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Will Subscription Services Work for Fashion?

Netflix, Spotify and Birchbox have tapped subscription services to build businesses with predictable revenue streams and loyal consumers. But for fashion companies, subscriptions present a unique set of challenges.
StitchFix sends customers boxes of clothes selected using a combination of personal stylists and algorithms | Source: StitchFix
By
  • Helena Pike

LONDON, United Kingdom — Monthly subscription isn't exactly a new concept.  Wine-of-the-month-club memberships have been around for decades, and who can forget the Columbia House mail order CD club?

But today, subscription services have become an integral part of the way modern consumers shop, with companies such as Netflix and Spotify leading the charge. Consumers “are very comfortable with buying online, with buying unknown commodities, with buying products and then letting someone else select it for you,” says Marshall Cohen, chief industry analyst at the NPD Group, who predicts that subscriptions will become an additional retail channel, alongside e-commerce and bricks-and-mortar.

Subscription box companies charge customers a recurring fee to receive boxes of products — from fresh fruit and vegetables, to dog treats, to disposable razor blades — on a regular basis. Since 2012, the number of companies registered through My Subscription Addiction, an online directory for the market, has sky-rocketed from just 200 to over 2,000. In 2014, the subscription commerce industry generated $5 billion in revenue, according to Cratejoy, an online platform that helps users build their own subscription businesses.

Subscription box businesses enjoy a few advantages over other retail models. Subscription businesses operate a recurring revenue model, which requires consumers to pay a regular fee — once a customer commits, they are a guaranteed source of income for at least a month, and usually longer. Because of this, the company can predict its revenue stream, allowing management to plan and invest accordingly.

As a result, subscription services can invest heavily in growth and are often quick to gain momentum. Birchbox, a beauty subscription business that sends customers a selection of makeup samples every month, launched in September 2010 and acquired 1,200 subscribers in the fourth quarter of that year. Today, Birchbox has over a million subscribers, according to the company.

So it’s no surprise that dozens of fashion companies have also tried their hand at the subscription game. In the last six months alone, the subscription-based fashion and jewellery rental services Le Tote and RocksBox have raised $15 million and $8.7 million, respectively. Start-ups in the space include Golden Tote (which sends customers a monthly selection of clothing, costing upwards of $49), Elizabeth & Clarke (quarterly deliveries of white shirts, costing $60), Adore Me (a monthly lingerie selection for $39.95) and Avenue A, Adidas’ subscription service for women’s sportswear, which launched last month and costs $150 a quarter.

But for each of these, there are several more subscription start-ups that have faded into oblivion. Clothing companies CakeStyle, Wardrobe Wake Up and Swag of the Month, activewear brand Ellie and underwear suppliers Ditsies and the Knicker Issue are just a few of the fashion subscription services to have closed in the last few years. BeachMint, the parent company of six fashion subscription brands, raised over $70 million in funding but was quietly shuttered after being acquired by Condé Nast’s now-defunct Lucky Group in 2014.

Indeed, unlike beauty or accessories subscription boxes — or subscription streaming services like Netflix and Spotify — fashion companies trying to tap this business model face a unique set of challenges, related to sizing, personal taste and product accumulation.

Too much stuff

Thus far, the most successful subscription companies don’t require the customer to handle a physical product. In 2014, music-streaming service Spotify’s annual revenues reached €1.08 billion (about $1.21 billion), up 45 percent on the year before. Netflix has grown dramatically since adding digital services to its DVD rental programme. Today, the company (which reported $6.78 billion in sales in 2015) has over 75 million users, compared to just 7.5 million in 2007, the year it launched online streaming.

Streaming services allow users to listen and watch whatever they want, whenever they want, without touching a single product. Fashion services, on the other hand, can easily fall into the trap of overloading their customers with too much stuff — there are only so many new t-shirts or ties a customer can receive before fatigue kicks in. “After the fourth or fifth or six month… they usually just check out,” says Robin Lewis, chief executive officer of the Robin Report, a retail strategy publication. “They don’t want another box of clothes every month.”

To combat the “accumulation trap,” some fashion subscription start-ups offer monthly memberships that allow the customer to borrow clothing instead of purchasing it outright. This week, Rent the Runway, which previously focussed on one-off rentals of high-end fashion products, launched a new “Unlimited” service, which allows customers to borrow as many pieces as they want each month through a rolling subscription.

At Gwynnie Bee, a subscription-based rental service for plus-size clothing, subscribers borrow an average of eight to nine pieces per cycle and pay upwards of $49 a month. The company adds new styles to its website every other day. “You have to constantly bring the customer newness and freshness and provide them with things that they feel they need to try,” says Christine Hunsicker, chief executive officer of Gwynnie Bee. Since launching in 2012, the company has delivered more than three million boxes across the US, becoming the largest buyer of plus-sized clothing in the country. The company declined to disclose revenues but says sales grew, on average, 15 percent per month for the last 12 months.

This is less of a problem in the beauty subscription market, where companies send customers boxes of samples, which are disposable, cheap and allow customers to try new products before deciding to buy the ones they want. As well as its subscription business, Birchbox operates an e-commerce store, which accounts for 35 percent of the company’s revenue and is the fastest-growing part of the business. “[It’s] really an industry about discovery,” says Birchbox founder and chief executive officer Katia Beauchamp. “The subscription helps you discover and then be able to purchase in a really easy, efficient and delightful way.”

Sizing and personal style

While most subscription boxes across categories such as beauty or food are non-refundable, for fashion companies, sizing issues present an additional hurdle: refunds. “If you’re sending clothes, then you have to allow some way for consumers to exchange, if not return, those items,” explains Liz Cory, founder of My Subscription Addiction.

“You have a high chance of getting things wrong — that the customer won’t like it, that it won’t be the right size, that the colour is not exactly what they want,” says Hana Ben-Shabat, a partner in the retail practice of management consultancy firm A.T. Kearney. This can dramatically impact the profitability of the business, especially if it offers free shipping and returns, she adds.

Indeed, another issue is personal taste. “Clothing is super personal,” says Hunsicker. “Everybody has their specific taste and preferences — much more so than for a make up or beauty service.”

“It’s a very different mindset to say I will try or sample skincare, versus I will wear a piece of clothing or fashion that’s been selected for me,” adds retail consultant Robert Burke.

One way around this is to let customers pick out the items they receive through their subscription. For $39.95, subscribers to JustFab, the fashion retailer that also owns the sportswear and shoe subscription services Fabletics and ShoeDazzle, receive a credit each month to spend on the site. To opt out of the charge, subscribers have to come back to the site at the start of the month. “Our customers are obligated to come back once a month,” says Adam Goldenberg, co-founder and chief executive of the company. On average, customers only make three to four purchases a year, but visit the site two-and-a-half times a month. “We don’t have to pay to reacquire customers through advertising… it’s allowed us to sell amazing product at a much better price than you can find with the competition,” he explains.

Other start-ups are attempting to personalise their subscription boxes, based on information they have about their consumers. Personal shopping service StitchFix lets customers schedule how often they want to receive its boxes of clothing, the contents of which are selected through a combination of human stylists and algorithms. "Certainly we have the biggest data science teams in retail, with over 50 data scientists… to provide really, really accurate recommendations," says Katrina Lake, founder and chief executive of StitchFix. An algorithm suggests styles for an individual customer, which stylists can make a selection from, based on data and conversations they have had with the customer. "The algorithm is able to say probabilistically what is most like to be kept," she explains. The method seems to be working: over 80 percent of users return for a second "fix" within three months. The company declined to disclose revenues.

But investing in building complex algorithms, large data science divisions and teams of personal stylists is a costly investment for a young business. It’s also an investment that beauty and jewellery subscription services don’t have to make: these businesses can send subscribers a selection of similar products, allowing them to buy the contents of their boxes in bulk and benefit from economies of scale — a saving that translates into larger profit margins for the company and better value for the customer.

“We’re in the midst of a massive shift in consumer demand… the traditional retail model is fading away. In its place, the companies that are thriving provide convenience, personalisation and the ability to try new things without commitment or large risk, ” says Brett Northatt, who founded subscription-based fashion rental service Le Tote in 2012. In the last two years, the company has experienced a compound annual growth rate of 450 percent.

However, many remain sceptical about the scalability of subscription services in fashion. The subscription box model works with “products that are consumable, that [customers] use on a daily or weekly basis,” says Robin Lewis. “When it comes to fashion… there just aren’t enough people that want to keep getting this stuff shoved at them every month that would allow the business to make a profit.”

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