Sign Me Up: How Subscription Models Drive Data, Consumer Engagement

Driven by the growth of online retailers like Amazon and Jet, online grocery sales are predicted to become 20 percent of the overall grocery market by 2025, a more than $100 billion evaluation. But with the rise of these mega-retailers has also come the democratizing tool of direct-to-consumer (DTC) ecommerce, allowing brands to forge closer relationships with their customers and maintain more control over sales and customer data. Within this fast growing space, many startups are now looking to subscription models as a tool to growing their business.

According to McKinsey & Company, the online subscription service market has grown by more than 100 percent year-over-year for the past five years, jumping from $57 million in sales in 2011 to more than $2.6 billion in 2016. In both the pre- and post-internet eras, subscription based business models have typically operated as their own channel. From contact lenses to ready-to-cook meals to underwear, ecommerce brands have often built an entire business strategy around subscription, often through monthly box programs.

This applies to the food and beverage categories as well, where many brands are finding that subscription models make a strong addition to existing ecommerce and retail strategies. According to venture capital firm Greycroft, beverage stands to benefit from ecommerce in part due to high purchase frequency, gross margins, and market saturation, and subscription services have become a means for startup brands to generate strong, recurring sales that can help build a company quickly.

Building a Following

One startup brand that managed to take the subscription service to early success was meal replacement drink Soylent. Founded in 2013 from the remains of an aborted Silicon Valley cellular tech company, Soylent for its first few years solely utilized an ecommerce business model, both DTC and via Amazon, building with it a sizable consumer base. Not long after the launch however, the company identified a need to make sales more convenient for its frequent buyers. Soylent co-founder and former chief technology officer John Coogan told BevNET the company added a subscription service to fulfill a need for its online consumers.

“It really did come out of an organic customer need, and not a business need,” Coogan said. “In fact I think if we had been looking at it from a business perspective we might not have done it. It took a lot of work, it was complicated, it was not the cheapest thing, and there certainly wasn’t off-the-shelf technology for it at the time.”

As a meal replacement, most of Soylent’s consumers were drinking the product at least once daily. Seeing consistent ordering schedules, Coogan said, prompted the company to offer subscription, launching to instant popularity.

The consistency of subscriptions, Coogan said, helped Soylent to grow and scale faster, while the data collected from consumers allowed it to make adjustments to production levels as conditions changed. Inversely, running an ecommerce-based business without a subscription service opens a company up to vulnerabilities such as shifts in Facebook marketing algorithms or lack of media coverage that can create more volatility in sales, Coogan said, and can make it harder to predict how much product is needed on a monthly basis.

Instant coffee brand Sudden Coffee has made subscription service a core part of its business, founder and CEO Josh Zloof told BevNET. Harkening the model to the coffee shop experience, Zloof said DTC sales create a more personalized “touchpoint” between the brand and the consumer in contrast to the impersonal interfaces of larger online retailers. By utilizing newsletter mailing lists, the company is able to direct the customer’s attention toward different elements of the product by discussing coffee blends, sourcing, and other related topics.

Zloof said Sudden Coffee has focused its efforts on how to drive trial into subscription. The company gives a per unit discount for a subscription over one-time purchases — a common practice — advertising the cost savings during the checkout process, and offers a free trial to give consumers a risk-free chance to try.

“As a startup our most important thing is learning,” Zloof said. “We want to be able to iterate quickly and know if we’re onto the right thing, know who the right customers are, have these details. With subscription and DTC you have people’s emails, their address, you can looked them up on LinkedIn or Facebook and see who they are.”

While Sudden Coffee initially targeted the millennial demographic, Zloof shifted the company’s business strategy upon discovering that the subscribers tended to be older doctors, professors, and other professionals. Millennials, he said, would try Sudden Coffee, but the repeat buyers were between 35 and 55. The company has since refocused its social media marketing from Instagram to Facebook, and began highlighting qualifications such as “Fair Trade” that resonate more with the Gen X base.

Zloof even offers his subscribers opportunities to schedule time to talk directly with him and the team, creating an even closer relationship with his consumers.

“It changes your marketing tactics,” Zloof said. “If someone just buys once you have to do this direct email campaign after the fact. I’d rather have you subscribe and I can give you content relevant to the experience and teach your something than fill up your inbox with coupons to get you to buy more.”

Tapping the Data

When it comes to tapping into user analytics, Jon Wood, global knowledge management director at Kantar Consulting, told BevNET he believes companies should tread carefully. Security and transparency in how brands are collecting and leveraging data, is important to building trust. Recent political scandals involving breaches of consumer data at Facebook have created a social environment where consumers have become wary of private companies harvesting information, and brands would be wise to be open and honest, he said.

“Simple language is important,” Wood said. “If you were to make an effort to have very clear terms and conditions and a clear understanding of what data is collected and how it’s used I think that would do a lot to build trust from the very beginning. It could even become a differentiator for brands as the marketplace becomes more fragmented and more crowded.”

Speaking on stage at BevNET Live Winter 2017, Hint founder and CEO Kara Goldin said partnering with Amazon showed her how a direct-to-consumer subscription model was both viable and vital to growing the brand. Amazon, she said, had troves of consumer data — showing that Hint buyers were also buying medical equipment among other health-related products, for example — but the company would not give Hint direct access to the sales data. This inspired Goldin to launch Hint’s own direct-to-consumer business online, and with it a subscription service that would benefit repeat consumers.

“Owning your customer data is key,” Goldin told BevNET via e-mail. “If you are running your business through Amazon or Jet or Walmart, you don’t own your data. They own it. They own your customer.”

Goldin does not see subscription as a “tool” to building a brand, but rather as evidence of consumer loyalty and a means of creating convenience. Before launching a subscription service, she said, a brand must be able to drive trial and prove it has a high and predictable consumption rate.

With a strong ecommerce platform, she said, a brand should be able to in turn generate strong brick-and-mortar sales. Offline sales for Hint have grown more than 100 percent year-over-year in the last 12 months, with a significant portion coming from same store sales. “The customer owns the purchasing journey these days and if you don’t know your customer, their email and zip code as well as what they care about and where else they shop and what they like, you are behind the eight ball,” Goldin said.

Driving Innovation

Soylent eventually transitioned from an ecommerce exclusive business to building a presence in multi-channel retail, but other brands have continued to innovate around technology. Coogan pointed to brands like Verb Energy Bar and Dirty Lemon, a functional wellness drink brand, which sell direct-to-consumer via a SMS text messaging system. Dirty Lemon recently acquired weather monitoring app Poncho and will use the program’s artificial intelligence and messaging interface to further advance “effortless transactions,” the company announced in a press release last week.

In recent months, growing coffee giant JAB Holdings Company has hinted at an interest in entering the subscription space. According to Wood, there’s been a shift toward partnerships in subscription and “a huge potential” for larger companies to partner with Amazon or other major online retailers to launch their own services. Last year, Walmart partnered with meal kit subscription service Home Chef for its own specialty meal kit site.

But a rise of niche players, Wood added, will continue to fragment the space and it’s possible leaders in the subscription space may shift as consumers seek out more personalized businesses.

Teddy Citrin, a venture investor at Greycroft, told BevNET he sees the landscape for subscription refining and that, with some exceptions, brands like Soylent that offer a product built on routine are more likely to be the winners.

“The biggest killer of subscription businesses is stockpiling,” Citrin said. “It’s inherent in consumer behavior, once you see excess things you just want to get rid of your subscription.”

Not as Simple as It Looks

To get their service up-and-running, Soylent worked with software providers to modify existing subscription programs, designed with digital software distribution in mind, to fit a CPG business model. Most of the programs Soylent explored, Coogan said the company invested in creating a program that could meet the needs of a beverage company, adding necessary variables such as shipping addresses and SKU catalogues. According to Coogan, while ecommerce platform providers like Shopify and BigCommerce continue to innovate for companies looking to set up their own online shops, many subscription system designers are still working to modernize their programs for the CPG space.

“I think subscription systems are still just catching up to the idea that you might have a complex product catalogue but still want to be able to put people on an Amazon-style subscribe and save [service] with different quantities and variance,” Coogan said. “Taking all of that Shopify functionality that you can get out of the box with most of the ecommerce providers, and then taking that and wrapping that around these systems built for software was tricky.”

Another issue for subscription services in beverage, Coogan said, is a simple question of space. Beverages are bulkier to ship than many products with subscription programs, and storage for both companies and consumers can be an issue. Some brands may risk running into issues such as cold chain distribution, or customers seeking greater variety rather than repeat purchases of a single SKU.

“There’s a burden of complexity that weighs on all startups,” Coogan said. “Soylent was able to be successful because the business was so focused on ecommerce entirely, it was in our DNA. All four of the founders could code, we all lived online, it was very natural to us. But I think if you’re coming from a retail background, and then you’re trying to layer this over your business, well you can get sticker shock if you’re investing in technology. You might think you have something that’s working in retail, so why spend $100,000 on a web experience that you don’t even know if it will work.”

Last year, Coogan left Soylent to work as an independent consultant for the beverage industry, and has since helped brands such as Iconic Protein to develop their ecommerce strategy. While he says there’s many variables to a successful subscription model, the ultimate question is sometimes the simplest: Does your product have the quality and community to make it work?

“Subscription ecommerce is not an ‘if you build it they will come’ situation,” he said. “Great products are.”