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There has been a lot of recent excitement around startups focused on the subscription eCommerce model. The VC money has been pouring into the space , with Birchbox getting $10.5 million and ShoeDazzle raising a whopping $40 million in recently funding founds. The number of new entrants into the space has been accelerating, with most companies only launching within the past year. This excitement is going to run its course pretty quickly though.
The monthly subscription model is nothing all that novel. They basic models follow one of two approaches. You can have the surprise selection(s) of the month like Columbia House Records or such and such product of the Month clubs which are all about the discovery. There are also the “get it when you need it” convenience subscriptions which give you an ample supply of necessary items like Amazon and some online/offline commerce stores have already been providing.
Because the basic model has not changed all that much over fifty years, it is a pretty well-understood and well-worn business approach. Get cash upfront, ship later, and keep charging that credit card until the customer calls to cancel. It looks great on a balance sheet and investors enjoy the fact that their risky investment is actually making money day one. Therefore, all that is required of the entrepreneur is to build a functional website, secure some decent products, create interesting packaging, and ship. Not to trivialize the work involved in any of these steps, but it is not exactly blazing new territory here.
Therein lies the fundamental issues with the subcom category. There are absolutely no barriers to entry and anyone can get started immediately. Ask yourself who are the biggest players in the space other than Amazon? ShoeDazzle had big names behind it, including Kim Kardashian. Beachmint is backed by the founder of Myspace. Birchbox is the only significant player to be founded by relative unknowns. Why is this significant? It is because the only way to succeed in the subcom business is to scale quickly.
I am generally in the camp that believes money does not equate scale. This is particularly true when you are tackling a new market with an innovative technology. There are plenty of green field opportunities and it takes a significant amount of time to flush out what works from what does not work which is something that money cannot necessarily influence (e.g. Pets.com and Webvan.com).
In a model that is established with products that are available in multiple venues on and offline, there is little that differentiates any of these eCommerce variants. I can get my Right Guard just as easily on Amazon, at Duane Reade or from the local convenience store. You could get your high heel shoes from Zappos, the boutique in town or the outlet mall. While there may be a small benefit in convenience or getting something curated based on your tastes, the difference is not so overwhelming as to make people choose other options. Even the novelty of presentation or providing excellent customer service can only last so long, until someone else comes along to provide the same products for cheaper while shipping faster.
So where does this leave the subcom market? It is only a space for the big players, so if you have not gotten your $50 million valuation by now, you might want to rethink your strategy. While some of these startups could become profitable, the challenge is growing out into a broader market without a large trove of cash. What will most likely happen is that many of these startups will become zombies or lifestyle businesses, generating steady cash flow to keep the lights on just like the vast majority of eCommerce companies. They will not get big enough however to garner either more investment dollars or acquisition interest, thus leaving most investors out in the cold.
It is not all doom and gloom though in the subcom space. While the category of convenience is going to get crushed, there are a few bright spots that have a chance to flourish. Those startups that cater to very niche communities like CraftCoffee does for coffee can grow into appreciable business, driven by people that appreciate artisan, hard to find, high quality goods. Larger brands love to tap into these dedicated, fanatical consumers, and the ability to connect with such loyal customers is highly enticing. The Birchbox model also stands a chance as the product samples model works well for their particular category, cosmetics and beauty products, where the choices are dizzying and the discovery process it both expensive and time consuming.
The subcom market is not a hugely innovative space. If you have great taste and a passion for the products you sell, then you can create a small business that can turn a profit. However, if you are looking to build the next great Internet startup that is bigger than Zappos, you are going to need something a bit more innovative besides really pretty boxes or cool freebies.
For more enlightened reading on the space, here are a few links to check out: