Why are so many upstart brands in love with subscriptions

Why are so many upstart brands in love with subscriptions
Digitally native vertical brands are betting that subscription led bundling can counter Amazon led unbundling

New York Subway is a strange world, there are many things that one might be amazed by and ads are probably last on the list. But one can’t escape noticing them and recently I have seen so many DNVB (Digitally Native Vertical Brand — sorry, this is a doozy, but here is a good article on them) ads that I had to take time to make sense of them.

The one ad that really got me thinking was quip; they sell toothbrush on subscription, adopting the razor blade model, with the toothbrush head replacing the razor blade. My first instinct was why would anyone need this and why are so many upstarts foolishly trying to replicate Dollar Shave Club’s success. No doubt that CPG brands have been selling us overpriced products with very limited innovation for decades and they need to get disrupted, but why would I want to subscribe to a toothbrush!

Though I picked on quip, quick research will tell you that subscription model is all rage with DNVBs (MeUndies, Harry’s, Ritual, etc.) The interesting thing is that these brands don’t sell on Amazon! Contrast this to my recent post where I posited that Amazon marketplace is the AWS of brands which will (and has) led to an explosion of new brands, born on Amazon and selling to Amazon customers. However, these DNVBs are going for something else. They have an alternate vision of retail, one where they can co-exist with Amazon, owning categories and customers. They are betting on a brand led future of retail.

This vision is audacious and true success can only be guaranteed if these new brands can build (retain) pricing power over a large enough base of customers over a long period of time.

Building a brand led future of retail with subscriptions

The most important thing to appreciate around pricing power is that a brand can have it only if customers are coming to it directly and it has built defensibility against the hundreds of competitors that can challenge its portfolio of products, one by one. Selling on Amazon is inherently unbundled, it is search based and customers go about filling their cart one product type (detergent, deodorant, etc.) at a time. This exposes every individual product to head-on competition with tens of similar products, leading to an unsustainable race.

Alternate models of online retail: Bundling driven by DNVBs owning categories and unbundling driven by Amazon

DNVBs will build pricing power only if they manage to create a future where the bundled model on the left (above) can exist i.e. customers visit A.com (instead of Amazon.com) for buying all the products that they need for that category. DNVBs are hoping that subscription is the silver bullet help them get to that world. Let’s see how.

Subscription is a good test of customer need

Buying a subscription by definition means that a customer is agreeing to have a continued relationship with the brand; it is a privilege that the customer gives the brand. This gives subscription brands a better customer touchpoint than brands which model themselves around a one-time purchase. For sure, it’s harder to get a customer to buy into a subscription but simple trial plans (e.g. Harry’s) can help with that. Not all categories are suited for subscription but it is a model worth exploring for categories where product use is more frequent or a behavior around frequency can be shaped but no fundamental R&D is required to create great products.

Thinking “subscription first” pushes brands to design products and marketing that fits into the subscription model and see if customers are willing to give them that privilege to have the continued touchpoint. It’s a leading signal of a category’s readiness for disruption.

Subscription buys time

Customers get bored easily, novelty of products fades quickly, and there is always something that comes along that promises to change their lives. This means that customers are constantly prone to churning. So, one anchor product is good but brands need to keep it exciting for customers by making tweaks to the anchor product and introducing more ancillary products that make it worth it for the customer to continue the relationship with the brand. Doing this is not easy. With subscription, brands buy time to get to the point when they have more to offer to customers without having to reacquire them. This time window might be a few months, but it is still better than not having any.

Once DNVBs have solved enough jobs to be done for customers in a given category, they have likely given customers a reason to come to them directly, thereby proving success in the bundled model of retail.

Subscription enables building a product portfolio in a cost effective way

It’s well known that CAC has been rising steadily, requiring new brands to need more and more VC money to build a sustainable business. Given that CPG is not a winner takes all market generally (unlike tech), it is important for brands to figure out how to grow with less cash for the endeavor to make sense both for the founder and the VCs.

The secret sauce for CPGs historically has been that they have been able to cross-promote new products to their large customer base to ensure that CAC for any new product is under check. These products then sell on Amazon in mass (though at decreasing margins). Owing to an established touchpoint with the customer, subscription gives DNVBs a similar cross-promotion channel, allowing them to build a portfolio of products without spending exorbitant amounts of money and then selling them to a smaller set of customers but at better margins.

Subscription makes distribution more cash efficient

The need for high levels of working capital is one of the biggest issues faced by startups selling physical products. Inventory management costs and buyer/ supplier payment terms are a big part of that. By allowing better demand prediction and shorter payment terms, subscription allows them to be more cash efficient. Any cash conserved can then be put into product innovation or branding.


Overall, subscription is a great selling (distribution) model to explore and comes with many inherent advantages. Expect to see more of it with upstart DNVBs in commoditized categories with frequent product use. Online commerce is especially suited for experimentation around this model and, given the right incentives, there is always scope to shape customer behavior.

Merchandising your homepage to win

Merchandising your homepage to win
 

One of the hardest but well understood aspects about building an e-commerce business is acquiring the breadth and depth of inventory that can keep shoppers engaged. However, the often ignored aspect in the online world is the art of exposing that inventory in ways that increases the profitability of the business. Physical retailers do a lot of up-the-funnel merchandising but until recently online players have mostly treated merchandising very tactically, limiting it to recommendations on product pages. While this down-the-funnel merchandising is efficient, it leads to a significant missed opportunity to increase the LTV (Life time value) of the already acquired customer.

Effective merchandising on the homepage can be used to engage the shopper at times when he/ she might not be considering buying from your online platform. However, getting it right requires a deeper understanding of user psychology. The problem is harder for players that focus on multiple verticals but solving it at scale can be very rewarding. It all boils down to what inventory to present, when and how.

In my mind there are four states that an effective merchandising strategy on the homepage could address:

  • Create consideration through FOMO (Fear of missing out)
  • Create consideration through needs that will likely arise
  • Shape consideration
  • Leverage previous purchase

Companies need to understand their core customers to know which aspect they should focus on more vs. less.

Create consideration though FOMO

This is all about capturing the fear of missing out. The idea is to drive purchase by creating a feeling of scarcity.

Daily deals: These are meant to get shoppers to come back for those small and big wins that they will feel great about. Everyone likes to win and deal hunting can be very addictive. These shoppers will visit your site few times every week just to check the new deals.

Featured deals (eBay iOS app)

Events: These are limited time events featuring curated inventory within a particular sub-category or for a particular interest. With or without discounts, the idea is to catch shoppers attention and show them what they are missing out on.

Curated sale events (eBay iOS app)

Trending: This is more reserved for hobbyists/ collectors/ arbitrageurs who like to be in the thick of customer tastes and capture either perceived or real value from it.

Trending (eBay iOS app)

Create consideration through needs that will likely arise

This is all about creating entry points for needs that will likely arise at some point. If your platform is there when the need arises, it is more likely to lead to a conversion.

Retail moments: These are inserts that funnel the shoppers into experiences that allow them to be smarter about the purchases they should make for special people on special days.

Valentine’s day insert (Amazon iOS app)

Seasonal needs: This is solely about capitalizing on the spikes in purchase patterns of your shoppers through the year before they go to any other site e.g. winters mean skiing, summers mean beach, etc.

Winter sports gear placement (eBay’s new homepage beta on desktop)

Periodic needs: This is about capturing the needs for consumables because guess what, consumables run out. Given the high frequency of this purchase, the rewards in terms of volume can be realized in short term though low percentage margin of the category might mean that the dollar margin rewards might take longer to materialize.

Frequent refill categories (Boxed iOS app)

Editor’s picks/ Deep curation: This is about convincing shoppers that what they are seeing is the best of the best and that they should consider bringing forward their purchase and not hold it for the future. The idea is to pick one product area and go deep into it with the help of rich images and content. It is easier to execute on narrow/ specialized vertical platforms.

Perfect backpacks (Spring iOS app)

Shape consideration

This is based on shaping consideration in areas where the shoppers have already shown some interest. If done right, this can lead to quick conversion.

Recently viewed: Very simple but effective way to ensure that the recently browsed products remain in the consideration set of the shopper while he/ she is doing price comparison across multiple platforms or simply waiting to make the purchase.

Recently viewed module (eBay iOS app)

Categories you browsed: This gives the e-commerce players continued opportunity to surface new/ interesting inventory in the specific sub-categories that the shopper was shopping in. Since it is not clear if it was the inventory or pricing or something else that led to the shopper not making a purchase, showing this module allows the platforms to convince shoppers to reconsider them.

Inventory from the recently browsed leaf categories (eBay iOS app)

Collections: Collections consist of community curated inventory that is expected to spike one’s interest. What makes them interesting is the personalization based on the browse behavior of the shopper. Showing shoppers collections from the sub-categories they were shopping in can help inspire them in a way that leads to an impulse purchase.

Collections based on shopper’s interests (eBay iOS app)

Top sellers in the categories you browsed: These are designed to close the trust gap that might be inhibiting shoppers from making a purchase from sellers in a category they haven’t previously shopped in. By showing the Top sellers and their followers, the platform assures the shoppers that the community has vetted the sellers and that they can trust them. Following these sellers can lead to continued future purchases.

Top sellers in the recently browsed leaf categories (eBay’s new homepage beta on desktop)

Leverage previous purchase

This is very tactical around making sure that the platform can make more of the already monetized shopper.

Buy it again: Straightforward approach to allow shoppers to buy the previously purchased consumables again.

Buy It Again module (Amazon iOS app)

Complements to what you ordered: The idea is to showcase complementary products to what has already been purchased. Not every purchase would fit this well but it can be a good way to create impulse purchase for some categories such as electronics, home & garden, cars, etc. In some cases, the shopper might not even have realized what complementary item he/ she is missing and this can help them figure that out.

Recommendations for fitness accessories based on Fitbit purchase (Amazon iOS app)

Merchandising is fascinating. The kind of merchandising a platform does tells us a lot about what the platform thinks it stands for. Its hard to get it right in the first go and that is what makes it so interesting.

The Apple-Android story will play out in product e-commerce soon

The Apple-Android story will play out in product e-commerce soon

“You can’t stop the future
You can’t rewind the past
The only way to learn the secret
…is to press play.”
Jay Asher, Thirteen Reasons Why

Times change. Industries change. Apple heralded the golden era of smartphones, and while it still is a dominant player, Android smartphones now have an 86% marketshare. Apple vs. Android battle has primarily been the battle of a closed integrated system vs. an open modular system.

A similar battle will likely play out in product e-commerce as it matures. In this battle, Amazon will play the role of Apple and other e-commerce players will play the role of Android. Apple will dominate but not to the extent we imagine right now.

Why Android equivalents will develop

Every industry goes through a journey of integration to modularization. When an industry is nascent, integrated players emerge to solve a tough problem. As the different components required to solve the problem become better understood and the interfaces between them become standardized, modularized players evolve. This is what happened in the case of smartphones. Apple defined the smartphone and then Android phones sprung up with different pieces of hardware and software put together.

Even after quite a few years of existence, product e-commerce is still a problem that has not been completely solved because of the heavy element of operations. Therefore, an integrated strategy still makes sense. Amazon is trying to pursue that strategy by owning the entire stack from logistics to merchandising. It is continuing to tweak on that stack and make itself more and more differentiated.

However, as e-commerce grows to capture more than just 9% of the retail sales in US, modularization will become more prominent. Logistics processes (packaging, shipping, authentication, returns) will become well defined and third party players will emerge (and are emerging) to manage these aspects. Similarly, thanks to Apple pay, Paypal, etc., payment will cease (and has ceased) to be as much a barrier as it used to be. All of this will lead to the shoppers becoming more comfortable with buying online from a range of websites (marketplaces/ retailers). Confidence/ trust will become less of an issue and the fashion and brand preferences of these shoppers will come to the fore. They will diversify beyond Amazon online the way they have diversified beyond Walmart offline.

How modularization will manifest itself

As this modularization happens, we will see the emergence of interesting buy-side experiences that will leverage the scale of more open marketplaces such as eBay. Specifically, eBay will become even more open and adopt a modular strategy to remain competitive. It has already opened up its inventory for anyone to utilize with the recent launch of its buy-side APIs. These APIs allow end-to-end transactions to happen off-eBay. However, it will not stop there. It will also partner with third party logistics providers to fill the gaps in its stack so that it achieves the baseline expectations of shoppers on delivery, returns, etc. Figure below shows the visualization of the stack.

Amazon’s e-commerce stack on the left and emerging modularized e-commerce stack on the right

Interesting buy-side experiences built on top of open marketplaces will fulfill very tactical but important needs similar to how Android filled the need of having a smartphone without going broke. A live example is Wikibuy, a Chrome plugin, that does price comparison when you are shopping online and tells you if it finds a better deal.

Wikibuy showing the savings if I was to buy this item on eBay instead of Amazon

More examples were highlighted in this WSJ article recently. Retailers such as Crate & Barrel are filling their inventory gaps by partnering with different intermediaries without owning the inventory. These intermediaries such as RevCascade (a dropshipper) are taking up a bigger role in curation and analytics to make sure only the best products show up on Crate & Barrel so that Crate & Barrel is able to maintain its reputation as a more tasteful yet exhaustive online retailer of home furnishings than Amazon. Retailers across different niches are also doing the same thing to make sure they continue to occupy the mind-space they had in the offline world in their domain (sports, fashion apparel, motor parts, etc.).

Why Amazon will continue to go the Apple way

While the industry transforms, Amazon will double down on the stuff that makes it special. This is obvious from all the investments it is making into things like Prime Air. This is the only way it will be able to make the billions of dollars it has spent building warehouses still count. Similarly, it would want to make the most of the economics of each shopper by not encouraging off-Amazon transactions. A shopper visiting Amazon’s site is much more profitable for Amazon than a shopper who completes the purchase off-Amazon. This is because of Amazon’s ability to sell ads which has become a $1 billion business already and the chance that it can promote bundling to limit its shipping cost as a percent of sales.

One not so obvious factor that will keep Amazon on it’s Apple like path is the competition with Walmart. Walmart wants to play the same game as Amazon which means Amazon cannot let go now.

The one big difference compared to the Apple-Android play in smartphones probably is that in e-commerce, I don’t see a Google that will dominate the modularized industry. That Google will have to be a player in the merchandising layer of the stack but it is not obvious who that could be. It might as well end up being multiple droids dancing.

Fast fashion e-commerce is at the cusp of breaking out

Fast fashion e-commerce is at the cusp of breaking out
 

E-commerce has gone through an interesting journey over the last decade, colonizing categories one by one. While some categories such as electronics lent themselves to disruption early on, resulting in the bankruptcy of incumbent brick and mortar stores such as Radioshack, others such as fast fashion have been famous holdouts. However, because of the confluence of multiple factors, fast fashion is now set to get disrupted by e-commerce and many are scrambling to take a piece of that pie.

In this blog post, I will argue why the time is right for fast fashion e-commerce to break out and in my later posts I will talk about what the winners could look like.

What is fast fashion?

It is important to understand that fashion is not one thing. Fast fashion, which is the 4th tier in the pyramid below, is very different from the bottom 3 tiers. The difference lies not only in the buyer needs but also in the industry setup from marketing to supply chain. As per Wikipedia, “Fast fashion clothing collections are based on the most recent fashion trends presented at Fashion Week in both the spring and the autumn of every year.” In other words, clothing that is readily available on Amazon today and fast fashion are two very different things.

Why has fast fashion been a holdout and why is now the time for the holdout to weaken significantly?

Online shopping wasn’t as much fun a decade ago because a lot of customer needs that were met in the physical world were not met in the online world. That changed. However, the needs for fast fashion shopping are more nuanced and it is only now that those needs can be met online. Below are the conditions that will allow those needs to be met:

  1. Social taking the lead: Fast fashion buying is an inherently social experience. You try out different styles in the fitting room and seek opinion of your dear ones on what to buy. At the time Amazon was building its presence online, majority of its traffic was coming from search and customer reviews were not as elaborate. So, the experience was very cut and dry. However, thanks to the rise of social media, now more than 30% of the referral traffic on the internet (Forbes article) comes from social channels. Social is inherently trust based with rich reviews from people you know, and that is something that fast fashion shopping really needs to improve its low conversion rates.
  2. Less onerous returns: Online fashion is notorious for returns. Returns sit in the 40–45% range compared to e-commerce average of 4–5% and 8% average for brick and mortar fashion retailers. To reduce the cost impact of such high rate of return, scale and efficient logistics are a prerequisite, both of which e-commerce didn’t have earlier. In addition, returns themselves are set to go down with the advent of virtual trial room technologies using AR (Augmented Reality) and better fit probability estimation by using ML (Machine Learning) on previous purchases.
  3. Frictionless payment: All of us know how painful it can be to enter your credit card information separately in each online destination you visit. eBay solved that problem many years back with Paypal and Amazon has done the same. Unfortunately, that hasn’t necessarily helped online fast fashion retail because Amazon and eBay are not the places to buy that stuff. However, this is set to change with Apple’s announcement at WWDC 2016 that will make Apple Pay the backbone of online transactions on many retailer sites, thereby taking payment friction out of the conversion process. Given the higher price point of fast fashion, iphone users would cover a big chunk of the target audience.
  4. Personalization step-up: Electronics (say smartphone — a big success for online retail) and fashion differ significantly in the level of fragmentation in both the supplier (brand) base and buyer preferences. Fashion is very fragmented and this is plainly because our body types and tastes have infinite permutations and no one brand can cover them all. This is one of the reasons why the conversion rates in fashion linger around the 1.8% mark compared to the average conversion rates of 3% in e-commerce. However, with advances in ML (Machine Learning), for the first time this problem could likely be solved in a scalable manner. It is yet to be seen if the interface for personalization will be chat bots based or something else but there definitely be much more personalization to suit your tastes.
  5. Emergence of mobile: Fashion shopping inherently has a long consideration phase. You need to look through many styles before deciding to make a purchase just to be sure you are getting the best thing thing for yourself. Mobile, on the other hand, is an amazing platform that is set up to capture our attention in moments of downtime as evidenced by the amount of time people spend on Facebook and recently Snapchat. A good part of this downtime on mobile could be captured by fashion catalog browsing so that the consideration phase can kick in. With more frequent touch points via mobile during this consideration phase, the eventual conversion rate will improve and will also become more predictable. This will allow fast fashion retailers to have more confidence of selling season specific fashions in a set time frame, thereby saving themselves from junk inventory, the biggest problem in fast fashion. This wouldn’t have been possible in a desktop only world.
  6. More buyers: Buyers are now much more comfortable shopping online than they were a few years ago and this is critical because fast fashion is a highly personal and emotional category and in such categories mental barriers to not doing something can be very strong. A mindset shift to at least give online fast fashion shopping a try can lead to significant expansion of the potential user base. In addition, there are those people who don’t have access to fast fashion options in their neighborhood but have the resources and aspirations to dress better. These people can now access the fast fashion inventory as more of it comes online.

Evolution of fast fashion will be an interesting one to watch. Stay tuned for my next post on what the potential winners could look like.