Yesterday's announcement about ShoeDazzle’s and JustFab’s merger is not a sign that the subscription model doesn't work online. The subscription model itself is nothing new and has created sustainable businesses in the past (say, book clubs). But "negative" option businesses (when products are sent to you and you decide to whether to keep them) are hard to scale profitably into standalone businesses. And that’s likely the motivation for the merger.
It’s natural that in a market with a lot of start-up funding and competition, you begin to see consolidation. It’s a war out there.
What’s the rub?
The merger does, however, does raise a key question for investors and management teams as they navigate the subscription and retail market: Is the model sustainable as a standalone business, or is it best served as part of a larger retail company?
There are two key challenges subscription companies face being independent, stand alone businesses:
- Customer acquisition and churn: The economics are challenging. With so much competition in the market, it’s expensive to buy and retain customers. Retail margins and high churn rarely justify the customer acquisition costs. So how do you grow without buying customers?
- Expensive operations: Consistently growing your catalog is very expensive to operate in an inventory-taking retail business. It creates the risk that you’ll get stuck with unsold inventory and returns.
Does scale help a standalone business?
It’ll be interesting to watch and see how the JustFab/ShoeDazzle deal pans out--without a doubt, however, it will test whether subscription-only scale can solve its inherent challenges.
As an outsider with no interaction with either company, I've always considered a subscription businesses as a great potential add on feature to large retailers. It’s a powerful way to engage customers, upsell/cross-sell, and, depending on the business, test styles and liquidate unwanted inventory. The folks at Birchbox, for example, seem to be building a subscription business as the front-end to a traditional retail business. I believe we're likely to see more consolidation in the pure-play subscription market in the coming year--specifically, large retailers folding in subscription models. Imagine DSW owning JustFab, Saks owning Gilt, or Petsmart owning BarkBox.
For the deal announced yesterday, the big question is whether JustFab's scale will allow it to build a big, profitable, standalone business.
As an entrepreneur, I have tremendous respect for the journey the ShoeDazzle team has taken and am rooting for their success as part of the larger JustFab retailer.