Checking the Five Boxes of Subscription Commerce

October 22, 2013
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Blue Apron

Blue Apron makes incredible home cooking easy and fun with a subscription grocery service that delivers original recipes and fresh ingredients to customers nationwide.  BVP was eager to support our and former Bessemer colleague, Matt Salzberg, with seed capital to build Blue Apron. We backed the company at every stage and in June 2017, Blue Apron went public (NYSE: APRN).

 

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2013
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It’s easy to understand the VC attraction to “subscription commerce” – consumer businesses where a curated box-of-stuff (food/makeup/doggie goodies, etc.) is delivered again and again. After years spent basking in the recurring glow of SaaS revenue, investors grow weak-kneed at the prospect of unleashing repeat purchase dynamics on massive consumer markets – especially in an era of “Uber-like” consumer spending behavior where novel business models actually seem like a good thing.

Sell once, get paid forever.  On paper these are great businesses. 

In reality, of course, they’re really fricking hard!

Imagine you meet someone charming at a cocktail party. They tell a good joke or two, and after another drink you say “We should grab dinner sometime!” Everyone nods, laughs. Cards are exchanged. You part ways with zero expectation your paths will cross again.

Several days later you open your front door after a long day at work and there they stand next to your mail pile, sporting a goofy grin. “How’s tonight for ya?”

Then repeat every month until you murder this person.

Dinner Tonight?This is the challenge of subscription commerce. Unlike a digital service which can sneak by in a month of low usage (ahem- Netflix), subscription commerce thumps a cardboard box onto your welcome mat every time your bank account is debited – reminding you with every trip to the recycle bin that you are now poorer, and will be poorer still next time if you don’t call off the fling.

To put it lightly, if these boxes don’t deliver the goods they’re toast.

The math is simple.  Every cycle these services see cancellations which they strive to minimize with great product. Through advertising and most importantly customer referrals they must add more customers than they lose or they won’t grow. If the company advertises, product margins must cover the ad expense in a short number of cycles or growth will be too expensive. Nirvana is “negative churn” where referrals from happy customers outstrip cancellations and the company grows before spending a single advertising dollar.

These companies live and die by the harsh light of Net Promoter Score. If the product is great, consumers stick around and tell their friends and life is good. But any product stumble, and consumers cancel the service—and even worse, stop talking about it.

At BVP we focus on five consumer needs that these businesses can address to maximize NPS. We feel a subscription commerce concept must fill several of these needs to build a lasting business. 

[Editor’s biased note: BVP portfolio company Blue Apron, a service that delivers all the ingredients necessary to cook great meals at home, goes five-for-five on this list!]

The five value propositions of subscription commerce:

1.    Entertainment

Often the initial selling point and at a small enough price-point, possibly enough to sustain a long-term relationship. Ranges from the “Christmas morning” fuzzy of opening a box of goodies, to the joy of sampling new products, and often relies on the voice-driven relationship that the company builds with the customer… like an old friend stopping by for a visit. Our favorite visual here is the slobbering excitement of pooches across the country as the monthly BarkBox arrives full of canine goodies. You’re welcome, Mr. Postman. Likewise, the weekly thrill of opening our Blue Apron box to find out what’s for dinner this week hasn’t faded in over a year of using the service.

2.    Enrichment

Linked to entertainment – many of these services, especially those in a diverse product category, deliver on a promise of expanding our universe in some way that’s “good for us” beyond just being fun. Monthly book subscriptions provide the classic example, but recently we like NatureBox delivering healthy snacks to our door every month. Thanks to Blue Apron we can now dice an onion in seconds and aren’t afraid of mincing our own lemongrass.

3.    Curation

A first-world problem, but hunting for and selecting new products to buy takes time and energy that many of us don’t have to spend. Outsourcing this process to experts means consumers receive better products – often customized to individual tastes – all without lifting a finger. Diverse categories like Blue Apron’s (food) drive an even greater value from curation. BirchBox, launching with subscription beauty products for women, and expanding with their tagline “discover your next everything”, has curation at the heart of their value proposition. Done right, curation allows a service to monetize beyond the box, selling follow-on orders of the products they introduce.

Note: these first three “selling” value propositions are the most powerful tools used to acquire new customers.  But while variety is the spice of life and lures us into the tent, the long-term health of these offerings likely depends more on the final two attributes which determine the long-term fit with a customer’s lifestyle.

4.    Cost

Counter-intuitive given the nature of a recurring bill, but relative to a real or perceived consumer alternative, these sub-commerce services must offer an economic value proposition if they are to avoid major churn outside of the ultra-rich. Perhaps a service is simply so cheap that compared with other entertainment options it seems like a bargain (too cheap, however, and margins may not cover acquisition costs.) Other services can offer a true value proposition through bulk purchasing, or private label offerings. Dollar Shave Club has cost reduction in their name and at the heart of their pitch. Blue Apron reduces the grocery bill for good eats by passing wholesale food savings onto the consumer and eliminating spoilage (no more $3 bushel of Parsley when the recipe calls for a sprig.)

5.    Convenience

No need to go to the store, no time spent researching and hunting for items. The purchase is effortless. This can be highly valued if the item is a recurring necessity and otherwise requires ongoing work by the customer. It’s hard to sell convenience if replenishing the product is not critical (e.g. subscription shoes). Perhaps less appreciated than all other value props, convenience can be a powerful churn mitigator if turning off the service creates a painful gap in the customer’s life. If we cancelled our subscription to BlueApron and found ourselves circling a crowded grocery store parking lot tomorrow night instead of simply coming home to a complete delicious meal waiting to be cooked on our doorsteps, we would most certainly cry.

Ultimately, mastering the subscription commerce game is about nestling so snugly into the consumer’s routine – entertaining them, enriching them, but also saving them time, effort and money relative to other options – that they can’t imagine life without you. This requires building a true brand that delivers enduring value beyond just a box on the doormat. More than an occasional houseguest, a sustainable subscription commerce brand must become a member of the family.  This is extremely hard to do, but when done well the resulting lifetime customer value is massive. We believe that large sustainable subscription commerce brands will be extremely rare, but that the winners in this space could be among the great consumer brands built this decade.