The subscription commerce sector is growing fast and is acting as an intensive prototyping lab for what works in selling products online. The benefits of creating a subscription revenue stream are huge with some reports claiming that over half of all US businesses are either already using or are actively exploring recurring revenue offerings.

There are essentially three different business models that come under the “subscription” umbrella:
– Old School: this is like the old CD-subscription models under which a customer gets products cheap upon sign-up, on the basis that their lifetime value will be much higher. Current examples include ShoeMint and JustFab.
– Sampling: where merchants try to understand your tastes and send you product samples that you will like. The long-term key to this model is customer data. Birchbox was the pioneer, but more and more players are piling in like BeautyArmy and Blissmo. There’s a lot of VC money going into this area right now.
– Consumables: flowers, razors, diapers. This model is an obvious one for the right sector and success is down to execution.

Subscription revenue models have been big for affiliates for a long time – think of all those training programs! – and these new startups are showing just how far the model can be pushed. The problems can arise when subscriptions don’t bring in enough revenue to drive the entire business.

That’s when a traditional eCommerce model can be added on to create a successful hybrid:

“...Beauty Army seeks to match customers up with beauty samples that they’re most likely to enjoy. It works like this: Users sign up and create a profile, and then they’re offered a choice of nine samples to choose from. After choosing six, items are sent as part of a $12 monthly subscription. Customers pick the items they’d like to receive every month — and they can update their profile or choose to skip a month whenever they want.

In addition to the subscription commerce portion of its business, Beauty Army also has a typical e-commerce shop, where customers can purchase full-size versions of the samples that they’ve received and liked. That’s where the real money is made, as Beauty Army converts casual sample users to actual product purchasers.”

But it’s not necessarily that simple:
“The beauty of the “sub-com” model in the eyes of investors and would-be copycats is the recurring revenue stream and the ability to pay out to acquire customers. It is easy to justify spending big sums of cash on marketing, when it means the customers you recruit will shop often. At relatively low price points and healthy margins, they typically become profitable to the company in six months to a year.

“The beauty of the “sub-com” model in the eyes of investors and would-be copycats is the recurring revenue stream and the ability to pay out to acquire customers. It is easy to justify spending big sums of cash on marketing, when it means the customers you recruit will shop often. At relatively low price points and healthy margins, they typically become profitable to the company in six months to a year.

It almost turns the economics of a consumer ecommerce business into those of enterprise software. The keyword here is “almost.” Companies subscribe to SalesForce, because it’s efficient and mission-critical. Four inch stilettos or chandelier earrings? Delightful, but not efficient or mission-critical.

Many of these companies think they have a subscription business, because they’ve convinced people to sign up. They bake in an annuity stream, extrapolating that two-month subscribers will still be subscribers in 12 months. The problem is that this hinges on whether people are just sticking around because they can’t figure out how to cancel. There will be churn, and once there is, those customers don’t necessarily migrate to traditional ecommerce.”

As always, those who execute well will win, but for both affiliates and merchants, there is no question that subscription commerce is perhaps the hottest of all ways to compete in the currently over-crowded ecommerce marketplace.