Subscription business models are getting their day in the sun March 7, 2012
Posted by jeremyliew in Ecommerce, subscription.5 comments
Today’s NY Times notes that subscriptions are all the rage in ecommerce. It features three of our portfolio companies. Alex Zhardanovsky, cofounder of Petflow*, and Azoogle before that, is one of the people interviewed:
But he had an idea to build the business by taking a different approach to sales. While selling online ads, he had seen other companies, like Netflix, persuade consumers to lock in monthly fees for repeat orders. Those companies, he believed, were generally more successful and thus bought more of his ads. For his new business, Mr. Zhardanovsky’s plan was to sell dog food on a subscription basis. He figured that other pet owners had experienced the same frustrations keeping the food stocked and might be willing to sign up for a monthly delivery service as well. “Dogs never stop needing to eat,” he said….
In its first month, July 2010, the company shipped about 60 orders; by January of this year, that number had leapt to 27,000. In 2011, PetFlow exceeded $13 million in revenue — with 60 percent of its sales coming on a subscription basis — and it projects revenue will exceed $30 million this year. “I’ve come to appreciate,” Mr. Zhardanovsky said, “that subscription models are, in so many ways, the holy grail of business.”
Brian Lee, cofounder of Shoedazzle* with Kim Khardashian, is also quoted:
“A subscription model allows you to establish long-term relationships with customers as opposed to selling them one pair of shoes and hoping they come back,” said Mr. Lee, who also was a founder of LegalZoom. It was his experience at LegalZoom, a legal-document business based on single transactions, that prompted Mr. Lee to look for recurring revenue: “I wanted to start a business where you didn’t have to worry as much about whether the customer would come back.” The idea of using a subscription model to sell shoes came to him, he said, after he realized how many shoes his wife was buying on a regular basis.
The Times also notes where the subscription model works best:
Given the experiences of companies like PetFlow, ShoeDazzle and BabbaCo, it is tempting to wonder why not every company is trying a subscription model. And, in fact, Brian Lee, the founder of ShoeDazzle, said he frequently heard pitches from entrepreneurs who wanted to create the ShoeDazzle of wine or underwear or some other product. “I think subscription models work best in two instances,” he said. “Where the product is a necessity or when it’s an absolute passion. It stops making sense when you try to do something like a tree-of-the-month club, which doesn’t fit either of those categories.”
Taking his own advice, Mr. Lee recently founded another subscription-based business, this one with Jessica Alba, the actress. It is called the Honest Company*, and it ships diapers and other baby products.
We’re proud to be backing such great companies and entrepreneurs.
* Lightspeed Portfolio Companies
Why so many hot apparel ecommerce startups are vertically integrated February 3, 2012
Posted by jeremyliew in apparel, Ecommerce.1 comment so far
The WSJ has a story on what goes into the price of a shirt that shows why so many of the current batch of hot apparel ecommerce companies (e.g. Shoedazzle*, Bonobos*, J Hilburn, Warby Parker, IndoChino etc) are vertically integrated. The retail value chain has a significant markup built into both the wholesale and retail channel as can be seen here.
Vertically integrated companies can take a lot of the costs out of the system and provide a much more compelling value to the consumer while still making an attractive margin.
* Lightspeed portfolio companies
WSJ compares Petfood ecommerce, likes Petflow February 3, 2012
Posted by jeremyliew in Ecommerce.Tags: petflow
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Last year we invested in Petflow, an online petfood retailer. We believed that Alex and Joe, the two cofounders, would be able to repeat the success they had in founding Azoogle (now part of Epic Media Group) and that the repeat purchase behavior inherent in petfood would generate loyal repeat customers and high lifetime value, despite the high shipping costs inherent in petfood. Pets.com went down in flames when the first bubble burst, but we believe that today’s much lower cost of building and running an ecommerce site, today’s variable marketing costs that performance marketing affords, and today’s mainstream acceptance of ecommerce make this a much better opportunity.
Others see a similar opportunity, notably Quidsi (parent company of Diapers.com) who launched Wag.com.
Alex and Joe have been steadfast in their focus on high quality food and service, and it’s nice to see that recognized in yesterday’s WSJ Cranky Consumer article comparing online petfood retailers. The higher quality focus is noted, despite the fact that the tester is used to cheaper supermarket brand food:
Tester Pixel loved this food. We put out two bowls: one with Meow Mix and one with the Holistic Select. He went right for the Holistic Select, and now turns up his nose at Meow Mix. Pixel may force us to return to PetFlow.
Mr. Chewy also got a thumbs up, Wag and Petfooddirect unfortunately did not. Congrats to Joe and Alex!
Today is a good day to market to cheating spouses February 15, 2011
Posted by jeremyliew in apps, Ecommerce, seasonality.5 comments
Bloomberg Businessweek has an interesting article on the infidelity economy this week, noting that registrations for AshleyMadison, the online dating site aimed at married people, spike the day after Valentine’s Day. But nowhere near as much as they spike the day after Mother’s Day and Father’s Day.
It’s an interesting example of the sometimes ideosyncratic seasonality of web businesses. Knowing the seasonality of your business can help you market to, merchandise for and communicate with your customers most effectively.
Everyone is familiar with the Q4 seasonality of retail businesses, driven by the holidays. But each industry has its own annual seasonality cycles that may be less obvious in foresight, but are always obvious in hindsight. For example, in Shoedazzle’s first year of operation, we missed a few months of the winter boot season. Having the wrong merchandising mix from October to January in 2009/10 definitely dampened sales – women don’t buy as many open toed shoes when there is snow on the ground!
Another example is Mercantila, a company that sells a lot of exercise equipment, rowing machines, elliptical trainers and the like. They see sales spike not in Q4, but in Q1, when people are making their new years resolutions. When many online retailers are easing up on their online marketing and SEM, Mercantila is ramping up what it is willing to spend to reach new potential customers.
Smartphone app developers have learnt that the launch of new iPhones and heavily marketed Android phones is a period when they can rapidly increase installs, as are the days after Christmas, when many new phones are getting unboxed. The first thing a new smartphone owner does, is go to the appstore to get some apps. Being high in the “best-sellers” lists at that time can provide a real boost to your installs. Making sure that your release at that time is bug free, well reviewed and fully featured, is of course important too.
Seasonality is not confined to annual cycles either. As the number of ecommerce businesses relying on email increases, rules of thumb for weekly and daily seasonality are also starting to develop. For example, Mondays and Tuesdays of the first and last week of a month are when people tend to balance their checkbooks, so are bad days for subscription services to send e-mails. They have a higher probability of getting canceled on those days and don’t want to draw attention to themselves. On the other hand, emails sent Sundays after Church show high open rates for some ecommerce merchants. And for deal sites, open rates are higher when you are above the fold when someone first opens their email, which rewards sending emails in the weekday 5am-7am time slot to work based email addresses.
Why Lightspeed invested in Bonobos December 16, 2010
Posted by jeremyliew in apparel, bonobos, Ecommerce.12 comments
Today we’re announcing that Lightpseed and Accel are investing in Bonobos, a vertically-integrated men’s apparel etailer. Bonobos was founded in 2007 by a couple of Stanford Business school students, selling better fitting pants out of their dorm room. Initially their focus was on pants, cut for modern American men who had played sports growing up. Not the too skinny Euro cut that doesn’t work for men who had some muscle in their legs, but not the baggy and pleated looks that Brooks Brothers made the staple of American style. I am happy to say that I have a lot of their pants in my closet!
The company has since moved to the web and grown substantially, both adding product lines under their own brand (shirts, jackets, polos, shorts and sweaters), as well as carefully curating products from other brands that fit their style and aesthetic. Their growth was initially steady, but has really taken off in the last few quarters as they got a better handle on Customer Acquisition Cost versus Lifetime Value. As I’ve mentioned before, companies who understand these customer level economics can quickly reach millions in monthly revenue as they can confidently spend on marketing to grow their customer base. Our investment into Bonobos will enable them to ramp their growth rate in just this manner.
Earlier this year Lightspeed invested in Living Social and in Shoedazzle. Both investments were premised on the idea that making shopping fun is driving this current generation of ecommerce companies. Unsurprisingly, both companies have a primarily female customer base.
Bonobos is different. Andy Dunn, Bonobo’s CEO, captures some of the differences between the way that men and women shop for clothes like this:
Basically, this says that for many women, style, trend and fun are the most important factors. Time and hassle is acceptable if the style, trend and fun are high enough. Shoedazzle certainly focuses on style, trend and fun.
For many men, the equation is different. They do not like to shop, but they do care about looking alright. They focus primarily on fit, but want time and hassle to be minimized. For an e-commerce website, this means that fast, free shipping and returns are important factors to drive men’s apparel sales.
Furthermore, men develop a certain loyalty to brands and retailers that have clothes that fit them. If they have confidence in a particular brand, they can make their annual shopping fast and easy, and they don’t have to cross shop from other places. Whereas the lifetime value for female clothes buyers comes from their frequent purchases driven by entertainment shopping, the lifetime value for male clothes buyers comes from the brand loyalty engendered by meeting their needs for clothes that fit, in a fast and easy buying process.
I’m very excited about our investment in Bonobos. We believe that they are the leading pureplay vertically-integrated men’s apparel etailer, and are well positioned, and well capitalized, to expand on their leadership position. In Shoedazzle, we are also investors in what we believe to be the leading pureplay vertically-integrated women’s apparel etailer as well. JCrew, Lands End and others have grown to be billion dollar businesses in the vertically-integrated catalogue led apparel space, and have transitioned well to the web, but the advantages of being a pureplay etailer will allow for very valuable new companies to emerge.
If you’d like to check them out, grab something for work, the weekend, a party or the holidays. Use my discount code – SECRETHANDSHAKE, and get 20% off through the holidays!
How to estimate Lifetime Value; Sample cohort analysis July 19, 2010
Posted by jeremyliew in Ecommerce, ltv, subscription.40 comments
In many businesses, repeat purchase behavior is a key driver of value. Many companies track % of repeat purchases as a key business metric. This is useful in steady state, but can sometimes be quite misleading if the company is showing substantial growth. By definition, growth implies many first time customers, and the mix of these new customers can distort the view into how much repeat purchase behavior is actually occuring.
I prefer to try to analyze repeat pruchase behavior, and hence, estimate lifetime value, by doing cohort analysis. This is approximate by definition, but it can give you some sense of lifetime value well before you actually see a full customer lifetime, which can help in accelerating decisions about marketing and customer acquisition. I recently posted about how you can improve LTV and CAC for your subscription or repeat purchase business. But how do you estimate Lifetime value?
I’ve uploaded a spreadsheet with a sample cohort analysis, using representative but dummy data to illustrate how to do this.
In this particular example, I look at a hypothetical subscription business. Assume that the business has been in operation for one year. First, divide the users into cohorts depending on when they initially subscribed to the service. I calculate retention at the end of month N by dividing the number of subscribers still subscribing after month N by the total number of subscribers that started in each cohort. These are the numbers in blue. Obviously, for the subscribers that started in month 1, we have 12 months of retention data, for the subscribers that started in month 2 we have 11 months of retention data, and so on.
By averaging across the cohorts, you can get an average retention rate at the end of one month, two months and so on. As the cohorts age, there are fewer datapoints to average over, and hence the potential for error is greater. However, it is still a useful exercise to get an early indication of how the business looks.
A typical pattern found in subscription businesses is that after a steep drop off after an initial period, month-on-month attrition rates tend to level off. You can see a similar pattern in this example, where after the first month, month-on-month attrition rates are around -6% (ie month N subs ~ 94% of month [N-1] subs).
If you see a pattern like this, you can extrapolate forward using the same month-on-month attrition across several years. As you can see in the model, we extrapolate an average lifetime of 9.77 months by extrapolating forward over 5 years of data.
So if you were a subscription business charging $20/month with 90% gross margins (after accounting for customer service costs for example), then you would attribute a lifetime value for a new customer of 9.77 x $20 x 90% = $176. This sets an upper bound of what you would be willing to pay to acquire a customer (although in practice, you would prefer to see a ratio of CAC/LTV in the 25-35% range).
This example is for a subscription business where the key value driver is the number of active subscribers. However, you can conduct similar analysis on any type of repeat behavior business. In a social business the metric might be activity (e.g. how many users posted a photo this month), and in a social game the metric might be dollars spent in virtual goods that period. The measurement periods may vary according to the tempo of the business. Many social games do their cohort analysis on a daily or weekly basis, whereas some ecommerce companies whose purchases are less frequent may do their cohort analysis on a quarterly basis. This will dictate how long you have to collect data before you have enough data to project forward.
Different billing mechanisms can complicate this (e.g. an annual billing system will by nature skew average lifetime upwards) and while these can be important levers, it is usually helpful to hold billing constant and compare cohorts on a same-billing basis, at least initially. However, this cohort analysis is also useful tool to see what the impact of changes in billing, registration flow, product features etc can have on retention as you can often see an increase in early month retention from later cohorts.
The spreadsheet for the sample cohort analysis is read only but you can download it to play with it yourself.
I’d love to hear from others how they estimate lifetime value.
Why Lightspeed invested in Living Social April 29, 2010
Posted by jeremyliew in Ecommerce, growth, local.Tags: entertainment commerce, living social, push commerce
17 comments
Well, I’ve been busy since the beginning of the year! Earlier this week Lightspeed’s investment in ShoeDazzle was announced, and today our investment in Living Social was announced.
Both companies reflect our belief in entertainment commerce, or push commerce. The traditional model of ecommerce treated buying things like a chore, crossing things off of a list. Some of the newer commerce models, the ones that are quickly growing to millions in monthly revenue, help users discover great deals and great items that they were not explicitly looking for. By manufacturing serendipity, they help create demand, rather than just fulfilling demand. Living Social falls into this category.
Living Social sends a local deal each day via email (see some examples here) to residents in 18 cities across the US. The deals are usually 50-80% off on a local restaurant, spa, bakery or similar merchant. If the deal appeals to you, you buy it directly from Living Social. Living Social makes money by keeping a cut of the revenue, and sends the rest on to the merchant.
The leader in this category by far is Groupon. Groupon has seen tremendous growth, from $100k in revenue in January 2009 to $10M in revenue in January 2010. Living Social got started 6-9 months after Groupon, but is seeing similar growth. According to Hitwise, traffic in the group buying category is up 72x since last year, with Groupon and Living Social neck and neck for traffic at around 49% each (click through to see the full graph):
Sadly they are not neck and neck for revenue, at least not yet!
There are many entrants into the local deal space, with Techcrunch reporting earlier this month:
When Yipit launched a little over a month and a half ago (!), the startup could already identify 30 daily-deal Web services. Today, the company tracks deals from no less than 66 Groupon-like websites across the United States, more than double the number it counted less than two months ago.
As you can see from the chart above (click through to see the full graph), the 66 companies are delivering 176 daily deals. Since 50+ of these deals are from Groupon, the other companies are averaging 2 cities each. This is an easy category to enter, but I believe that it will be a difficult category in which to scale. Success will depend on building the email subscriber base, which is challenging on a single city basis. The more targeted you want to be, the harder it is, whether you are relying on viral growth or buying advertising. National growth is easier, but requires a national footprint of deals to take advantage of it. That is hard to do, and expensive to do. It is an execution game which will require great management and significant capital.
I suspect some of the other 64 companies will be able to reach viable scale to join Groupon and Living Social. Both companies are well funded, and with very impressive management teams. Anyone hoping to make it to scale will need to bring the same assets to the table.
We’re excited to help Living Social continue in its growth.
Why Lightspeed invested in ShoeDazzle April 28, 2010
Posted by jeremyliew in Ecommerce, growth, subscription.Tags: entertainment commerce, push commerce, shoedazzle
12 comments
Lightspeed led a $13m investment in Shoedazzle, announced yesterday. We are very excited to help Shoedazzle grow.
Shoedazzle is one of the companies that I was thinking of when I wrote about startups that can quickly get to millions in monthly revenue:
… are all taking advantage of one of Lightspeeds consumer internet predictions for 2010, that direct direct response advertising is getting more efficient. A bad time to sell ads is a good time to buy ads. All these companies are taking advantage of relatively low customer acquisition costs.
If you understand your customer lifetime value, and you can acquire customers for 20-30% of the lifetime value, you are going to make money. Understanding lifetime value is hard for media companies, but it’s easier for gaming companies, ecommerce companies and subscription businesses. They have predictable customer behavior cohorts that can be extrapolated from a few months of data from a representative sample. Running an aggressive positive arbitrage while online media is cheap has allowed all of these companies to grow revenue very fast once they get the micro-economics right.
The company is based outside of Silicon Valley (LA) and is definitely built on the back of business model innovation, as are many of the current crop of fast growth companies.
Shoedazzle has a terrific user value proposition. A member first takes a style quiz to assess her taste. Then, on the first of each month, she receives an email with five pairs of shoes that have been specially selected for her. If she likes one of the pairs, she buys it. If none of them grab her, she can either skip that month, or request a re-selection and give specific guidance as to what she is looking for (e.g. boots, or higher heels, bolder colors). Women get personal stylist advice and recommendations brought directly to them, helping them to keep abreast of the latest fashion trends.
Thematically, I am very excited about the move towards entertainment shopping, and Shoedazzle falls squarely into this category:
One of the most exciting trends in e-commerce over the last couple of years has been the trend towards “shopping as entertainment”. Traditionally e-commerce has been a chore type activity. Customers know what they are looking for (a digital camera, a new laptop) and are looking for the best product and best price with a very “research” based mindset.
This is quite unlike the real world, where a customer might walk around a mall without any particular purchases in mind, and perhaps opportunistically buy something that caught their eye in their wanderings. There is no real “intent to buy” in a trip to the mall. It is more like entertainment time which may, or may not, lead to a purchase.
SheoDazzle captures the wonderful serendipity of finding something great as you wander the mall, and brings it into your inbox.
Kim Kardashian is one of the co-founders of Shoedazzle, and has been instrumental to the success of the company, both through her promotion of the site, and through her fashion input into the shoe selection. But this company is about much more than Kim alone. The company prides itself on delivering terrific experiences to its members, and this has resulted in an incredibly strong and positive community, as reflected by the vibrant wall on its facebook page, the constant tweeting on twitter, and even the unboxing videos on youtube.
Notwithstanding Kim and the community, Shoedazzle is about the shoes. And that is what has let the company grow through word of mouth. This isn’t the manufactured virality that works so well for facebook apps and early social networks, riding the transports of notifications, invites, wall posts or email importation. This is the real thing, with one happy member telling another about where they got their great shoes.
On the flip side, online commerce is an operationally intensive business. With physical goods, you get lower gross margins then you see in online media. In shoes, return rates can be high (Zappos’s average return rate is 35%). If you care as much about member satisfaction as Shoedazzle does, client care needs a lot of resources. And breaking through the noise and clutter on the consumer web is always difficult. Building a business like shoedazzle is not as easy as simply hacking all night for a few days and standing up a website. It requires deep knowledge of merchandising, logistics, customer care, marketing and promotion.
Shoedazzle has a terrific team of experienced, passionate people (with great shoes!) who are tackling this challenge, and at the end of the day, that is why we invested in ShoeDazzle.
