Shaking Up Subscription Services

Tags: Retail, Demand Planning, E-commerce

During the lockdown, some subscription services unboxed a demand surge while others were forced to close the flaps. Here's how successful services deliver the goods.

In January 2020, Pipsticks, which offers a monthly sticker subscription, moved much of its final production and kit assembly from California to an area of China that wasn't heavily affected by COVID-19.

The timing proved fortunate. Several of Pipsticks' domestic employees were at high risk for the virus due to other health issues and age, and had to stop working as the pandemic emerged in the United States, says Nathan Vazquez, co-founder and chief executive officer with the company, which is based in San Luis Obispo.

Now, because products arrive in "a ready-to-ship state," he says, Pipsticks has been able to meet most delivery deadlines even as subscription sales jumped, and with a skeleton warehouse crew.

Pipsticks split its remaining California warehouse staff into two teams. Team A works Monday and Tuesday, Team B on Thursday and Friday. The teams alternate Wednesdays.

"If someone shows symptoms or tests positive, we can send their team home for an appropriate time and have the second team take up the slack," Vazquez says. Employees who can work remotely are doing so.

Even with these actions, Pipsticks has had to transport a few products facing delays via air instead of ocean shipping. "Stickers are reasonably small, so while air freight is not desirable, it's viable in a pinch," Vazquez says.

Like Pipsticks, some subscription companies have seen sales jump during the past few months, even as they've had to rework operations to manage changing transportation routes and reduce employees' exposure to COVID-19.

Alcohol delivery companies, for instance, boomed—growing by 700% in April 2020, according to 1010data, a provider of analytical intelligence.

One driver is the massive shift from brick-and-mortar retail to e-commerce. "Consumers who had never had been online, got online," says Barb Renner, vice chair and leader, U.S. consumer products, with consulting firm Deloitte.

Data from the U.S. Department of Commerce shows online retail sales jumped nearly 15% between the first quarter of 2019 and the first quarter of 2020. What's more, the 2020 numbers include just a few weeks of lockdowns.

Subscription services provide an experience that differs from the one offered by brick-and-mortar retailers, even absent a pandemic: the fun of receiving a package at home and anticipating what might be inside.

Subscribers "sign up not just for products, but also for an outcome," says Amy Konary, global vice president, subscribed strategy group, with Zuora, a platform for subscription businesses. Konary is also founder of the Subscribed Institute, a think tank for the subscription economy.

The outcome that draws consumers to subscriptions might include surprise, convenience, or a healthier lifestyle. Subscription services that provide these outcomes tend to enjoy some resilience, even during economic crises.

Rise Up

Demand at Rise Gardens, which offers indoor hydroponic gardening systems, has jumped 750% since March 2020. "The lockdown has been a blessing for our company and it has been a true challenge to keep up with demand," says Hank Adams, founder and chief executive officer with the Chicago-based firm.

Also boding well for many subscription businesses is that many younger consumers are shifting from "ownership to usership," says Christopher George, co-founder and chair of the Subscription Trade Association. "They rent and lease more than they buy."

Not all subscription businesses have thrived. Apparel and accessory subscription services dropped 70% in April, as consumers sheltered at home and cut back on clothes shopping, 1010data reports.

Because subscription companies build direct relationships with their customers, most gain a deep understanding of their preferences. "There are a lot of advantages to knowing their preferences," Konary says. This knowledge helps many respond more quickly to changes in demand.

That's especially true when demand surges. Gobble, a meal prep company whose dinner kits are designed to be ready in 15 minutes, saw its weekly shipment numbers triple in March and April 2020, driven both by new customers and existing ones ordering at higher rates. "Consumers were eager for home delivery, especially for food and other essentials," says Aamir Mausoof, general manager, East Coast, at Gobble. Since then, business has settled to about double its pre-pandemic size, he adds.

Gobble was one of few meal kit companies that didn't refuse new customers or make major service changes while absorbing the spike in demand. Instead, the company doubled its fulfillment staff and added additional shifts, essentially working around the clock.

While Gobble didn't experience major supplier disruptions, it still doubled its vendor base. The company also partnered with carriers to help improve service, find new routes, and troubleshoot issues.

Mausoof and his team continue to work to quickly respond to demand fluctuations. "Responding quickly to demand can only be done through accurate planning, recruitment, training, and the productivity of our team," he adds.

Enhancing Both Online and Offline

During the past few months, Blender Bombs, which offers a nutritional booster for smoothies, enhanced its website to better convey the value of its subscription services. "We want people to add the booster to their daily nutrition plan," says Scott Maynor, president at Blender Bombs.

The company also checked that its subscription software was running efficiently and supporting its web offerings appropriately.

The company's marketing efforts extended offline. Some employees embarked on a cross-country road trip in the Blender Bombs RV, handing out samples where they safely could. "It was a way to get in front of people and still socially distance," Maynor says.

Maynor and his team continue to calculate the optimal subscription discount. "Is it 10% or 12% or free shipping?" he asks. If a customer orders just one item each month, providing free shipping may mean the company essentially provides the product for free.

Blender Bombs also had to adjust its supply chain to respond to a few COVID-19-related disruptions, including difficulty sourcing coconut cream powder from organic coconuts, a key ingredient in its balm butter. Fortunately, the company identified a new supplier whose product offered the flavor, texture, and shelf life Blender Bombs needed, and at a price it could handle.

These efforts appear to be working. During the past 90 days, Blender Bombs' subscription base jumped by 30%, Maynor says.

As more consumers move more of their shopping to e-commerce, many companies that sell through both retail stores and online subscriptions are similarly focusing more of their efforts online. That's the case with The Organic Project (TOP), a provider of organic feminine hygiene products based in Duxbury, Massachusetts.

While TOP had planned for a greater push into retail in 2020, many stores are delaying new product launches due to the pandemic, says Denielle Finkelstein, co-founder and president. At the same time, online traffic on TOP's website jumped about 60%. This was driven by a rise in subscriptions of about 25% and in nonsubscription orders of 165%. "We quickly pivoted to push more business online," Finkelstein says.

Fortunately, TOP was ready. It had placed a large order in preparation for its April retail launch; these products arrived in February, as the pandemic emerged in the United States. And because many of TOP's manufacturers are based in Europe, the company hasn't seen disruptive hiccups in production. As a precaution, however, it's adding a four-week cushion to upcoming deliveries.

Building Supply Chain Redundancy

The pandemic has highlighted the value of supply chain safety planning and redundancy. Rise Gardens uses many of the same suppliers as companies in the medical device industry, which were given priority early in the pandemic.

The experience hammered home "the importance of redundancies on the supply chain," Adams says. He and his team identified the critical components that become harder to source when a supply chain disruption occurs, and dramatically increased inventory of those products.

Rise Gardens has also increased its safety inventory. "It became clear that, as a startup, this safety inventory would be make-or-break in key moments, and especially in moments of high growth," Adams says.

Some companies launched new subscription models as part of their attempts to survive COVID-19 and eliminate retailers' margins. The transitions can work, but most also introduce challenges.

The companies have to establish new operating models and work through new supply chain obstacles, such as learning to pick and pack individual orders, says Kim Kuesel, an associate partner with Clarkston Consulting.

They also need to collaborate and share data with supply chain partners. "Understand what levers they can pull and how they can help you succeed in a crisis," Kuesel says. A strong relationship with a supplier may mean they're more inclined to work with you during a crisis.

Customer acquisition and retention costs can be high. Given the absence of physical store fronts, many subscription models rely heavily on ads, says Jim Martindale, chief executive officer with consulting firm Navint Partners.

To remain relevant, companies must encourage consumers to continue to use their subscriptions. That can require regularly tweaking their offers. For instance, a food company might offer customers a promotional product in the first month they subscribe, then 10% off orders from a partner company in the second month, and a related item—say, a cookbook—in the third.

A New Normal

While it's difficult to predict how the COVID-19 pandemic will continue to affect businesses, it has already had a profound impact. "COVID-19 has been a huge accelerator for digital transformation," Martindale says. He predicts continued growth in subscription offerings.

At the same time, some rationalization is likely as companies evaluate whether subscription services are an effective and profitable way to engage with consumers. "Companies that provide a unique experience or differentiated product offering and can draw in subscribers, react to supply chain challenges, and be flexible will survive," Kuesel says.






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