Monday, Mar. 05, 2012

A 21st-Century Twist on the Old [Blank]-of-the-Month-Club Idea

This past spring, Markus Rauschnabel began to notice that his Westchester neighbor, a new mom, was receiving tons of Amazon packages in the mail. It reminded Rauschnabel, a father of three, what his own wife went through when she had a newborn: long days trapped at home without even a minute to run to the store. "I had an epiphany that maybe we can help moms at home so they can discover products before they have to buy them," says Rauschnabel. "Half of what my neighbor orders goes back unless it's diapers."

The furniture design company that Rauschnabel was running with partner Sebastian Reichelt had been stalling — in part because of the huge expense of shipping large items. So the two German entrepreneurs decided to wind it down and follow Rauschnabel's hunch. The result was Bluum — a play on the German word "Blume," for flower — which sends four to five deluxe product samples like baby wipes, stretch-mark cream and baby shampoo to customers' doorsteps for $12 a month (or $11 for three months; including shipping.)

With a team already in place from their previous business, Rauschnabel and Reichelt were able to get things moving fast, creating a website in four weeks and making its first deliveries three weeks later. Bluum hired two mom experts to test and sort through baby and beauty products so that the only best samples make it to customers.

They seem to be choosing well. Since September, when its first boxes shipped, Bluum has doubled the number of customers each month, largely thanks to word of mouth, social media and mommy blogs promoting the service. In January, Bluum sent out 5,000 boxes. "There are a lot of products that you discover that you wouldn't have known about otherwise," says Erica Borunda, a 29-year-old new mom from Phoenix who found out about Bluum through a blog. "That's what I like about it most."

Indeed, subscription-based startups are one of the hottest new trends in e-commerce these days with investors lining up to fund everything from beauty products (Birchbox) to premium coffee samples (Craft Coffee) to toiletries and other household staples (Guyhaus, Hoseanna) to undershirts (Manpacks) to PMS-easing products (yes, you read that right; it's called Good and Lovely) and even gifts for your dog (BarkBox), to name but a few.

Sure, the business model is just an updated version of your grandmother's Fruit of the Month Club, but there's a twist. Today's subscription sites focus on building online communities and relationships with customers, offering advice on how to use the products and creating stories around the brands so customers feel connected to the site and to one another. "Subscription startups have gotten really hot in the last two or three years as people will pay for convenience," says Nick Seguin, manager of entrepreneurship at the Kansas City, Missouri-based Kauffman Foundation. "It all comes back to better and cheaper logistics and leveraging excess stock or inventory."

Birchbox, which delivers deluxe beauty samples to your doorstep for $10 a month, was the first of these modern subscription businesses to really take off. Katia Beauchamp and Hayley Barna were section-mates at Harvard Business School and Beauchamp remarked that Barna always had tons of cool cosmetics. It turned out that Barna's best friend, Mollie Chen (now Birchbox's editorial director), was a beauty editor at Conde Nast and gave her lots of free products. That spawned the idea of Birchbox, which they launched in September 2010 from their campus apartments. "We wanted to give everyone a best friend beauty editor," says Beauchamp. The biggest hurdle: getting people to think about samples differently. "Starting was intimidating because we were asking both sides, consumers and beauty brands, to change their behavior," wrote Beauchamp in an email. "We wanted to change the value of a sample." Sites like Birchbox and Bluum pitch themselves as vehicles for customers to discover and test the best products out there.

The business model is a lucrative proposition for both Birchbox and the 150 company partners like Kiehl's, NARS, Stila, Benefit and Laura Mercier whose products are being pitched. Birchbox gets beauty samples for free and the featured brands get their products in front of interested buyers, who can easily purchase full-size versions on Birchbox's online shop. Brands can get coveted customer data like purchasing behavior and demographics. And for customers Birchbox offers original editorial content with beauty advice — think popular hair-style videos — that keeps them coming back and interacting.

By the time the women left campus, they were already profitable and VC firms started clamoring to get in on the action. Today, they've raised $11.9 million in funding led by Accel Partners and First Round Capital, which helped them expand to 53 employees. "We grew much faster than we ever expected," says Beauchamp. "We hit year three goals in month seven." And the customers keep coming. Birchbox has over 100,000 subscribers today, more than double its subscriber base of 45,000 six months ago. "Who doesn't like to get nice mail?" says Katherine Barna, 27, of Manhattan who signed up for Birchbox six months ago when her dad sent her an article about the women founders, one of whom shares her last name (there's no relation). "I got a subscription for my mom and I'll ask her what she got in the box and when she mentions what she likes I can easily go on the website and order it as a gift."

The success of Birchbox has encouraged a flood of other subscription startups to follow suit with this model, including the cleverly named BarkBox, a kind of Birchbox for dogs. (The Birchbox founders are currently serving as advisors to the two-month-old startup.) For $25 a month, your beloved pooch will receive hand-selected gifts such as hygiene necessities, all-natural treats, bones and innovative gadgets. And 10% of each sale is donated to a local rescue organization or cause they're sponsoring. "It's a lifestyle product for people who want to spoil their dogs," says Carly Strife, CEO, co-founder, and proud owner of a Puggle named Cooper and a Pitbull named Roxy.

Subscription services are catering to babies, beauty and Beagles, but what about addressing your morning caffeine habit? Michael Horn started Craft Coffee to do just that. His passion for coffee started ten years ago when he attended law school at Cornell and found that Ithaca didn't have a Starbucks. He began frequenting Gimme! Coffee, a local shop that roasts its own beans, and loved it. Years later, after working on Wall Street as a corporate attorney, Horn created an e-commerce site to make it easier to buy from different roasters.

His first attempt was a disaster, however. "No one bought anything," says Horn. "Literally nothing." So he sat in a coffee shop for 12 hours giving away free cappuccinos in return for people's time, asking what would make them buy coffee online. "People said they were intimidated and wanted more guidance and the ability to sample the product," he says. That's when he thought of doing a monthly subscription service. For $24.99 a month ($19.99 a month for a year subscription; including shipping) Craft Coffee delivers a tasting box of three 4-ounce bags of coffee from small roasters around the world.

Horn's experts evaluate the coffee in a blind taste test, selecting their favorites from the 30 to 40 coffees they are sent each month to evaluate. (Ithaca's Give Me Coffee made it into the first box sent out this past May.) Craft Coffee has over 600 customers and ships to 48 states and nine countries. It was named best new product of the year by, a coffee industry blog. "It's not an exaggeration to say it has changed how I think of coffee," says Christopher Bliss a Craft Coffee subscriber from New York. "Now most of the other coffees seem burnt and unpalatable."

As Subscription startups gain traction, there's even a new company that automates the process for you on the front end: Memberly helps entrepreneurs run their own subscription programs, or "of-the-month" clubs, by offering a platform to build a website in minutes (no programming skills required), compile and format orders and easily contact customers, bill subscribers, collect money and print out shipping labels. "We do everything up until the point of sourcing and sending out the products," says Jack Cheng, co-founder of Memberly. Currently 24 companies use the beta version, which launched in July. "Where we see subscriptions start to gain traction is when they capture some of the qualities of small, local businesses you love that have a story and relationships," says Cheng.

Lauren Thorp, founder and CEO of the three-month old Umba Box, a site that delivers curated, handmade goods each month for $26, was able to launch her subscription business in about a month thanks to Memberly. ("Umba" means "to create" in Swahili.) "It's pretty turn-key — just start and go," she says. "I don't have to spend a lot of my time on the tech side so I can spend it growing the business." Still, making the startup process fast and easy has a downside too. "Because the barrier to entry is so low with Memberly," says Thorp, "who knows what kind of competition can creep up."