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August 27, 2011

Subscription commerce seems like all the rage these days.  There’s a nice little graphic below created by Sean Percival was a few players that have emerged in this space.

I think there are a bunch of other entrepreneurs now that are thinking “hey, subscriptions would work for category X, let me try it!”  It’s an interesting thought, but in my opinion, only a few of these companies will become meaningful, sustainable businesses of significant scale.  And much like other categories of e-commerce, it takes a lot of time, executional excellence, and often, a lot of capital to build a significant business.

That said, I think we will see some transformative companies out of this batch.  Here’s what I think will seperate a few of these companies from the pack.

1. Does a subscription really address a meaningful need?

I think it’s a given that the category needs to be pretty big to support a big subscription business.  But in addition, the subscription needs to actually solve a problem for consumers that existing buying options fail to do. Right now, it looks like there are a couple “jobs” that the subscription can do:

  • Curation.  This is being demonstrated by Shoedazzle, Trunk Club, Babbaco, etc.  The job that the subscription service fulfills is choosing stuff that is a fit in a highly subjective category
  • Trial / Sampling. This was pioneered by Birchbox.  Our portfolio company TurningArt also falls into this category by allowing a “try before you buy” experience for a high-consideration good like art.
  • Convenience.  Companies like Manpacks and Guy Haus promise to save consumers time by having the things they need replaced on a regular basis just showing up in the mail.

2. Is there potential for real barriers to entry or network effects?

I was looking at an investment in a subscription commerce company and was pretty bullish about it.  Then I asked myself “isn’t this something Amazon could just implement tomorrow and kill the market?  Yes, I know this is true for almost every startup, but I do think that in e-commerce, startups are particularly vulnerable to the big players because of their immense marketing advantage and the level of service that they are able to provide (and consumers have been trained to expect).

That said, e-commerce tends NOT to be a winner take all market.  This may sound like good news, but it also means that startups will have to fend off copycats and similar services very early on.  But I do think that a small number of these emerging players will be able to create network effects or other significant barrier to new entrants.  I have a few hypotheses about how this might happen, but I’ll save that for another post.  But I think the reality is that this is probably only going to happen for a very small handful of companies.  What we’ve learned from Gilt/RueLaLa/HauteLook and Groupon/LivingSocial/etc is that true barriers to entry are limited, but scale does seperate the few big winners from the rest of the pack.

It’s still early days for this category of companies, but I’m excited for what is in store.  My last gut check is really a re-statement of #1.  I ask myself “is the current buying process for these sorts of products broken?”  IF the answer is “not really, but this is a bit more convenient, then I”m less interested in the category.  But if the answer is “yes” then I think there is an opportunity for MARKET EXPANSION by exposing consumers to goods and services that they previously found much less attractive or accessible.

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