Strategy

Subscription commerce startups are putting a fresh spin on a old business model

Columbia House Records 2.0?

Remember those subscription-based music companies in the 1990s? The ones that promised 12 CDs for $1? A number of online enterprises are giving that old-school business model a new lease on life.

Subscription commerce startups have been mushrooming all over the U.S., selling anything from fresh-cut flowers to women’s footwear, with varying degrees of success.

In Canada, one of the companies spearheading the trend is Montreal-based Frank & Oak, a men’s online clothing store specializing in premium basics like Oxford shirts and silk ties. The apparel is geared toward 20 to 30-year-old men who loathe the prospect of stepping into a clothing store, but still want stylish threads.

Frank & Oak comes to the aid of the shopping-shy with its exclusive service, the Hunt Club, which ships a selection of recommended menswear directly to its customers’ doors. The suggestions are based on each customer’s profile—when users sign up, they are required to fill out a one-time survey. As more purchases are made, the recommendations are tweaked to more accurately reflect each customer’s unique taste.

But, you only pay for what you keep. Hunt Club members get free shipping on up to three items each month. And, men will be happy to hear, everything on offer is under $50.

The secret is to develop and maintain a database on the clients—their tastes, shopping patterns and price range. And the company also surveys customers each time a new product category is introduced. About a month before rolling out its first line of pants late last August, for example, it asked Hunt Club members for their size, brand preference and whether they would be interested in purchasing pants in the first place. The feedback proved fruitful.

“Everything was sold out,” said Hicham Ratnani, chief operations officer and co-founder of Frank & Oak. “We had very low [merchandise] returns too because we designed everything according to the clients standards.”

Insight into personal taste and habits is key to developing customer loyalty. And loyalty is the name of the game. On average, it’s about seven times more expensive to get a new customer than it is to get a repeat purchase from an existing client, says Alan Middleton, assistant professor of marketing at York University.

Old subscription-based companies like book-of-the-month clubs and mail-order music retailers required customers to make minimum yearly purchases. Or they charged hidden fees. But their web-savvy descendants are largely shying away from demanding any commitment at all from their tentative new customers, betting that convenience of use, low prices and a personalized touch will be enough to get their subscribers to buy—and then buy again.

“This model is very much a model of the future,” said Middleton. “Instead of looking for stuff through the bigger search engines like Google, we’ll sign up to some brands that we trust to do the work for us.”

But he warns, ultimately it will be the product, not the business model, that will make or break a newborn enterprise. The point of any subscription-based setup is to increase the chance that customers will make future purchases—and, in the long run, whether subscribers turn into a devoted customer base mostly depends on what’s up for sale. CD subscriptions, for instance, didn’t last not because of issues with the business model, but because downloading and streaming became a more appealing alternative, says Middleton. “The CD industry was collapsing,” he added. “It was just the wrong idea at the wrong time.” The same Darwinian law of natural selection, in all likelihood, applies to the new online incarnations of that well-worn business model.

Frank & Oak’s Ratnani, for his part, seems convinced his company will be among the fittest: “I think we’re going to be bigger than GAP,” he said, “we’ll become the number one brand of the Internet generation.”