The days of newspapers hitting doorsteps every morning may be dying out, but that era's delivery method is thriving. Beyond Netflix and Pandora is an expanding economy of subscription-only startups, which regularly send customers everything from fashion accessories to online snowboarding lessons.
So should your business go subscription? Some veterans say, unequivocally, yes. There's "a lot of experimenting, but we really feel we've stumbled onto something big," says Seth Peterson, CEO of All You Can Arcade. The startup delivers, yes, monthly rentals of Mortal Kombat, Ms. Pac-Man, and other old arcade games, mostly to tech companies looking to provide hip employee perks.
Subscriptions have paid off handsomely for some startups, including Birchbox (beauty products), Blue Apron (make-at-home meals), and Dollar Shave Club (men's razors). The three have collectively raised more than $150 million, and each serves hundreds of thousands of customers per month. When the model works, it's great. Customers pay up front, giving the business the cash flow to fund operations, and recurring sales mean predictable revenue. But if you plan to start selling subscriptions, make sure you can answer these questions:
1. Are your customers ready for commitment?
"You can't just convert to a subscription business and expect your revenue to grow," says Michael Dubin, CEO of Dollar Shave Club, which ships razor blades to more than 800,000 members. "Is the subscription an enhancement for your customer? If not, then don't do it."
Dollar Shave has been subscription-only from its inception; Dubin launched his business on the gut feeling that other men hated the process and cost of buying razor blades as much as he did. But other companies, including meal service Plated and digital library Scribd, have simultaneously offered single-purchase and subscription options. Scribd still offers both, but CEO Trip Adler says readers far prefer the flexibility of a monthly pass. Acquiring such market insight can take a long time.
Planning Pod spent years building a wedding-planning software tool--only to discover "that brides will spend $7,000 on a wedding dress but won't pay $30 a month for software," co-founder Jeff Kear says. Planning Pod eventually found more customers among event planners.
2. How long can you sustain risk?
Supply and demand often will not immediately match, putting your finances in jeopardy. Plated spent six months testing dozens of price points and menus before finalizing its ready-to-cook meals; co-founders Nick Taranto and Josh Hix funded the tests by emptying retirement accounts and maxing out credit cards, burning through tens of thousands of dollars. "There's a long trough of doubt and hardship before you get back to managing success," Taranto says.
3. Can you sacrifice your traditional retail relationships?
If you succeed at subscriptions, you may find yourself winding up in a brick-and-mortar setting; witness Birchbox, which opened its first physical location in July. "We are bringing our tried-and-true 'try, learn, buy' model to our store," says co-founder Katia Beauchamp. But it can be more difficult to do the reverse and back away from the traditional retail model, especially if you already have well-established business relationships. Evermore Pet Food sells frozen pet meals via distributors to approximately 75 retailers, but now co-founder Hanna Mandelbaum wants to sell subscriptions directly to consumers. That would give Evermore a wider distribution, better margins, and a more consistent cash flow--but it could also damage sales to the loyal retailers that built the brand. "I need to make more money, but I also need them," says Mandelbaum.
Ultimately, short-term sacrifice may be necessary to make a long-term subscription model pay off. Scribd lets subscribers read unlimited books, but it must pay publisher fees for each book checked out--a cost that can outweigh revenue from voracious readers. But Adler says he'll forgo some short-term returns to build up loyal subscribers: "The main thing is, you want people to keep using it for a long time, because that leads to more revenue."