The earliest subscription services such as newspapers and milk cartons have existed for decades without much attention. However, In the past five years, we have seen an explosion of innovative startups using the subscription business model to dominate their niche, beating out incumbents in the traditional retail sector.
This disruption is happening across a wide variety of industries, with over 2,000 business entities that operate under the subscription model in the United States alone. Meal kit subscription service Blue Apron went public earlier this year at a company valuation of nearly $2 billion. Birchbox, the New York-based startup that sells monthly boxes of beauty samples, is now valued at over $500 million. And Dollar Shave Club, the eccentric shaving brand, was acquired for over $1 billion, just to name a few success storiees.
Success achieved by early players in the industry has inspired a fresh wave of entrepreneurs to apply the subscription box model to new areas. Many of these hot startups are proving you can leverage big data and machine learning models to create extremely lucrative steady sources of recurring revenue.
One example of this is Trendy Butler, which offers a $65/month subscription box that comes with a combination of designer clothing (t-shirts, jackets, pants, etc.). The company, like many of today's subscription services, uses an algorithm that collects your personal tastes and preferences (like sizes, styles, colors, etc.) to craft the perfect mix of outfits. It's like Spotify, but for your clothing.
In analyzing the success of startups like Trendy Butler, I dug into why the subscription service model is likely to beat out conventional brick and mortar retail long term. Here are 3 reasons why:
1. Personalization at scale.
The assumption that entrepreneurs must operate under is that their customers are inherently trying to maximize their personal value while doing as little work as possible. In the case of shopping for clothing, we all want to look good, but many of us do not want, have the time, or frankly the talent to pick out the best outfits.
That's what fueled Trendy Butler's founders into realizing that we can use technology to completely rethink the way a shopping "experience" is delivered. Rather than randomly recommend products, predictive machine learning algorithms are used that take in a large data set (100+ points) of personalized information. As you expand the scope of the inputs to the algorithm, it gets smarter.
As recommendations are able to improve and become more personalized, the traditional brick and mortar way of doing business will simply not be able to keep up.
2. Predictable revenue sources.
Subscription business models also bring a sense of predictability that the retail industry has been lacking for decades. Since many stores cannot accurately forecast demand, there is often lots of waste, saturated product and overhead costs. These inefficiencies can often mean the difference between success and failure for many retailers.
Subscription companies circumvent these costs by doing much of the work behind the scenes. Additionally, most of if not all of their customers are paying monthly in exchange for a routine service/product. This is an extremely secure source of revenue that companies can develop over time
3. Establishing relationships with customers.
There is something special about opening your door to a new package even just once or twice a month. I personally love it when I receive a shipment from BarkBox and get to see my puppy light up with joy. The surprise in every subscription box is a unique opportunity for a company to delight their customers and provide a unique and memorable experience.
These touch points, which are rare in most other industries, develop customer loyalty. Over time, subscription box businesses tend to develop relationships with their customers because of the recurring nature of the interactions.
Retail is far more transactional as most of the instances are one time exchanges. With subscriptions, there is a constant need to interface with customers and continue the relationship.
As more and more companies infiltrate different industries, the only true competitive advantage startups will have will be in their ability to establish a strong and loyal community of backers. Building defensible relationships with customers is a great method of doing just that.