Subscribe Here: Yes, Please

Posted: Jun 02 2014

Over the past few years, the subscription box business model has taken off. Birchbox pioneered the model and their success has prompted a number of others to follow in their footsteps. (By the way, at the end of our series, you'll come to realize that Birchbox really isn't a subscription-box driven business...stay tuned)

An interesting aspect of this subscription box model is its attractiveness from an operating perspective. Investors are pretty bullish about the subscription box model (or at least they were) and after some study and number crunching, we understand why.

Over the course of the next two blog posts, we are going to do a deeper dive into the subscription box model and why it's so appealing. The bulk of our analysis will be in our next blog post, but today we're going to walk through the basics of the model. And because most of these companies are private and public info is scarce, we're going to draw heavily on the information that is available. That information happens to be from the most successful companies in this space, most notably, Birchbox.

Here goes...

In case you are wondering what this whole Birchbox thing that we're discussing is, let's level set. Birchbox is a beauty, grooming, and lifestyle product retailer with both a traditional, online retail store and a subscription box service for men and women.

The Company's subscription services vary from month-to-month subscriptions, to 3-month subscriptions, to 6-month subscriptions, to 12-month subscriptions. Each month subscribers receive a box filled with 4-5 beauty, grooming, and lifestyle samples from a combination of new, up-and-comers and well known, established brands. Two important elements of these monthly boxes are: 1) there are no returns or exchanges on samples and 2) subscribers do not choose what he or she is sent. However, in an effort to send relevant products, Birchbox asks all subscribers to fill out a profile, which they use when deciding what to send.

Women's subscriptions are $10/month or $110/year. Men's subscriptions are $20/month or $195/year.

If gifting a subscription, one must choose from 3,6, or 12 month subscriptions. If one signs up on his or her own, he or she can choose from 1, 3, 6, or 12 month subscriptions.

Finally, monthly members can cancel their Birchbox subscriptions at any time without cancellation fees. Others can cancel at the end of their subscription.

From an operating model perspective, most, if not all, of the samples that Birchbox sends in these monthly boxes do not cost Birchbox a penny. Yes, they are sent to Birchbox for free. Why?

Well, simply put, Birchbox has 800,000 monthly subscribers and the brands would do anything to get in front of that large of an audience each month. So, they happily send their sample products to Birchbox for free and Birchbox also agrees to buy full size versions of these products, which they also sell on their store via the traditional, online retail portion.

So, what's the ROI for these companies that send samples for free? I don't know the specifics, but I can tell you that ~50% of Birchbox's monthly subscribers buy full size items on the company’s website and about a quarter of Birchbox’s revenue comes from traditional website sales. So, it's probably not too bad of a deal for these companies.

Next time we'll explore the specifics of this model and show you why Birchbox is really not a subscription box company. We'll also discuss the economics of similar subscription businesses and why they are so darn attractive to investors.

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