Enough With the Boxes Already…

Subscription commerce is one of the over-invested sectors in the Valley today. At this point, it seems like it’s in every vertical you can imagine. There is Birchbox for monthly curated beauty samples, Blissmobox for organic products, Babbabox for entertaining kids, and even Boinkbox for adult toys (and the list goes on). Is subscription commerce a sustainable business model in the long-term or is it just a matter of time before consumers reach subscription overload?

The Model

The idea behind Birchbox is to surprise and delight consumers on a monthly basis, with a box filled with beauty products curated based on their needs. Customers sign-up online and fill out a “beauty profile” so that products can be curated based on their preferences. For $10 per month, the customer then receives a box with five to six beauty samples ranging from skin care to make-up and hair care to nail color. The samples are sourced from popular brands as well as niche brands. Sometimes the box also includes a bonus sample for example, a cute heart-shaped nail file or a chamomile teabag. The Birchbox website also features “how to” videos and interviews on latest products and trends. There is also the opportunity to buy full-size products directly through the Birchbox website and earn loyalty points through these purchases that can apply towards subsequent purchases. In 2011, the New York City-based startup raised $10.5 million Series A funding from Accel Partners, First Round and others2.

The subscription model has several advantages for both businesses and consumers. For businesses, especially for start-ups, the upfront payments, recurring revenue stream, and the element of predictable demand are crucial. For consumers, subscription commerce has become a way to discover new products and experiment in categories ranging from beauty to food (any many more) with products being delivered right to your doorstep. At the same time there is an element of surprise when you open a box you have just received (full disclosure: I have an annual Birchbox subscription and have enjoyed it thus far).

Is This Sustainable?

Given the proliferation of subscription boxes, especially in the beauty space, Birchbox has seen a lot of competition via domestic and international clones. One way to beat competition is to acquire it – which is exactly what Birchbox did in September 2012 with the acquisition of JolieBox which offers a nearly identical service in Europe3.

In contrast, the Amazon “Subscribe and Save” model for items such as toilet paper, toothpaste, and other consumables is a lot more compelling. While it lacks the surprise and delight aspect which comes along with a Birchbox subscription, I have no reason to stop my Amazon subscription; the free shipping is a plus and I get a subscription discount on essentials. Additionally, it saves me a trip to the grocery store and having to lug home bags of consumer staples. However, I have little incentive to renew my annual Birchbox membership. The ‘surprise and delight’ aspect loses its charm after 7-8 boxes because when you get your 6th face cream which you throw away or you see your ever-growing and unused stash of sample fragrances, the rational side of the brain kicks in and you think, “do I really need another year of beauty samples?”

ShoeDazzle, a Los Angeles-based online personalized styling and retail service, recently moved away from its subscription model. Historically, members paid a monthly $39.95 fee in exchange for a pair of shoes which could be picked from a ‘personalized showroom’ curated by Hollywood stylists. In its new model, the retailer continues to send its members a monthly email including the showroom option, but consumers are not charged if they do not respond. Additionally, consumers can go to the website and make purchases whenever they like, and as often as they like, bringing ShoeDazzle’s business model closer to an online shoe retailer such as Zappos or Piperlime. Is ShoeDazzle the first of many subscription commerce businesses to get squeezed out of a crowded marketplace?

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I received my first Birchbox in the mail a couple of weeks ago. After a good friend worked there this summer and a few of my friends had signed up, I was curious to see what all the hype was about. While I was totally delighted to receive the pink box full of fun, new samples (a bronzer primer, facial cleanser, hair treatment, hand cream, and laundry detergent), I ultimately question the sustainability and scalability of this model for a few key reasons.

1)     1.  Stockpiling. Beauty consumers love to try new things, but they also eventually find tried-and-true favorites that they develop a loyalty for – particularly in tough economic times.  After a certain point in time, samples are no longer necessary and end up feeling more like stockpiling waste and clutter, rather than exposure to new products. In fact, the purpose of getting samples is to hopefully find the perfect product, and the joy comes when you actually end the tireless search!  Sephora addresses this issue well by allowing the consumer the ability to opt-in or out of sample receipt each month. (As a point of comparison, I opt-in to the Sephora sample option 1 out of every 5 times it’s offered to me, because I just don’t need or want five new samples each and every month.)

2)      2.  Lack of choice.  I love beauty products, but at the end of the day, I find the majority of items in the Birchbox to be supplementary nice-to-have’s (i.e. a bronzer primer?, laundry detergent?).  The value in these monthly packages is in the authoritative customization and curation of essential products that solve a real need. Taste-testing new items is important but at the end of the day (again, especially when money gets tough) people eventually drop the “nice-to-haves” and stick with the must-haves. The subscription commerce companies that will ultimately win a member for the long run is going to solve a real need with real products that are more personally customized to his or her needs.  Sephora also addresses this issue well by allowing you to choose the samples you want, so if you have no need for a new skincare item, you can choose the fragrance sample instead. 

3)     3.   Lack of conversion. Suppliers of Birchbox samples are primarily concerned with Birchbox member’s conversion to full-size products.  If this isn’t happening, they will no longer be willing to supply their items to Birchbox’s cause. To date, Birchbox is not offering its members enough incentive to purchase from their site.  The loyalty program is a start, but Amazon offers me free 1-day shipping, recommendations based on what I’ve previously purchased, reminders to purchase again, member ratings and reviews, 24-hour / 365 day-customer service, as well as a cheaper price for the product. It’s a no-brainer when it comes to the purchase decision.

4)      4.  Difficulties in expansion.  Birchbox’s current user base (at 45,000 members) is very small, and when considering expansion in to non-beauty verticals, economies of scope are also relatively non-existent.  Whether it’s food, clothing, stationary or jewelry, these verticals require completely new relationships to be formed, and the products likely require different handling and customer specifications.  Though Birchbox already has 45,000 paying members, as a point of comparison, Gilt had 2MM+ members in its core business before it expanded in to Gilt City, Travel, Taste, Man, etc.  Despite this larger user base, a number of industry articles have suggested that Gilt expanded too fast, and many elements of the culture, morale, strategy and product quality have consequently suffered as a result.

Given these issues, I suggest Birchbox focus on providing more value to its members by allowing more choice in both frequency of delivery (opt-in / opt-out) and in items included (skincare, fragrance, etc).  In addition, Birchbox should work to optimize its service model so that it is more customer-centric, providing free shipping, round-the-clock advice and expertise and additional product discounts for full-size purchase. Lastly, before expanding in to new non-beauty verticals, the company should focus on maximizing the value from its core beauty business, increasing its customer base through customer acquisition tactics (i.e. enhancing referral marketing), strategic partnerships (i.e. hotels, spas, airlines, bridal, fashion-related e-commerce sites like Gilt, RTR, etc) and promotions.  Once it has increased the size of its core member base through these partnerships and acquisition tactics, perhaps the company can consider a more essential, must-have category for its future expansion.

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