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Subscription business models are getting their day in the sun March 7, 2012

Posted by jeremyliew in Ecommerce, subscription.

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


1. writingprincess - March 7, 2012

All one has to do to understand the brilliance of subscription-based business models is to look at child sponsorship. Started in the 1950s this model of charity allowed a person, family or church to support a child overseas – help them out with food, shelter education etc., for a low price of just $2 a month. After working at one of the largest child sponsorship organization with a $500 million budget I realized how lucrative thousands of people of giving a small amount of money a month can be. However, when you have someone paying monthly the cost of maintaining that relationship is ENORMOUS… your customer relations management system will cost a pretty penny and the time you spend on communicating with your customers – read inbound call center – will increase exponentially. So while subscription-based models look like the shiny new penny for some biz models, they do have their draw backs. Just ask any magazine! Or NPR…

2. Subscription based business model | Pearltrees - March 8, 2012

[…] “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. Subscription business models are getting their day in the sun « Lightspeed Venture Partners Blog […]

3. senith @ mba tutor - March 9, 2012

The assumption is that the subscription model increases your customer life time value. Evaluating actual data is the only way to check this for various businesses/products/services. Writing princess’s point is that LTV should also consider cost of serving the customer.

I think you had a post on customer life time value sometime ago.

4. Jyasper « jyasper.com - March 9, 2012

[…] Lightspeed Venture Partners Blog ASAP Rocky Talks Sneakers and Favorite Shoe Brands with UpscaleHype […]

5. Ben Milstead - March 19, 2012

As mobile and social gaming businesses consolidate into the modern equivalent of more traditional video game publishers — as they build their catalogs and cross-promotional layers, then codify their content franchises, service/platform features and overall stickiness, subscriptions are a natural fit. With the somewhat recent rise in the rate of consolidation, I believe we’ll see more and more success with subscriptions, particularly over the next two years.

6. Scott Hill - July 8, 2012

Subscription based models also work when the content is not readily available or when the information gathered is used to monitor a big industry or business opportunities. If consumers need the information to make better and more informed decisions, a reasonable subscription or license can prove invaluable.

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