon’s Prime Music service with its personalized recommendations and playlists triggers anticipation and is stimulating. Walmart is trying to do the same with its beauty box and baby box. The subscription box business is complex, requiring smart, nimble and holistic cross-functional integration and execution to thrive and excel over the long haul. Nevertheless, one cannot minimize the importance of emotionally engaging one’s customers; herein lies the advantage of entrepreneurs, specializing and dedicating themselves to subscription boxes rooted in passion and creativity.

Venture capitalists are taking note and investing in this space: Birchbox has received $70 million and Blue Apron has received $135 million – giving it a $2 billion valuation. But the fallout may have begun: Several of the 1,940 subscription boxes listed on the directory Hello Subscription were already noted as closed! So it is important to assess what it takes to run such a business.

Sure, you can get started quickly but it’s a very challenging business model for the long haul. Running a subscription box service requires that you create the ultimate integrated company with excellent strategy to differentiate its value proposition in this crowded space. You’ll need superb marketing capabilities to identify heterogeneous customer tastes and preferences and buying behavior through data collection and analysis.

You must have phenomenal logistics and supply-chain management and you must operate in a highly effective and efficient manner, given the low margins. You must manage lots of moving parts, from sourcing uniquely appealing products to packaging them together and shipping on time for a growing customer base with diverse tastes and preferences. Don’t be overly swayed by the buzz around box subscriptions as holiday gifts.

Still, subscription boxes are likely here to stay, even if the industry consolidates. The milkman may have vanished along with rotary phones, but you can check out the dairy-free subscription box NoMoo. Those who can emulate NoMoo’s unique value proposition and run the ultimate integrated company will be the winners in this innovative, crowded and fast-moving marketplace.

Sharmila C. Chatterjee is senior lecturer in marketing and the academic head for the Enterprise Management Track at the MIT Sloan School of Management.