By Paul Jarrett, CEO & Co-Founder of Bulu. Contributors Nicole Bauer & Paige Piper of Bulu.
As the CEO and co-founder of Bulu Box, the 6th Subscription Box and also the first non-beauty box to hit the market back in 2012, I’ve had a front-row seat to the transformation of the Subscription Box industry. And I’m here to tell you that Subscription Boxes will experience a major evolution in the next five years.
Since launching Bulu Box, we have evolved into a private-label Subscription Box company that works with big brands like Disney and Scott’s MiracleGro to leverage our expertise and fulfillment strategies to bring new revenue streams to life for our partners. We’ve built many successful Subscription Box programs. We’ve also watched many fail...including our own flagship program, Bulu Box. More importantly, our experience helps us see what’s around the corner for Subscription Boxes.
Before I can tell you where the future of Subscription Boxes is going, we should probably start by defining what constitutes a Subscription Box. Since there is no universally accepted definition of a Subscription Box, allow me to offer you ours which is based off doing this for 8 years: Subscription Boxes describe the product category made up of multiple, varied items shipped together on a recurring basis (you’re welcome, Miriam Webster.) Subscription Boxes can further be divided into three primary categories that unlock unique customer experiences: curation, exclusive access, and replenishment.
Subscription Boxes describe the product category made up of multiple, varied items shipped together on a recurring basis.
Not all Subscription Boxes are created equal. For example, each Subscription Box company measures and reports key metrics--such as customer acquisition cost (CAC) and lifetime value (LTV) --differently, which makes it difficult to compare apples to apples across the industry. In fact, disparity in terminology makes it even dangerous to discuss topics like growth and sustainability. Afterall, is it fair to accept “subscriber counts” that are actually a reflection of a company’s email list rather than the number of paying customers?
Subscription Boxes will endure, but they must evolve to do so.
The current state of the Subscription Box industry is widely debated. A slowing of growth leads some to think that Subscription Boxes are on their way out, while others argue that they're here to stay.
I prefer to think of the current state of the Subscription Box industry in terms of its Product Life Cycle. Back in 2014, when Steven Sinofsky introduced "The Four Stages of Disruption,” he provided a framework for describing disruptive industry changes which happen in four key phases. First, an innovative idea is born. Then it rapidly grows for a short period of time that is followed by maturation. Finally, the innovation peaks and begins to decline. Sometimes during this declining phase, another innovation is conceived that is different enough to start the whole process over again on a new curve.
Right now, the Subscription Box industry is in the transition from maturity into decline, and we’ll soon see many of the Subscription Boxes fizzle out completely or radically change their strategies to embrace other pockets of innovation.
(My hunch? Key features of the Subscription Box product, such as Specialty Fulfillment and super kitting, may break out into their own markets. But I'm getting ahead of myself.)
The Birth of Subscription Boxes
A decade ago, the Dot.Com bubble gave rise to eCommerce, and suddenly established retailers were competing with scrappy eRetailers and struggling to keep pace. Sooner or later, brick and mortar shops realized they also had to launch online storefronts or lose their customers.
And many large brick and mortar retailers did lose their customers. (RIP: Borders, Radio Shack and Sports Authority). We all remember what the now-infamous Blockbuster CEO Jim Keyes, said back in 2008, “Neither RedBox nor Netflix are even on the radar screen in terms of competition.” In 2011 Keyes led Blockbuster to file for bankruptcy, earning himself a top spot among retail CEOs whose denial of innovation in a digital era caused their company to implode. This resulted in pressure from executive boards for large retailers to offer customers online shopping experiences.
Occurring simultaneously was the wide adoption of SaaS business models. Out of this economic primordial stew emerged the Subscription Box industry. Subscription Boxes provide CPG companies the opportunity to apply subscription business modeling to the marking and sales of products in a B2C eCommerce context. Subscription Boxes are uniquely positioned to complement and bridge the gap between brick and mortar and eCommerce.
Despite the mass extinctions predicted, the market has managed to sustain the buoyancy of all three sales channels because rarely do customers use one retail option to the exclusion of the others. It’s all about convenience. It’s a lot like what folks have said about open-air offices vs. cubicle farms. It’s less about one option being better than the other, and more about providing choices for people to make the decisions that work best for them.
The Fast Growth of the Subscription Box
It didn’t take long before every eCommerce entrepreneur caught wind of the Subscription Box train and began to introduce their own ideas and products into the market. Makeup was the first vertical to experience high growth beginning with BirchBox and quickly introducing others that were fast to scale like Beauty Army and Ipsy.
Other CPG product verticals followed suit and soon we saw the rise of health and wellness boxes, food delivery, clothing, beverages and more. Ultimately, the Subscription Box industry ballooned and peaked in 2017, with over 10,000 Subscription Boxes on the market.
Further validating the high growth, the Subscription Box Trade Association came into existence in 2015. They quickly created SubSummit and Recur, two conferences focused on the Subscription Box industry, intended to explore the continued growth and best practices that have emerged over the past five years.
Others capitalized on the industry by creating sites like MySubscriptionAddiction and HelloSubscription to give consumers insight into the best box programs on the market.
Subscription Box companies were quickly faced with the age-old question of “will they buy” and consumers were quick to answer “YES!” On average, men and women between ages 18 and 44 are subscribed to upwards of three Subscription Boxes at a time.
The Maturity of the Subscription Box
As Subscription Boxes began to reach maturity, a growing number of support services began to emerge. From apps that help facilitate recurring billing, to Cratejoy where you can order customized packaging in small quantities.
We witnessed the rise of companies like Stitch Fix, FabFitFun, and Rent the Runway who have all invested millions of dollars in advertising to grow their subscriber base on their path to profitability. In the process, they wiped out many of the smaller copy-cat brands that simply couldn’t compete with the major players.
And In the peak of the maturation phase, Dollar Shave Club sold to Unilever for $1B. That’s a lot of zeros for a non-proprietary razor.
The Decline of the Subscription Box
Now that we’re halfway through 2020, it’s interesting to survey the players who are still in the Subscription Box Game.
You’ll notice Plated, among others, are no longer with us. Even LootCrate went belly-up before receiving a buy-out.
So what we have learned from their failure? High customer acquisition cost coupled with high churn is a recipe for disaster, especially for mom and pop Subscription Box businesses. In fact, according to the SUBTA 2019 Annual Report, Subscription boxes have the highest churn rate of all of the segments at a median churn of 10.54%. Plain and simple, you need a lot of capital to sustain the cost to acquire and churn out your customers, and mom and pop shops simply can’t afford it.
High customer acquisition cost coupled with high churn is a recipe for disaster, especially for mom and pop Subscription Box businesses.
So who has risen to the top despite the decline? Truly, it’s the Subscription Boxes who are using the box as a marketing vehicle. Companies like GNC, Disney and Stich Fix benefit because they leverage economies of scale, data analytics and marketing. They drive additional sales to both their bricks and mortar locations as well as to their eCommerce channels. Ultimately, they succeed because the Subscription Box is more than a product: it’s a method to engage their customers with unique in-home experiences that increases brand affinity beyond a sales channel.
Like Brick and Mortar, many Subscription Boxes will die…
Similar to brick and mortar retailers many Subscription Boxes will die. A combination of pressure to go direct-to-consumer as well as the appeal of recurring revenue is leading numerous large retailers to enter the industry. For every successful launch, there are countless others that fade out. The reason? It’s a challenging and expensive market to navigate.
When we first started Bulu Box our cost to acquire a customer was less than twenty-five cents. Within three years that amount climbed to nearly $30. We were not prepared to sustain the financial hit to effectively market the box and acquire subscribers at a fast enough rate. This situation is not unique. It’s happening to thousands of Subscription Box companies right now. The reality is, the industry is still young and many Subscription Box companies are learning on the fly.
So now what? The big dogs are going to squash the mom and pop box programs. Though controversial, it’s true. Much like the brick and mortar evolution, small Subscription Box companies are not going to withstand the hit as more and more billion-dollar companies enter the scene. Their marketing power and brand recognition through their existing customer base is simply too strong. It’s like Walmart moving into the small town and wiping out the local grocery store. We don’t have to like it or agree with it, but we also don’t mind only paying $2.99 for a gallon of milk.
A New Lifecycle: Smart Marketers Will Leverage Subscription Boxes
Considering the industry cycle it’s arguable that Subscription Boxes are somewhere between the maturity and decline phase. But, there’s a rebirth coming where Subscription Boxes are going to experience a breakthrough and new growth as more and more large retailers begin to offer their own boxes as marketing vehicles.
In fact, arguably the big brands that leverage a Subscription Box channel as part of their loyalty marketing program will THRIVE.
Studies show most consumers belong to an average of 29 loyalty programs. However, most are only actively participating in about a dozen. Customers sign-up to get the initial offer or discount and then their involvement fades. Brands need to structure loyalty programs in a way to ensure continuous customer engagement. Subscription Boxes allow them to do this.
Subscription Boxes, when leveraged as a marketing tool, allow bricks and mortar to get their products into the hands of their ideal customers, in the place where customers are most likely to actually use the products: their homes. In talking with brand partners about Subscription Boxes, we often describe them as an engaging direct mail piece with a 100% open rate.
For example, GNC revamped their customer loyalty program with a multi-faceted brand activation impact. One component of their PRO Access paid-membership tier is a PRO Box delivered to customers twice a year featuring personalized samples. The PRO Box drives long-term profitability by increasing customer acquisition, activation, referral, retention engagement, and purchases.
Leveraging a Subscription Box to distribute samples is proven to be the most effective way to change consumer behaviors, such as switching brand loyalties, increasing engagement, and driving new sales. When executed well, sampling is an opportunity to introduce products to your customers they did not even realize they wanted. It also has the added benefit of serving as a focus group when customers are invited to provide feedback, which can facilitate the research and development for new products, flavors, and packaging with the customer in mind.
Additionally, a report from Crimson Hexagon explores how Subscription Boxes can be a vehicle for delivering a whole host of customer benefits. From upselling curated, complementary product offerings to building community, or surprising and delighting customers. There’s also the opportunity to conduct research and development through data mining with the end goal of driving repeat sales both online and in-store.
The market will continue to support a blend of bricks and mortar, eCommerce, and Subscription Boxes for many years to come, but the future of Subscription Boxes belongs to the smart marketing teams of big retailers to recognize the opportunity for what it is: an ideal way for increasing customer affinity.
But don’t take my word for it. All the major players are validating my predictions.