October 3, 2013, 2:57 PM

A subscription for success?

Investors loved the idea of online subscription sales, but consumer adoption has been uneven. Now subscription e-retailers are testing new ways to sell.

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Over the past few years a slew of subscription-based e-retailing programs have hit the web, delivering consumers such products as fresh undies (UnmentionablyCheeky.com), healthy snacks (NatureBox.com), trendy shoes (ShoeDazzle.com) and titillating bedroom pleasure products (SecretSexBox.com) for a flat fee each month. It's the old CD-of-the-month business model married to the marketing tools of the Internet: Retailers can use social media and online advertising to get the word out, use the web to collect product feedback and sign up consumers in seconds via their e-commerce sites.

Investors bought the idea: JustFab raised $109 million and BeachMint, whose various subscription sites feature items endorsed by celebrities like singer Justin Timberlake, $73.5 million.

But consumers in many cases decided they didn't need three fresh pair of underwear every month, which is what they received when they signed up with UnmentionablyCheeky.com. "Consumers were saying, ÔI like your service but I don't need any more underwear,'" says co-founder Rich Young. The e-retailer has cut the monthly allotment to two pair for $6 rather than three pair for $8 and is working on a way to let shoppers pause their subscriptions and restart when their undergarment collection needs sprucing up, using payment information already on file with the e-retailer.

It's not the only retailer diversifying beyond the subscription model. ShoeDazzle, which acknowledged shoppers didn't necessarily want monthly shipments when it stopped automatically shipping shoes to subscribers early in 2012, merged with JustFab in August. Neither company has turned a profit, although the merged companies say they expect to next year. BeachMint, which operates a handful of celebrity-infused subscription sites like ShoeMint and BeautyMint, announced in September that its HomeMint furnishings site would be taking an "extended staycation."

"The challenge has been in sustaining the subscriptions and keeping people engaged on a regular basis," says Sucharita Mulpuru, vice president and principal analyst for e-business and channel strategies at Forrester Research Inc. "I think it was a fad for a short time."

But online subscription retailers—and the investors that poured money into them—are not giving up. They're adapting, in many cases seeking to turn the subscribers they recruited early on with flashy marketing campaigns into return shoppers on conventional e-commerce sites.

That's the plan at NatureBox and Birchbox, two subscription-retailers that have received a lot of media attention and attracted significant followings on social media sites like Facebook.

Launched in early 2012, NatureBox.com develops and delivers healthy snacks to subscribers via FedEx for $19.95 per month. Each shipment contains five snack foods, such as dried fruit strips and trail mix, in full-sized packages bearing the NatureBox label. Gautam Gupta, co-founder and CEO, says sales and subscriber numbers are growing between 50% and 100% each month and the company is on track to ship 1 million snack food packages this year, up from 50,000 last year. The site attracted 450,000 visits in June, double the monthly traffic at the beginning of the year.

Gupta recognized that many consumers want healthy snacks, and aimed to address that demand.

NatureBox says its value proposition is that it provides consumers with a variety of healthy snacks to try without having to go to the store, walk the aisles and read the ingredients to make sure each snack is actually nutritious. Gupta says NatureBox-branded snacks, sourced through the company's own suppliers, cost about the same as similar snacks would in a grocery store—but the price includes delivery.

He is relying on consumers' desire to eat healthy snacks, and the fact that they need to replenish snack supplies regularly. Subscription models lend themselves to products that need replenishment, such as food, cleaning supplies and household goods, Gupta says. "Subscription retailers need to think about if there is really a need for their product on a recurring basis," he says.

Gupta, however, has a business plan that reaches beyond subscriptions. NatureBox later this year plans to start selling full-sized versions of its goodies on its web site, giving it another revenue stream. That dual sales model has attracted investors. NatureBox in July received $8.5 million in Series A funding from General Catalyst Partners, an early investor in the retailer and Gupta's former employer. Gupta says it will use the funds to finish building its traditional e-commerce operation. 2012 sales for NatureBox totaled $1 million, the company says.

NatureBox isn't the only retailer hoping that a base of subscribers can be transformed into a steady stream of buyers on a traditional e-commerce site. Birchbox.com's subscription service is designed to help consumers test new makeup and personal care samples in the hopes they will return and buy the full-size versions. The retailer, which launched in 2010, has shipped more than 5 million monthly boxes to more than 400,000 shoppers at $10 a pop for women and $20 for men. And its traditional e-commerce business is growing, too. Birchbox says its full-sized sales are on track to more than triple in 2013 from 2012, though the retailer declines to reveal sales. And it's not just subscribers buying full-sized products, 15% of online orders at Birchbox.com come from non-subscribers, Birchbox says.

Birchbox.com, which has received $11.9 million in funding to date, now sells more than three full-sized products per minute and traditional e-commerce currently comprises more than a quarter of its business, says Katia Beauchamp co-founder and co-CEO. More than 50% of its subscribers have made purchases on Birchbox.com, she says.

Birchbox gets the samples it includes in its subscription boxes for free from brands trying to drive sales and awareness. Birchbox says its business model can do just that. For example, Birchbox sent an eye shadow palette from makeup brand Stila to 7% of its subscribers based on information they provided about products they desired. After getting the sample, 11% of those who received the item went on to buy the full-sized version on Birchbox.

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