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.