DEEPER DIVES: Recurring Revenue Models Are What Everyone Wants

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Here’s what this issue brings:

• Subscription boxes are a fun D2C business that gets into every category these days. The best ones make a lot of money. But have you ever wondered how they operate and what it takes to succeed? I’m sharing a full breakdown of the space from some work I have been doing and some recent information in the news

From Fulfillment To Fortune. Operational Excellence Is The Key To Subscription Box Success

While you might not have ever experienced a subscription box, I am sure you’ve heard of them.

Ipsy, FabFitFun, CrateJoy Stich Fix and Hello Fresh are a few of the biggest names in the market.

These businesses are built on the holy grail of retail - planned (and known) recurring revenue. With traditional sales being “reactive”, subscription boxes are focused and proactive, giving a lot more control of the P&L to the vendor.

But they aren’t without their own challenges. Efficient operations, solid logistics and a never ending “pressure to perform” are at the core of these models.

With more competetion than ever, and a customer base that is starting to feel subscription fatigue (as more businesses every day look to capture their own recurring revenue stream), each execution is getting harder. Small gaps in experience or quality now lead to significant customer churn.

Understanding the Subscription Box Business Model

A subscription model will generally fall into one of three categories.

Curation / Discovery, Replenishment or Acess.

Curation or Discovery boxes are built on personalized selections or predetermined goals. These boxes are the most common and popular of what’s out there. Customers either select a set of preferences for the types of items they’d be interested in, or they opt-in to a type of thematic box prepared by the proivder.

Replinishmet boxes are those that focus on home or personal essentials. They offer convenience and ship to customers based on normal use patterns.

Access boxes are those that offer exclusive products or early access to new items.

While each box connects with customers in different ways, they all require flawless execution to meet the promise that’s been made.

These services work by charging customers a regular fee. It can be monthly, quarterly or annually. Fees are usually charged before items are shipped to customers (the sooner the business can charge, the better for them). The recurring revenue gives visibility to the business revenue and is much easier to forecast and correlate since there are fewer impacting factors than in tradiational retail or eCommerce environments.

The two biggest challenges subscription boxes face are:

1. Cash flow / Capital (especially early)

2. Customer Churn

Supply chain and sourcing can also be a challenge, but with the lead times required for most of these businesses to get their base box inventory, this impact usually ends up being more of a cash and capital problem versus sourcing - since customers are rarely promised specific items that they know in advance.

Operations and Logistics

Execution is everything.

For subscription box businesses, the complexity of operations and logistics is real. You have a large inventory to manage, you’re building different boxes, staging them for transport then shipping each one out as an individual item to customers.

While other eCommerce vendors spend the majority of their time focused on product, a subscription box provider has to put equal (or more) effort into their logistics.

Efficient Fulfillment Processes 

As the business grows, so does the number of boxes that need to get built and pushed out the door.

The benefit of recurring revenue comes with the heavy promise that everything has to ship on schedule each month.

That type of volume and activity clustering isn’t easy to deal with. It requires infrastructure and technology.

Take a look at some of these facts for FabFitFun:

• Each box contains 11 pickable items, plus 2-3 additional items often added by members

• 600,000-square-foot warehouse

• Handles seasonal peaks with volumes comparable to Amazon's largest West Coast facility

• 200 Full time employees (this scales up to about 800 during peak shipment periods with temporary labour)

• Cutomized WMS

• Goods-to-person system with pick-to-light stations

Their ability to scale operations seamlessly during peak seasons, where they can go from shipping thousands of orders to over 100,000 orders in a day, showcases the importance of having a real operational infrastructure.

Inventory Management 

When you are doing the type of kitting required to for a subscription box business, having all of the your items is a non-negotiable.

Running this type of business requires a twist to traditional inventory planning. You need to have enough stock to meet the demand of your known orders, a buffer for new customers that you acquire during the source-to-delivery cycle and enough to cover damages, errors and other miscellanous issues that can cause inventory variances.

Being able to order with short lead times or from “local” vendors can help alleviate some of these risks, however this isn’t always an option. To get the best deals for the boxes, you usually have to buy with a longer lead time and commit to certain volume thresholds from manufactuerers.

The ultimate goal of the subscription box model (versus traditional retail) is to sell out of all of your inventory quickly and not have anything left over. You are working on an in-and-out model, and don’t have has much ability to keep selling a product past it’s inital offer window.

Technology Integration 

A tech stack is a non-negotiable in these businesses.

That doesn’t mean you have to have all of the best tools on day one, or that manual processes can’t be used to effectively start the business.

But, by not moving towards a data-driven operations flow, you will limit the scalability (and quality) of your business.

On top of the warehouse technology for example, FabFitFun usese shipping and cartonization software from EasyPost to further streamline the movement of goods out of the building.

Building thounsands (or millions) of boxes is a HUGE logistical challenge. Doing it at scale requires standardization and systematic processes. The sooner these things get in place, the better off your business will be.

Shipping and Packaging 

Shipping is usually the single largest expense for subscription box companies.

Being sloppy here will directly erode your profitability.

There are all types of strategies that you can take. What’s important is to understand what type of shipping or delivery method best suits the needs of your business and ensures the quality of experience for your customers.

Some compaines are able to use simple strategies like rate shopping and zone skipping.

Others needs to develop more intimate relationships with partner carriers due to the sensitivity of their products (think meal subscription boxes like HelloFresh).

Same goes for the packaging.

What you ship dictates the available options when it comes to packaging.

If you boxes are shipping lightweight, low cost or hard to damage items, you can get away with less protective packaging which will reduce you costs. On the other hand, delicate product requires packaging that keeps it more protected through the mail stream - so more expensive packaing is used.

Keeping Customers Is All About The Experience

While efficient operations and logistics form the backbone of a subscription box business, they need to be complemented by a strong focus on customer experience.

(One thing a lot of operations people forget is that everything we do is still about the customer experience. Without customers buying the finished goods, the operational execution - no matter how good - doesn’t pay the rent).

The better your customer experience, and operational execution, the higher the chance that the customer keeps buying your subscription.

Customers have more choice than ever. Don’t underestimate how often a customer will question that charge on their credit card each month when they see it.

Keeping customers feeling like they always get the best value means going beyond just delivering a box on time; it involves creating a personalized, high-quality experience that keeps customers WANTING to coming back.

Personalization and Customization

Subscription box companies that offer personalized product selections, like Birchbox and BarkBox, have higher retention rates because they cater directly to individual customer preferences.

This level of customization requires data analytics and customer relationship management (CRM) systems, but the payoff is worth it.

When customers feel that a box is tailored specifically to them, their perceived value of the service increases, making them less likely to churn.

Quality Control

A customer should NEVER be questioning your quality.

Nothing drives customers away faster than receiving subpar products or damaged goods.

There’s two things that you need to manage here.

First are your internal processes and quality controls. This is all about making sure what’s going into the boxes is good, working, as described, etc.

Never push out anything that you (as a customer) would be disappointed with.

Second, are your processes and solutions around failures.

No matter how much effort you put to make sure everything goes out properly, things happen in transit or on people’s doorsteps.

Having clear SOPs and delivery instructions with carriers is a must. There cannot be any ambuiguity in what a successful delivery is.

Customer Support 

Becuase subscription based models leverage more trust than other eCommerce transactions, you have to be prepared to handle a wide range of customer inquiries, from subscription changes to billing issues.

Quick, responsive, and effective customer support can turn a potentially negative experience into a positive one, increasing the likelihood of retention.

Moreover, integrating automated support tools like chatbots can help manage customer interactions efficiently, providing immediate assistance while reducing the burden on human agents - BUT, do not over use these or allow customers to fall into loops of bot hell where it ends up creating more frustration bouncing from one automated menu to another.

If automated tools can’t resolve the customer’s question after a second level response, it needs to get to a person.

Balancing Operations with Customer Experience for Profitability

The subscription box business model thrives on finding the right balance between operational efficiency and customer experience.

While cutting costs and streamlining processes have to happen for profitability, these efforts can never come at the expense of customer satisfaction.

Companies like HelloFresh and ButcherBox, offer high-quality products delivered reliably, which in turn fosters customer loyalty and reduces churn.

For instance, HelloFresh combines convenience with quality, offering meal kits that are not only based on customer preferences and selection but also come with the promise of fresh, high-quality ingredients.

Their operational efficiency, from sourcing ingredients to packaging and delivery, ensures that customers receive their orders on time, every time.

This reliability, combined with the convenience of a subscription service, creates a strong value proposition that keeps customers coming back.

But HelloFresh has had challenges as well. As they have struggled with profitability in certain markets, they have chose to work with providers that have dropped the ball on the delivery reliability. This had an immediate impact on their business and retention levels, causing them to re-evaluate the new partnerships.

Subscription services is a highly competitive eCommerce market, and to be successful, you need more than just offering a box of products.

Having a finely tuned operational machine that can handle the complexities of fulfillment, inventory management, and shipping, while simultaneously delivering an exceptional customer experience is what seperates billion dollar business from failed ones.

The future of the subscription box industry belongs to those who can innovate in operations and logistics while maintaining a relentless focus on customer satisfaction. 

It isn’t easy, but for those who do, the rewards are substantial.

That’s it for this week. Thanks for being here.