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. 293: Uber Eats vs. Postmates

exp

If your family is like mine, you’ve grown to depend on the last mile delivery industry. On any given week, we’ll receive Amazon Prime Now deliveries for grocery, meal kits from HelloFresh, or the occasional prepared meals from Postmates.  As last mile becomes a way of life for more consumers, the platform influence for these companies have grown.

For last mile delivery, 2019 will be a significant year. According to Postmates CEO Bastian Lehmann, Postmates will IPO after a $300 million late stage investment by Tiger Global at a $1.2 billion valuation. This raise was finalized just months after the news of DoorDash raising nearly $800 million (led by the embattled Softbank) at a $4.2 billion valuation.  According to data by RSG, Inc. the real battle for last mile delivery is between Postmates and Uber Eats.

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Market share of last mile drivers: February 2018 (Source: RSG)
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Growth: 2017 v. 2018 (Source: RSG)

Between 2017 and 2018, Postmates’ market share of delivery contractors rose from .5% to 8.7% and Uber Eats‘ share of the same measure has grown from .5% to 22.5%. In a recent report by Bloomberg, Uber’s quiet initiative to build virtual restaurants was revealed:

Uber Eats is still a secondary player in this segment, but it’s expanding the fastest. It kicked off in December 2015 in Toronto, following various food delivery experiments including Uber Fresh. The virtual restaurant program began quietly in early 2016, and by March it had spread to 10 cities. Today the company works with 1,600 virtual restaurants around the world in the 300 or so cities in which Uber Eats operates.

In a manner similar to Amazon’s growing private label catalogue, Uber Eats is employing consumer data to deploy new brands within their delivery app. According to Bloomberg, there is a unit of 300 employees focused on leveraging order data and supply gaps to build in-app restaurants. This accomplishes a few things for the Silicon Valley titan, one that’s struggled to find a path towards profitability.

  • This move increases delivery margins: by partnering with a restaurant and leveraging demand, Uber can negotiate a higher margin of the sale. Rather than delivery, service fees, and 10-15% share on each sale: Uber Eats can demand a 40-50% share of that delivery’s revenue (on top of delivery and service fees).
  • For the restaurants, they are generating a higher volume of orders and spreading fixed costs over new business.
  • This circumvents consumer dependence on Yelp and Foursquare rankings by instituting its own an-app system. Uber Eats can repackage mediocre restaurants into great first impressions.

By building digitally vertical restaurants, Uber has gained the ability to engineer product loyalty that competing platforms cannot yet compete against. Uber Eats’ explosive growth between 2017 and 2018 is a result of the logistics company incentivizing its regular drivers to become delivery hands and also by incentivizing Uber users to become Uber Eats users. By increasing supply and demand-side economics, Uber Eats has leverage to that Postmates cannot yet manufacture. This is essential when approaching existing restaurants and offering them a private label product opportunity.

The value of groceries to Uber is connecting consumers with retailers and in turn, identifying the optimal strategy for monetizing the platform and services Uber can provide across each transaction to match supply with demand.

Uber Wants To Deliver Groceries

Uber Eats is benefiting from their parent company’s top funnel to grow the consumer demand for these types of products. This will translate well to Uber CEO Dara Khosrowshahi’s commitment to reenter the grocery market. Using the aforementioned restaurant model and the vertical branding that Uber has instituted, Uber Eats is one step closer to distributing its own unique brand of meal kits. This is an efficient path to regaining a foothold in the hyper-competitive market of grocery delivery.

Read the rest of your curation here.

By Web Smith | About 2PM

No. 285: The End of Ownership

Ownership
Scene: the perfect vacation experience, fueled by rented products.

Go on vacation and you’ll undoubtedly encounter at least one couple who snaps photos of their perfectly manicured brunch experience. They took an Uber to get to the general area, asking the driver to play their favorite Spotify playlist for the 17 minute drive. Rather than walk the final .7 miles, they both grabbed Bird’s to the brunch spot. Hey, it was more scenic and memorable that way. The husband followed along so that he could snap the perfect candid shot of his wife’s Rent the Runway dress billowing in the wind. And when they finally arrived to their seats, he snapped another photo of her with their DSLR from Parachut. It was the picture perfect experience.

Let’s breakdown access vs. ownership: 

  1. Rather than drive their vehicle, they accessed an Uber.
  2. Rather than listen to their music, they accessed a Spotify playlist.
  3. Rather than walk .7 miles, they accessed a Bird scooter.
  4. Rather than own the dress, she rented it from the runway.
  5. Rather than buying the iPhone, the husband has access to one through AT&T.
  6. Rather than configuring his own DSLR, the wife sourced one through Parachut.

But the memory of this was very much their own. They owned that memory and it’s well documented in the place where America stores their moments: Instagram. A place that keeps what we really care about owning. Above all else, we care about owning great moments. The couple accessed rented goods to own an experience.


Issue No. 265: Can A DNVB Achieve Modern Luxury

Buying experiences over buying consumer goods is a trend being adopted by the luxury-set. The interpretation of the word luxury means something altogether different for the types of customers who have the means and awareness to shop with DNVB brands. Skift’s latest research shows a clear shift in demand for more transformative travel experiences among upscale travelers (Skift / May 2, 2017). Whereas expensive products used to be the consumer desire: products, community, and service now play the role of enabling experience economy.


What’s the access economy? An economy driven by a business model where physical goods and services are traded on the basis of access rather than ownership: it refers to renting things temporarily rather than selling them permanently.

If you ask Joe Fernandez, CEO of Joymode, he’d tell you that a consumer revolution is coming. This belief is an increasingly popular sentiment held by founders and executives of the companies fueling the access economy. And there’s validity to it. Consider sector startups like: Rent the RunwayArmarium, Parachut, and For Days. These startups provide hard goods in exchange for a monthly subscription fee. For consumers, this shift isn’t just about personal economics or reducing the cost of ownership. It is a redefinition of what it means to “own” and whether or not permanent possession of a product is more valuable than access. Some would argue that access is ownership.

BMW is testing it’s new program called “Access” of all things. Here’s an excerpt by Andrew Hawkins of The Verge:

For $2,000 a month, users can choose between models like the X5 SUV, 4 Series, and 5 Series sedans, including all plug-in hybrid versions. For the higher-tier $3,700-a-month fee, they can get M4, M5, or M6 convertibles, as well as X5M and X6M SUVs, but it doesn’t include access to BMW’s highest-end 7 series. The fee includes insurance, maintenance, and roadside assistance, BMW says.

Consumerism is a part of America’s DNA, it’s what drives us. It powers our national economy, it fuels international trade, and it incentivizes entrepreneurial innovation. But even a casual observer can understand how the accumulation of goods, accelerated by eCommerce, can have detrimental effects. Consider this passage from a recent article in The Atlantic, “We Accumulate a Mountain of Things.” 

Thanks to a perfect storm of factors, Americans are amassing a lot of stuff. Before the advent of the internet, we had to set aside time to go browse the aisles of a physical store, which was only open a certain number of hours a day. Now, we can shop from anywhere, anytime—while we’re at work, or exercising, or even sleeping. We can tell Alexa we need new underwear, and in a few days, it will arrive on our doorstep. And because of the globalization of manufacturing, that underwear is cheaper than ever before—so cheap that we add it to our online shopping carts without a second thought. 

In many ways, Joymode is at the forefront of the movement to alter consumer behavior, with respect to the concept of ownership. At first glance, it’s easy to look at Joymode and reduce them to an events company, a place to go to have fun. But only at first glance. Upon further exploration of their offering, you’ll notice the featured products are everyday items. The platform rents everything from an Oculus Rift set to camping essentials. There is access to products for events and products for everyday life. It makes you wonder. If this is where things are going, how many products do we really need in our closets, cabinets, and basements?

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Essential products. Do we need to own them?

There is a massive backlash coming in the form of a cultural shift in how people consume. I love that we get to be a part of it. This weekend more than 15,000 products left the Joymode warehouse and it will all come back and go to different families next week. There are massive amounts of people fed up with the cycle of debt, clutter and waste.

Joe Fernandez, Cofounder and CEO of Joymode 

Fernandez, the former founder of Klout, is adamant about what he believes to be the future of ownership. He may have a tougher task ahead, when compared to companies like Rent the Runway. The barrier to entry in seeing value in paid access to clothing may be slightly lower than that of common household goods. But our analysis indicates that we will see more brands entering the rental service space. It’s no longer just about cost basis reduction.

There are numerous macroeconomic indicators that bolster Fernandez’s views: accelerating urbanization, increases in the housing rental community, millennial debt loads, the growth of streaming entertainment, and even how we travel. As a consumer, you will own fewer things. But those accessed items will be personalized to your specific needs.  People are beginning to redefine the need to buy because access is, in effect, ownership. It’s the community of like-minded consumers that they’re buying into. They’re paying for more than access to products. They’re paying for access to a collective who believes in an ideal. And that ideal could change retail, for better or worse.

By Web Smith | Edited by Meghan Terwilliger | About 2PM