Are Box Service Subscriptions A Gambling Habit?

Subscription box services like Dollar Shave Club, Birchbox, Hygge and Blue Apron are continuing to surge in popularity likely due to online sales passing store sales for the first time in mid-2019. Within four years, the industry around these consumer product and retail companies grew 890% based on a recent survey by Hitwise. Ultimately, more than half of all consumers said they are using one or more of the hundreds of services today to the point that comparison review sites started to pop up.

These services follow three main buying patterns to support a new customer experience: product curation, replenishment or access. Across all three, sellers assume that your marginal perceived benefit outweighs the ongoing cost and that the consumer continues to maintain such a service because it would be too inconvenient to cancel given the relatively insignificant cost. Like casinos, they also assume most of their members (players) won’t or cannot do the math required to analyze their true utility.

Let’s analyze this argument first around a product curation service. This type of service is typically used for seasonal or highly taste-dependent items like fashion or food. They curate an offering over time and introduce new items along the way after a one-time or frequently recurring sampling period. A good example are fashion curation services like Stitchfix or Trunk Club in which the consumer receives a total outfit or set of outfits based on a monthly subscription or styling fee, keeps what he or she likes and returns the remainder. Increasingly algorithms around style choices like color, fit, size, material, etc. will be able to predict, which items will likely be kept allowing the company to reduce returns to boost margins in the long run. As increasingly more consumers subscribe, the volume of data allows the company to establish a “statistical twin”, a similar concept to the asset management counterpart “digital twin”, to create a higher probability a new client will appreciate the second or third instead of the tenth or twelfth shipment to combat the looming 40% cancellation rate. This allows for the rise of personalized curation and predictability of successful new product or feature additions to create further stickiness.

Ultimately, I argue that as long as such a company knows their consumers truly and understands how much it can charge without annoying its membership by having to return or dispose the vast majority of the garments or dishes, people will continue the service. They will remain in the scheme as long as there is marginal hope for a novel and positive experience given the minimal per shipment or monthly cost. Once that negative experience threshold is reached, the member will likely churn out. Having said this out loud, it sounds like the gamification of the retail experience.

Unboxing videos on YouTube make the case that this is a dopamine-enticing gambling or FOMO pattern. They show how the initial appeal of novelty and surprise can be harnessed via the use of influencers, who can help with demand generation and predictability. On the flip side, this need for novelty also creates an R&D challenge to test products or keep related content fresh in order to maintain the marginal utility of the subscription, which is likely only turning profitable a few months after its start.

Manufacturers and retailers are now trying to harness the power of crowds to close the R&D as well as the initial and continuing demand gap. This year’s Facebook Superbowl spot is trying to alert not only consumers of their ability to bond over similar interests but also their product advertisers. If large CPG and retail companies realize the appeal of a community’s interest by monitoring Facebook group growth, their ability to create curated product subscriptions and replenishment services can be quickly field-tested and deployed. Integrate social data, monitor trends in membership and content sharing and connect it with existing or likely future member profiles and voila, a new subscription campaign for mufflers, earrings or detergent is born. With over 10 million Facebook groups and users 18-24 years being open to value-based posts by brands, the sky is the limit when you think outside the box – pun intended.

As the “barrier-to-buy curation” decreases to allow for non-traditional or just additional items, which many consumers would not even consider today, a box service will likely continue to broaden its product portfolio. This increases customer life-time-value, profitability and overall wallet share by stealing it from brick-and-mortar alternatives, which may become showrooms for these products. If a company operates both channels, the strategy needs to be fine-tuned to avoid cannibalization of profits. I would posit that for some omni-channel retailers and consumer product firms it would make sense to offer consumers a physical box by invite-only to create a similar novel consumer experience. High end-fashion brands are using this approach through their personal in-store style consultants today.

Let’s look at the second service pattern next: product replenishment. This is what I personally signed up for during a visit to Las Vegas a couple of years ago. A friend dragged me into a men’s grooming salon in a hotel on the strip and I walked out with a beard wash/conditioner and wax combo. Despite thinking I was tricked into a signup during a moment of weakness, I am still subscribed to it today. McKinsey’s 2018 study gauged me right. I am the poster child for the subscription buying pattern. My friend’s recommendation, the purported 15% savings and the novelty drove my initial sign-up. However, the lack of personalization and ongoing value made me question if I should continue the service. When I saw similar prized options elsewhere and my online account was unable to ship individual items with different intervals, I discontinued one item in my subscription order.

In this case, if such a self-service online capability would have been available, I would have continued. If a larger product size would have been pitched to me for every other shipment, I would have continued. If they would have included a novelty gift or introduced another add-on item, I would have continued. Also, I would have stayed if content around savings would have been significant and clearly communicated vis-à-vis alternatives. Sample-size-of-one aside, this indicates that their R&D, IT infrastructure as well as understanding of the consumer journey may be misaligned.

Lastly, let’s look at the access subscription option. This would be your typical Amazon prime, Instacart, Boxed and your average “virtual box” service like Netflix, offering you volume discounts or points for the delivery of a changing basket of goods. It is probably the most established strategy into this business model. Therefore, the players in this space are gigantic in size and product portfolio. They can also absorb the startup cost challenged by an average 55% conversion rate.

Given the relatively-speaking, small annual subscription cost, I would surmise that organizations in this model follow a Costco-type algorithm. This logic stipulates that as long as there is a chance you will buy one more item or visit one more time this year, the savings for such a small financial outlay may be worth it. However, most members will likely not sit down to do the math across their typical market basket. If they did, they would probably find out that there were little to no savings.

Making a living in box subscription services is hard and not for the faint-of-heart. However, consumers also really need to analyze their impulse sign-up, just as the seller needs to understand what motivates the ongoing purchase decision.

This blog was originally posted on Forbes

Related Posts