No. 298: Retention is the new currency

Contributor. The much mused about sharing economy jump started by disruptors like AirBnB, Rent The Runway, Netflix and Uber is running past its adolescence. In 2019, both Uber and its rival Lyft expect to go public.

According to Fortune, Uber alone could be valued at as much as $120 billion, higher than the valuations of Ford, General Motors and Fiat Chrysler combined.

It’s also close to double Uber’s valuation at a fundraising round two months ago and would be the biggest debut since Alibaba went public in 2014.

AirBnB, too, is expected to file as early as 2019, bringing some of the biggest disruptors of the last decade to Wall Street. But their impact has already been felt beyond their Silicon Valley offices.

The sharing economy has given rise to the subscription economy:

  • An economy preferred by investors for it’s stability.
  • An economy loved by consumers for its accessibility.
  • An economy coveted by entrepreneurs for it’s long-term customer relationships.
2PM, Inc. contributor: Tracey Wallace

The rise is thanks to the ubiquity of internet access and smartphones in the U.S. across nearly all segments. “Customers, the ultimate endpoint of any business, are today just as connected as the employees of any large enterprise,” writes Ben Thompson on The Stratchery.

This gives consumers and businesses alike endless access to on-going services that don’t function like gym-memberships of old. Instead, modern subscription models are gym-like in execution and participation.

  • They are based on service, not product: The product is the means not the ends.
  • They build convenient communities of like-minded individuals with end-goals in mind: Think Shopify users want to be seen as successful entrepreneurs. Spotify users want to be seen as having the best playlists and musical tastes.
  • They rinse and repeat the experience: The service begets the product, the product begets the goal, the goal begets the service.

Retention is the new currency

Costco – perhaps the longest standing subscription business around – has perfected the model. Amazon evolved it online with Amazon Prime. Giants like Apple and Google are touting their subscription services as differentiators for their products.

  • Google is offering six month free YouTube Premium subscription for all Google Home devices (and varying YouTube Premium subscription access for nearly all Google devices).
  • Apple is packaging their streaming music service and phone care services into single packages –– selling you a full suite of services that beget a product.

The success of the model is clear. You need only look at Dollar Shave Club on the consumer side to see the impact on the industry (or look at newer DNVBs like Quip following similar paths). Or, on the B2B side, look at the stock prices of Adobe (up 770% since 2012), Microsoft (up 320%) or Autodesk (up 360%), which have shifted to offer internet cloud-based software for a monthly or annual fee.

Indeed,  many DNVBs are putting their own spin on the subscription model business. In retail alone, there are more than 5,000 brands offering clothing, cosmetic or the like “subscription boxes” each month.

“It is totally faddish right now,” says Robbie Kellman Baxter, a consultant with Peninsula Strategies and author of The Membership Economy. “Most of them are going to fail. How many ties does dad need?”

But in technology, the rent-rather-than-own trend is holding stronger. In health care, too, it is growing in popularity with brands like SmileDirectClub and MDVIP, a direct primary care service, gaining more and more subscribers.

In media is where we will see the most pronounced shifts. After all, subscriptions are the easiest way around an unforgiving advertising world inhabited by Google and Facebook’s duopoly.

That duopoly began hitting media brands as early as 2015, when many considered the “gold standard” of online content to be free and commoditized. Many digital media brands have yet to recover from this mistake.

According to CNBC:

Vice Media has been the gold standard, earning a valuation of $5.7 billion in June 2017. Earlier this month, Disney wrote down some of its investment in Vice by 40 percent, suggesting a declining overall valuation.

Buzzfeed has built itself into a company that tops $1 billion in value. Still, Buzzfeed missed its 2017 revenue forecast by up to 20 percent, the Wall Street Journal reported last year, pushing back hopes of an initial public offering indefinitely. Vox Media, the owner of sites including SBNation, Eater and The Verge, also missed internal revenue forecasts and is not planning to go public any time soon, said people familiar with the matter, who asked not to be named because the company’s financials are private.

Separately, media companies including The New York Times, The Wall Street Journal, The Washington Post, New York Magazine, Quartz, Bloomberg, Business Insider, Vanity Fair and Wired have all returned back to media’s subscription business model roots by completely paywalling, introduced paywalls or hardening their paywalls beginning in 2018.

We’re living in an environment where Facebook, Google, and Amazon are sucking up so much of the advertising revenue,” says Sterling Auty, software analyst at J.P. Morgan. “Subscriptions and ecommerce are an antidote to that.”

These media companies are looking to lower their reliance on Facebook and Google algorithms and return to their service roots through subscription payments –– adding yet another monthly subscription to consumers’ bank accounts.

On paid subscription tolerance

According to eMarketer, 71% of U.S. consumers with internet access subscribe to at least one streaming video service. However, the number for all other verticals drop dramatically beyond video.

This leaves ample room for other verticals to grow their subscription services, especially as consumers become more accustomed to the model and testing out various offerings. Paid subscriptions through Apple’s App Store reached over 330 million last quarter. That’s up 50% year over year and includes both Apple and third-party services like Netflix.

Consumers are downloading. They are trying. They are testing. And there will be winners. Some analysts like Eddie Yoon, a consultant and author of the book Superconsumers, see the subscription economy as a 20-year trend –– just now beginning to hit its growth stage.

But there are caveats:

“All brands will try to offer subscriptions, but only a few will take,” he added. “Consumers will push back if they feel overwhelmed with subscription services,” Yoon says. “People won’t tolerate a world where everything is subscriptionized,” he said. “For the things that you really care about, you’ll definitely subscribe.”

The experience economy edges in

This is where the experience economy matters most. Subscription business models create desirable P&Ls, forecasting models and enable brands to act in the best interest of their most dedicated subscribers (rather than advertisers), but fail to provide the experience and you’ll lose your list and your recurring revenue.

Ben Thompson from The Stratechery pulled out this quote from Bill McDermott, the CEO of SAP, on this challenge on an investor call:

There are millions of complaints every day about disappointing customer experiences. This is called the experience gap. Businesses used to have time to sort this out, but in today’s unforgiving world, the damage is immediate, disruption is imminent. This has shifted the challenge from a running a business to guaranteeing great experiences for every single person.

It’s best here to remember that subscription and membership are separate things. Membership provides experience and community. Subscription just gets you access to something behind a gate.

Take a look at Peloton, for example. The company has long argued that it’s bike ($2,000) and subscription program ($39 monthly) are a bargain compared to regularly attended SoulCycle classes. And SoulCycle is hard to beat. Similar to fitness organizations like CrossFit, Inc., it has a hardened fanbase and community.

But where Peloton succeeds is its content –– the ability to stream classes on your bike, forgoing a trip to a physical class. All for substantially lower costs than regular in-person classes anyway. Peloton reports its churn at less than 1%.

You have to do delightful things and leave money on the table,” says Peloton CEO and co-founder John Foley.The monthly service is what you really buy. That was the flaw with the old models. It was just hardware.

Of course, not every company can be a Peloton. The subscription model itself does not lower the cost of doing business. It cannot, on its own, generate demand.

As subscriptions proliferate, investors need to dig deeper into the dynamics of their models,” says Aswath Damodaran, a finance professor and valuation specialist at New York University’s Stern School of Business.Many venture capitalists and public investors are pricing user-based companies on user count, with only a few seriously trying to distinguish between good, indifferent, and bad user-based models.

What’s next in the subscription era is a dwindling down to those brands, media packages, and services which can offer the experience worth paying for –– the service that begets the product, and the product that begets the consumer’s goal. A subscription model, alone, won’t be enough. Consumers will seek membership and the benefits that come with it: experience, community, and camaraderie. For the product companies, the software companies, and media companies that figure it out – the prize is recurring revenue and stability until the next preferred model comes along.  

Read the rest of your No. 298 curation here.

Additional reading. Member Brief: The Subscription Economy

By Tracey Wallace | Edited by Web Smith | About 2PM

Editor’s Note: Tracey serves as the Editor-in-Chief at BigCommerce and a public speaker. She is launching a DtC pillow brand, this spring. She is a paid contributor of 2PM, Inc. 

No. 279: The Appeal of Independents


While overall advertising revenues for print magazines continue to decrease, the real story is the increasing number of well-received independents. You know these magazines when you see them. They are wider and heavier than most, the paper is of higher quality, and the photography has a common theme throughout. In these publications, the magazines’ creative teams determines the artistic direction; it’s not the brands’ direction. This means a more natural feel with a greater connection to the reader.

These publications feel more like books than magazines and the price reflects that: they range between $10-25 per issue.

The savviest of these publishers are sidestepping the mistakes of previous era of print publishing. This new generation of print magazines aren’t merely media vehicles that are built to support a bloated advertising payroll. These magazines are brand statements and loyalty builders. But most importantly, they are the break from the digital economy that we all seem to be craving.

The Data

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Magazine advertising will continue dropping (2018-2020).
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Major media estimates for 2018: magazines ranked third from bottom.
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Magazine advertising revenue is set to fall over the next two years.

Conventional publishing houses like Hearst and Conde Nast are increasing investments into digital properties as traditional print advertising falters. But independent publishers are taking a counter cultural approach to business. The Guardian just recently published a timely article on the independent publishing craze here:

Magazines espousing the counter-cultural idea of “slow journalism”, such as Ernest or Delayed Gratification (which was founded in 2011 to review news events “after the dust has settled”, has 5,000 subscribers and a print readership of 24,000), are funded by fairly expensive subscription charges. Ernest starts at £21.50 for two issues a year, while Delayed Gratification costs £36 for an annual subscription of four issues.

Whether they prioritise elegant looks or go for a samizdat-like underground style, they all share the appeal of the tactile experience of printed paper. “It is hard to say why people buy them. But the magazines are usually run and read by people who are enjoying the fact they have a voice and a place to go,” said Catterall. Read more.

Issue No. 6: Gear Patrol.

Independent magazines have taken on a new role as home to more than a readership. These publications are cultivating consumer-driven communities away from the world wide web. Here are ten of the notables:

Monocle. $14. Winnipeg, Canada. The magazine launched on in 2007, By 2014, Tyler Brûlé sold a sizable minority stake in Monocle magazine to Nikkei Inc. It is reported that the company was valued at $115M at the time of the investment. Read more.

Darling. $20. Los Angeles, California. In 2009, the magazine’s Founder and Editor-in-Chief Sarah Dubbeldam and her husband Steve Dubbeldam created Darling. After starting off as a blog, the first print issue arrived in fall 2012. The magazine proudly embraces women of different ethnicities and body types. Read more.

Gear Patrol. $20. New York, New York. In 2014, founders Ben Bowers and Eric Yang launched the first magazine. GP is an award-winning digital, social and print publication that reaches nearly two million young, affluent men. The creative direction by Andrew Haynes has elevated the Gear Patrol brand to new levels. Read more.

Highsnobiety. $10. New York, New York. A publication covering forthcoming trends and news in fashion, art, music, and culture, all on one platform. Highsnobiety has steadily built a strong brand in the online fashion and lifestyle world. Today the blog and print magazine sit among the most visited global sources for inspiration in the areas of fashion, sneakers, music, art and lifestyle culture. Read more.

Uncrate. $15. Columbus, Ohio. A publisher for men, the bi-annual magazine features what to buy and how much it costs. Read more.

Cherry Bombe. $20. The magazine celebrates women and food through a biannual magazine. The book shares the stories of everyone from industry icons to notable newcomers, encouraging creativity in the kitchen. Read more.

Suitcase. $25. London, England. The magazine exists to change the way you travel: from where to go to how to pack. It’s for travel insiders, not tourists. Read more.

Raquet. $15. New York, New York. Racquet is a quarterly magazine that celebrates the art, ideas, style and culture that surround tennis. Read more.

Franchise. $20. New York, New York. A premium print publication dedicated to global basketball culture. The team consists of a group of players, artists and writers. The magazine documents the stories, characters and ideas that shape the game we love. Read more.

Here. $10. New York, New York. Away is a company on a mission and their latest project falls within this category. A well-produced, independent magazine that leans more on brand equity than advertising revenue. Steph Korey and Jen Rubio are the latest brand executives to turn their product into an escape for their readers. Read more.

Traditional publishing has been plagued by pay-for-play influence and an excessive approach to advertising sales and placements. Does anyone else ignore the first 20 pages of advertising? For brands that are looking to grow along with impassioned, independent audiences, this is the class of publishers that are truly making an impact for retailers.

Legacy magazine publishers focused on building a readership that advertisers would pay for. Independent publishers focus on building a product that consumers will pay for. Brand partnerships with independent publishers can reveal a smaller-yet-primed audience that can supplement performance marketing efforts. In the last two years, we’ve seen similar efforts launched by eCommerce brands: Airbnb, Hodinkee, and GOOP.

As traditional advertising and product placement continues to attract DNVB brands, you can expect to see more partnerships in this space. And more brand-funded magazines that mirror the quality of independent publishing.

Read more of the issue here.

By Web Smith | About 2PM 

No. 271: A Modern Luxury Update

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There is a famous scene in The Social Network where Justin Timberlake’s portrayal of Sean Parker tells Jesse Eisenberg’s Zuckerberg contemporary the story of the Victoria’s Secret rebirth. In the script, it was Sean Parker that explained the genius of Les Wexner and his ability to change with the times after acquiring the $6 million / year business for a fraction of its real value, only to turn it into a $500 million dollar brand just four years later. The brand grew from four to nearly 100 stores in that short amount of time. It was a historic turnaround for a brand that was more niche than it was main street at the time.

The fundamentals of the brick and mortar lingerie business changed because Wexner emphasized the appeal of the brand to female consumers. He set aside the money-losing model of selling lingerie to men and replaced it with one that focused on female customers. But more importantly, he recognized that it should have been that way all along. It was an authentic move that evolved Victoria’s Secret (and its parent company: L Brands) into the $10 billion dollar company that it is today. But the brand is overdue for another shift. And it’s worth considering the recent hires and acquisitions by Wal-Mart to turn L Brands‘ most valuable ship around.

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Now led by CEO Jan Singer (former CEO of Spanx and Global VP at Nike), Victoria’s Secret cites the lingerie icon’s struggles on corporate restructuring, ending the famous catalog, and exiting the swimwear category. These are contributing factors, in addition to increasing pressure from eCommerce-first retailers.

The growing competition is promoting more variety in models and products. Now in its fifth year, online retailer ThirdLove has shoppers answer a series of intimate questions about their breasts — which of these nine illustrations matches your breast shape? — while reassuring consumers that every woman’s body is unique. The company has raised $13.6 million from investors and expects to double its sales this year. Companies like Adore Me, True&Co. and Everlane are taking a similar approach.

Business of Fashion

Their chief challenger, Adore Me (21) was founded in 2010 with the express intent to challenge Victoria’s Secret by giving consumers an online-first, inclusive alternative to the lingerie titan. The latest Inc. 5000 list has Adore Me’s growing 1,400% from 2014 and 2016 with revenues exceeding $100 million. Now, Adore Me is looking to expand offline and the timing couldn’t be worse for the L Brands subsidiary.

Niche players may only have a small share compared to Victoria’s Secret, but their innovative approaches mean they are nibbling away at its market share.

GlobalData Retail Managing Director Neil Saunders 

In addition to intimates brands expanding into VS’ territory, there are adjacent pressures from the athleisure market, an evolving beauty market, and the rejection of lingerie by consumers looking for comfort, function, and individuality. Rather than continue competing against the likes of Adore Me (21), THINX, Inc. (31), and Third Love (51), or Savage x Fenty, Victoria’s Secret could re-invest in the brand, messaging, and end-to-end processes by following Wal-Mart’s lead.

Making a strategic acquisition to evolve Victoria’s Secret’s prized retail real estate could be just what the forty-year old retail property needs. The brand has a history of retail innovation. In addition to Wexner’s early decision to rebrand the shopping experience, Victoria’s Secret was one of the first brand’s to invest in early eCommerce (1999). In a recent retail roundtable, it was proposed that L Brands execute a Lore-like acquisition to oversee the brand’s eCommerce and omni-channel experience.

In addition, an interesting pivot was discussed. Victoria’s Secret could house brands and content across beauty, women’s athleisure, and intimates. The express goal would be to rebuild Victoria’s Secret as the premiere women’s-only destination – a house of brands, with their VS namesake positioned as the most premium offering within the store.

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Lean Luxe Founder, Paul Munford

In a conference call with Lean Luxe’s Paul Munford, he added, “Not every brand deserves to exist forever.” He also added that L Brands‘ recent track record has been less than favorable, making the idea of a pivot like this highly unlikely. Specifically, he cited the $710 million dollar La Senza acquisition (2006) that did not achieve the intended effect. According to Munford, there was no indication that the retail group could operate with the same speed and precision that Wal-Mart has since Marc Lore became their eCommerce CEO. Munford added, “With Lore coming in at Wal-Mart, there wasn’t a negative track record of Walmart acquiring brands and dropping the ball. Walmart just started from scratch. So comparatively, Victoria’s Secret’s task seems harder.” 

Though Munford and I disagreed on the approach that the vaunted L Brands subsidiary should take, we did agree that VS is a brand that is long overdue for a modern luxury update. One of the first names that arose when discussing who’d be a great number two to Jan Singer was Emily Weiss, founder of Glossier.

Read more of the issue here.

By Web Smith and Meghan Terwilliger | About 2PM