Four years after Dollar Shave Club released its inaugural commercial/YouTube video—a campaign that crashed its servers and sold out its entire inventory in six hours—multinational consumer goods manufacturer and distributor Unilever scooped the startup in a deal worth $1B. For the discount shaving supply subscription box service, it’s a valuation five times this year’s projected revenue. It’s also $1B more than the company has ever seen in profits.
Yep. One of the increasingly rare billion-dollar valuations for young startups just went to a profitless, physical product company. Is it a sign of the End Times? Or a sign that eCommerce startups are about to ride roughshod over the retail landscape like so many Horsemen of the Apocalypse? According to most analyses, it is not. For once I agree with the crowd.
Subscription Boxes: The Good
Dollar Shave Club isn’t the only physical product subscription company doing well. JustFab fashion subscription service appears to be gearing up for an IPO; Warby Parker‘s “Netflix for eyeglasses” business model had earned it over $200 million in investor funds and a valuation of $1.2B by April of last year; Dollar Shave Club rival Harry’s—which bucked DSC’s delivery-only model by purchasing the factory where its razors are made—is rumored to have been valued at $750 million during a private funding deal last summer.
Each of these companies runs on a subscription revenue model, except Warby Parker. WP will ship you five pairs of glasses to try out for five days and when you make a purchase online they ship a new pair right to your door. This no-hassle process is a big part of the brand’s success, just as it is with the other subscription box services.
What none of these brands are built upon is substantial product innovation. JustFab does sell several wholly-owned clothing and accessory lines—some created for the company and others acquired—but that’s typical of fashion retailers and the non-fungibility of apparel products (i.e. ,”new” is the only thing that reliably sells clothes). They haven’t reinvented the shirt and they aren’t anywhere near the leading edge of haute couture. Warby Parker boasts of a wide selection, but you can find equivalent styles in any traditional glasses emporium. Harry’s sells their own razors and branded gels, creams, and lotions, but compared to major razor innovator Gillette there’s nothing earth-shattering.
“Billion Dollar” Shave Club keeps it even simpler (and cheaper) than Harry’s. They deliver plain, good-quality razors, basic foams, and other standard grooming accoutrements, all from third-party manufacturers, in a single subscription box.
The Wall Street Journal quotes Barclay’s analyst Lauren Lieberman, saying in a note on the Unilever deal:
“We can’t help but wonder if this is a bold statement that technology and product quality has reached a level where it doesn’t matter as much as channel and business model.”
Channel means marketing, and there’s no question that all of these eCommerce successes have been savvy in that regard. But it’s a business model built on convenience that really delivers what investors are looking for.
Subscription Boxes: The Bad
If marketing savvy and a strong brand were the only ingredients necessary to a subscription service’s success, Birchbox would still be on top of the eCommerce world. The New York-based service sends out a monthly box full of trial goodies for its paid subscribers to sample, and if they take a shining to any of the products, they can order more any time they like. This model lets customers keep buying what they like while still being exposed to new products each months—and new is good, right?
Let’s hope so, because new jobs are needed for 25% of Birchbox’s workforce. In two rounds of layoffs this year, they’ve cut down from about 300 employees to 225, and there’s still uncertainty that they’ll be able to make ends meet.
Gilt Groupe is another former subscription box success story turned sour. The had their own $1B+ valuation and were headed for an IPO in 2014, all due to their members-only model, their flash sales, and their constant inventory turnover. Once again, always new was the aim, rooted in the idea that ongoing product refresh was the best strategy for keeping customers on the hook and reaching for their wallets. Consumers grew fickle, though, as they often do, and the company faltered; it was purchased by Hudson Bay Company in January of this year for around $220 million—less than the capital it had raised in its nearly decade-long history.
TrunkClub has fared slightly better—its acquisition by Nordstrom for an estimated $350 million probably turned its investors a pretty penny. At the same time, it has been around almost twice as long as Dollar Shave Club and ought to have a higher margin on its wide array of higher-end fashion items. That all said, it still couldn’t attract the same kind of attention. In fact, Nordstrom moved to close a Chicago-area distribution center (and 250 jobs along with it) just last month, signalling that the business is more valuable when it’s more streamlined and less focused on providing never-ending fashion options to its subscribers.
These companies all built strong brands. What they end up doing long-term was giving consumers what they truly value. As a result, they suffered.
The Ugly (or Plain) Truth
Innovation is great in a lot of ways. Innovation also gets tiresome. When it comes to things like shaving, and seeing, and wearing shirts, sometimes all people really want, and all they’ll really pay for, is an easier shopping process. Product abundance can overwhelm, and leaving the house gets harder and harder as Netflix shows get better and better.
We don’t necessarily want a bunch of options or an ever-growing collection of once-new things. We’d often prefer simply having what we need show up on our doorstep without any real though or attention. If you’re contemplating a subscription service business, take note: slap a strong brand on it, don’t get too fancy, keep it simple and keep it convenient. Unless your goal is to fire lots of people. In that case, totally do what Birchbox did.
Feature image courtesy takingnotescoasttocoast.blogspot.ca/
Daniel A. Guttenberg is an Atlanta-based writer who fell into the startup world by accident and has been gleefully treading water ever since. He will be survived by his beard and his legacy of procrastination.
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