Subscription Box Models

The early 2010s marked the beginning of an innovative type of business model – the e-commerce subscription box. The subscription model itself wasn’t anything new – Netflix and many other SaaS companies use this model to generate a stable method of recurring revenue. However, applying this to certain kinds of physical goods and services is what allowed for a niche market to really come alive. Throughout the decade, more and more of these kinds of companies rose (and fell), with a few making it big and an overwhelming majority coming up short.

Most consumers are familiar with Dollar Shave Club and Stitch Fix, the two biggest benefactors of this business model. Most are also aware of the cautionary tale of Blue Apron, whose stock has imploded and has been showing very faint signs of life after its IPO in June of 2017. The fact is that the market for these kinds of boxes reached its peak back in 2014-2015, with fewer and fewer companies being launched since then. This market is also dependent on the product or service being offered in a box.

Based on this McKinsey report, there are three types of subscription box models: replenishment, curation, and access. Replenishment models are based around commodity items, such as razors, diapers, or contacts. Curation models depend on providing new items and personalized experiences and are typically seen with apparel and food categories. These also happen to be the most common kind of box subscription service that consumers sign up for. Lastly, there’s the access model – these subscribers pay a monthly fee to obtain lower prices of something that would otherwise cost more. These are based around exclusivity.

There are definitely some good and bad things about this model for both the company and subscriber. For the company, most of the revenue they generate comes from this model, whether it’s based on a single package or broken down into different tiered options. For consumers, it allows for an automated option to some of the household goods and services they typically rely on. However, for subscribers of access and curation types, they can quickly become disinterested if their experience isn’t tailored to them, which would cause them to quickly cancel their subscription. This typically happens with a third of users within 3 months of using the service and half of users within 6 months. This is bad for companies because it results in high churn rates, which essentially measures the life of these kinds of companies.

Looking at the market at a macro level, this article here shows how the growth of subscription box companies have slowly declined in terms of the number of companies launched year-over-year since 2015. About 17 of every 20 companies have been bootstrapped, with a mere 2% ending up being acquired or going through an IPO at the end. Another concerning trend is the statistic that both the number of investments in this model and the amount invested have both declined since 2015 as well (with an increase in 2017 when compared to 2016). The last note here is that every year (outside of 2017), at least 30% of companies that have launched have shut down.

From an investment perspective, it may seem like a bearish market. Although this market is quite broad with respect to the categories of goods and services offered, it seems like a decline has been in place the last few years in number of companies launched and investment money shelled out. That isn’t to say that there are a few exceptions to the rule, but one must look close and deep in order to spot them.