Among Online Retailers, Subscriptions Are All the Rage

Among Online Retailers, Subscriptions Are All the Rage After Alex Zhardanovsky sold his online ad company, AzoogleAds , he went trying to find a new business concept. Those companies, he believed, were generally more successful and thus bought more of his ads. For his new business, Mr. Zhardanovsky's plan was to sell dog food on a subscription basis. He figured that other pet owners had experienced the same frustrations keeping the food stocked and might be willing to sign up for a monthly delivery service as well. "Dogs never stop needing to eat," he said. To test his theory, Mr. Zhardanovsky and his co-founder, Joe Speiser, set up a online profile in 2009 with a form that asked customers if they would be interested in signing up for regular deliveries. It stops making sense when you try to do something like a tree-of-the-month club, which doesn't fit either of those categories. " Taking his own advice, Mr. Lee recently founded another subscription-based business, this one with Jessica Alba, the actress. It is called the Honest Company , and it ships diapers and other baby products. " The idea of using a subscription model to sell shoes came to him, he said, after he realized how many shoes his wife was buying on a regular basis. Subscription models and recurring revenue also tend to impress investors — a lesson learned by Jessica Kim, founder and chief executive of BabbaCo , which is based in Chicago and sells children's activity products. When Ms. Kim started her business in 2008, she sold wholesale products like car-seat covers and inflatable play mats. "Where the product is a necessity or when it's an absolute passion. They then placed a few ads online and waited to see what happened. "We had an overwhelmingly positive response from our customers who wanted to sign up for the service," said Mr. Zhardanovsky, who lives in New York City and who proceeded to introduce PetFlow in 2010. "If you're a dog owner like I am, you go out and buy food every three or four weeks," Mr. Zhardanovsky said. "But you usually don't realize you need it until you're out. " Mr. But he had an idea to build the business by taking a different approach to sales. While selling online ads, he had seen other companies, like Netflix, persuade consumers to lock in monthly fees for repeat orders. 's are beginning to appreciate the the importance of recurring revenue in a way I've never seen before," said Jim Schleckser, who heads the CEO Project , an executive coaching firm based in Washington. "I think that the software industry adopted it, which caught people's attention. Now you're seeing companies in just about all kinds of industry embracing it. "I've come to appreciate," Mr. Zhardanovsky said, "that subscription models are, in so many ways, the holy grail of business. " They are far from a whole new concept. Consider magazines, for example, or the record clubs that employed so-called negative-option billing (the record was delivered and you were charged unless you told the club you did not want it). Amazon encourages customers to place standing orders for products like power bars or paper towels. "C. "I think subscription models work best in two instances," he said. Kim came up with the idea of sending out a monthly "BabbaBox ," a box of projects, activities and books which are tied to a theme and that parents can complete with their children. The change to a subscription model had a quick impact; Ms. Kim's business grew more in the five months after she made the switch than it had in the previous three years combined. Just as important, Ms. Kim landed several prominent investors because of the change, including Mr. Lee, who will be a partner in Lightbank, which was started by Eric Lefkofsky, a co-founder of Groupon. " It is not hardto see the appeal of recurring revenue, but many of the benefits may be less obvious. "This is the best business model you can ever have because we can place inventory purchases against future sales," Mr. "I will be shipping out 24,000 products next month whether I land a whole new customer or not. "He told me that he noticed we had such a strong connection with our community of clients and suggested a subscription-based model," Ms. Kim said. "That's when it hit me that subscription models are a fantastic way to build lifetime relationships with our clients. " Ms. Zhardanovsky said, only about 1. 5 percent of his subscription clients drop the service each month — and several do so only because the pet has died. In its first month, July 2010, the company shipped about 60 orders; by January of this year, that number had leapt to 27,000. In 2011, PetFlow exceeded $13 million in revenue — with 60 percent of its sales coming on a subscription basis — and it projects revenue will exceed $30 million this year. Given the experiences of companies like PetFlow, ShoeDazzle and BabbaCo, it is tempting to wonder why not every company is trying a subscription model. And, in fact, Brian Lee, the founder of ShoeDazzle, said he frequently heard pitches from entrepreneurs who wanted to create the ShoeDazzle of wine or underwear or some other product. The answer that finally came to him — pet food — was inspired by sheer inconvenience. Among Online Retailers, Subscriptions Are All the Rage Trade News selected by Local Linkup on 09/03/2012