It’s no secret that subscription businesses are hot, but Hitwise’s 2017 whitepaper on the subscription industry measures just how popular they are: The U.S. subscription market grew by 831 percent between April 2014 and April 2017, according to the report.
Clearly, the competition is anything but slim, no matter which audience a subscription targets. And today’s customers aren’t easy to please. They want it all: Simple transactions, free shipping, value and, above all, to belong to something unique.
Once a subscription brand clears those hurdles and gains ground in its market, it’s time to step on the gas. Brands can’t afford to let growth stagnate in today’s competitive environment — they need to learn how to continuously move toward the future.
Getting off the ground
In the first phase of any company’s subscription offering, digital advertising is ideal for testing the waters. At this point, it’s likely that the founding entrepreneur is still handling every aspect of the business, perhaps aided by a small team. During these tests, remember that it’s more important to garner a smaller base of loyal customers than to appeal to everyone.
Related: 25 Tips for Earning Customer Loyalty
Knowing when to kick subscription efforts into high gear requires a delicate balance of marketing intel, personnel, technology resources, product offerings and a sense of timing. You need to see measurable success with a statistically significant number of customers before accelerating your investment in the business.
Subscription boxes are popular because they’re fun. Entrepreneurs often start out lovingly packaging the boxes and ensuring that they offer great products. It’s common in the subscription box industry to incentivize people to give these boxes a try, so the first shipment generally provides the best value possible to get new customers interested in receiving the first box.
Overcoming every hurdle
But in the beginning, things can go off the rails quickly. It’s easy for entrepreneurs just starting out to overestimate future demand and overinvest in their inventory, especially when they’re emotionally connected to the business.
Additionally, it’s not uncommon to see low cost per acquisition at the start. This low cost is a function of inexpensive media paired with a pool of interested initial target customers. If the very first offer is a huge success, customer acquisition might seem affordable or even easy, but marketing will ultimately cost more and require more focus. Failure to anticipate the velocity with which the CPA can increase while you are trying to reach a larger or broader audience is a major hurdle.
One of the greatest hurdles entrepreneurs will face with subscription businesses, however, is financing. Lack of funding at the start often requires entrepreneurs to do everything themselves, perhaps outsourcing or using friends and family to stay above water when quantities increase. Knowing when to bring in external help is a critical stage for entrepreneurs, and finding the financing to bring in the right expertise is never simple.
In my experience, most subscription businesses seem to struggle around the 15,000-subscriber mark. Today’s subscriptions and customer expectations are at a sophistication level that cannot be managed by general vendors with cheap or unfocused outsourcing, especially in key places like customer service. Successful subscription businesses need the help of truly experienced management or specialized partners to grow and scale.
Companies that are ready to hit the gas on their subscription businesses should follow these three tips to achieve sustainable, profitable growth.
1. Experiment and learn about products, supply chains and media.
These three disciplines are crucial for subscription success; entrepreneurs need to understand the specifics of the business model before beginning. When starting a subscription box, your initial focus shouldn’t be on bigger-picture issues such as how to scale. As LinkedIn co-founder Reid Hoffman says in the “Masters of Scale” podcast, “You don’t start with 100 million users. You start with a few. So stop thinking big, and start thinking small.”
Scaling comes with quality and experience after you have established your first 1,000 true fans. Birchbox, for example, is one of the leaders of the modern subscription box movement, but its co-founders started small. The company’s initial business model was based on shipping beauty samples it got for free or low costs directly from brands — and the company grew from there. It fine-tuned the core elements of product assortment, supply chain and media to hit the gas once it had initial proof of concept with a core group of loyal customers.
2. Listen to a financial expert.
External financing is often a must, given that media is the most expensive part of a subscription business as you scale. Without significant funding, growth is challenging. So take time to listen to your company’s financial expert, whether that’s your CFO or another “numbers person,” to discover the specific best course of action as you move forward. Make sure you know your key numbers and what they mean for the trajectory of your business. What is your lifetime value and average cost per acquisition? What are your margins? Which marketing channel performs the best?
Stitch Fix founder Katrina Lake started out storing her inventory in her own home and accepting personal checks. Her finances and customer information were tracked in Excel. But it was with VC Steve Anderson’s $ 750,000 investment that Stitch Fix was able to actually take root and reach the next step. The company grew slowly and steadily from a one-woman show to a public company valued at about $ 1.6 billion, all because Lake knew just when to find and secure external funding.
3. Learn from your competition’s wins and losses.
Subscriptions led by a great concept fail all too frequently because the entrepreneurs leading them start with “great” ideas but no plans beyond that. Stay apprised of the tools and technologies your competitors are using. As a CB Insights report shows, one of the top reasons startups fail is that they fall to their competition. Instead of losing to them, learn from them.
While numerous cloud-based tools or generic outsourcing companies claim to help subscription businesses grow, they aren’t guaranteed to give your company an edge. Watch your competitors’ results to see which tools or partners might be most beneficial for your company. Aligning with an experienced service provider that focuses on subscriptions, for example, can provide the data needed to help with acquisition, reduce shipping costs, deal with fraud and learn about customers.
Growing out a subscription box requires a delicate balance of many considerations, but it doesn’t have to end in failure. Follow these three tips to help a growing subscription box stay on the path to success.