Did you know it’s possible to subscribe to a service that delivers hand-picked craft beers to your house every month? What about coffee, gin, shaving equipment, underwear, geek and gaming-related merchandise, beauty products, or even toys and treats for your dog?
Consumer demand for curation, provenance and community has made subscription boxes into big business, promising startups recurring revenue and a captive audience. But how do you grow in a segment that most people don’t know about?
The diffusion of innovation
Subscription-based startups face what’s sometimes called diffusion of innovation. This 60s-era theory explains how a new idea reaches critical mass through the innovation itself, communication channels, time and social systems.
What we’re interested in is the way a new product moves through a bell curve of adoption from innovators, to early adopters and the early majority; think how Google Glass failed to reach beyond a small minority of the tech-obsessed, but the iPhone crossed the bell curve to saturation.
The model is a useful way to think about marketing.
The idea of sending locally sourced ingredients for a different meal to subscribers’ doors every week is relatively new - most people in the UK aren’t used to buying products like this. That creates a challenge that a lot of new subscription box products face; you don’t just have to make sales, you have to explain what you’re selling, to define a new segment.
This means starting with the innovators - consumers willing to take risks - and working hard to build word-of-mouth marketing and understanding before you can scale.
When HelloFresh started offering exactly that service in the UK, it was difficult to explain the offering through traditional digital marketing. What was the solution?
“You start with friends and family, and you try and build on that base,” says Freddy Ward, who joined HelloFresh as its first marketing hire and is now director of marketing at HelloFresh UK.
“The first job we had to do was build the category, not the brand. We spent a lot of time at food events and festivals talking to people face to face about the product.”
Startups need to think about creating a strong reason to purchase too, suggests Ward, whether that’s a discount or offer. They also need to be incredibly protective about the marketing budget they have.
“Don’t spend on anything that you can’t be confident you can’t scale at an acceptable marketing return,” he warns. “Some people get really excited and buy tube or TV campaigns, particularly when they get their first bit of investment. For us, we were incredibly disciplined in our early stages in knowing how much money we put in and what we would get out. And then you really scale and build that up.”
It’s common for these startups to leverage partnerships to build audiences in a cost-effective manner. In some cases, these businesses will even cross-sell, promoting other subscription products to their customers through inserts.
“Avoid diving straight into paid search, social and other paid activity unless you have in-house expertise. At the early stage, finding ways to leverage ‘new entrant’ opportunities is a great way of getting into blogs and potentially the press. A great founder story or an unexpected backstory for your product could also be a great way to cut through,” he adds.
The role of content in building a brand
Building a narrative around your product and the problem it solves is incredibly powerful to develop market awareness. Think about what makes it unique. How does it improve the lives of your subscribers?
If you’re looking to build out content ideas, look at the journey your customers are on and then identify the individual points of friction (there’s a great explainer on this on First Round). We use this model to develop ideas for BusinessZone. I’ll sit down with an entrepreneur and talk about specific pain points and challenges they have faced as they build a business, like having a co-founder leave the business and working on a startup part time.
“The educational element of subscription products is best crafted once you understand the consumer and the gap you’re filling in their life,” says toucanBox’s Mandalia.
Content can help when the business starts to develop past its initial stages too, helping you build a more evolved sales funnel. HelloFresh, for example, put a big emphasis on content as the business evolved from early adopters who make purchases on an impulse to the early majority who take a more considered approach.
“What we realised and worked hard to do is create a journey where we don’t expect customers to buy on the first time of seeing our brand,” explains Ward. “We look to build a relationship through capturing their email address or their cookies, and then slowly feeding them content, explaining the product, bringing that to life with our suppliers and testimonial videos, and then driving them to sign-up.”
This has the added benefit that when a customer joins they really understand what they are getting, boosting customer lifetime value (the total amount the business will earn from the average customer) and satisfaction.
Loot Crate offers a subscription to “Comic-Con in a Box,” as its founder puts it, sending out things like Matrix puzzles and RoboCop T-shirts. Matthew Arevalo’s built the business to an incredible 650,000 subscribers and says community content played a big role in that.
“Early on, we discovered that fandom is something that should be shared, regardless of the medium, and that people wanted a way to share their unboxings,” Arevalo explained in a recent post for BusinessZone.
That means fans post videos of them opening the box, some of which have thousands of views, and the business supports the trend by engaging with that ‘Looter’ directly, retweeting them, including them as featured ‘Looters,’ and even giving influencers unique referral links and custom landing pages.
Customer insight and targeting
The curated and specialist nature of the product means businesses use specific targeting to identify potential new subscribers.
HelloFresh’s Ward says startups can do this early on in their journey, recommending they build profiles of customers and find more of them in a very targeted way. The subscription service also uses Facebook’s Lookalike Audiences to help identify other possible prospects (it has 20 different marketing channels overall, he estimates).
“We try to grow penetration and awareness within our target market and haven’t got too worried about wider marketing. Some people can look at metrics like awareness among the full population, but what you actually want to do is focus on who your target audience is and not be too worried about people outside of that being aware of the product,” says Ward.
The importance of customer retention and lifetime value
It goes without saying that the job isn’t over when someone subscribes. It’s common for subscription box services to pay £25-50 in media costs to acquire a new customer if they’re buying from an agency, plus the first box is sometimes free which increases spend further, so it’s crucial to keep users engaged.
“Two often overlooked aspects of increasing retention are: increasing your understanding of your consumer and where the product fits into their life, and reinforcing the value of what you are offering,” says toucanBox’s Mandalia.
Pact Coffee, for example, includes a physical welcome booklet, email, SMS and a courtesy phone call. HelloFresh has a series of touch points to increase engagement, including a monthly magazine and a rewards programme, and constantly works to give our customers added value.
“We’ve just got a new office, which is great because people can come and see them and they’re more than happy for us to build content and drive that forward. It’s those personalities and connections that really set you apart,” says Ward.
Mandalia echoes Ward’s early sentiment about the importance of data analysis and suggests subscription companies use it to help tackle retention too.
“Customer insights can be gained from qualitative and quantitative methods but ultimately it is the outcome of your data analysis which will define how you tackle retention, whether it is based on affluence, life stage or another socio-demographic factor.
“The better you understand this, alongside with how the consumer uses your product, the better you can reinforce this,” he says.
The example he uses to make this point is a coffee subscription business targeting busy 25-35 year-old high flyers. Knowing that their prime drinking time is right before they leave in the morning identifies a communication path; talk about how quick and efficient your product is, and cross-sell them a branded travel coffee cup.
It’s an exciting time for subscription box businesses. They sit at the intersection of several consumer trends: people are more interested in provenance, whether it’s buying British or supporting craft breweries; the interest in provenance is driving people to shop locally and buy from boutiques (witness Waterstones’ faux independent bookshops); and the comfort of home delivery brought on by the rapid increase in ecommerce.
Those that have been successful stress the trick is to make sure your audience is well defined. That your marketing can target and convert them in a cost-effective manner in a well developed, content-led sales funnel. And that you continue to build engagement throughout customers’ lifetimes.
It’s great to see the level of consumer engagement too; whether the founder is passionate about Marvel swag or coffee beans, it’s possible to carve out a strong niche.
Journalist and editor with nine years' experience covering small businesses and entrepreneurship (ChrisGoodfellow.net). Follow his personal twitter account @CPGoodfellow and his events business @Box2Media. He has written for a wide range of publications in the UK, Ireland and Canada, including The Financial Times, The Guardian, The Independent and Vice magazine.