The Business Model that Ate Cincinnati1
There are days when it seems like eCommerce is taking over the payments world. Admittedly, I’m biased as I work for the eCommerce arm of Vantiv. But with news like the following it’s hard not to be seriously impressed:
- Alibaba sells $14.3 billion in goods on ‘Singles Day’
- Cyber Monday 2015 sales top $3 billion, up 16% from 2014
- Wayfair grows from $380 million in revenue in 2010 to $2.25 billion in 2015
- Netflix revenues more than double from $3.2B in 2011 to $6.8B in 2015
- Dollar Shave Club valued at $615M after their first three years in business.#_msocom_2
With success stories like these and new developments almost daily, eCommerce is arguably the most exciting place to be in the payments ecosphere.
So… why? Why is eCommerce growing so rapidly? Certainly there’s the fact that it’s incredibly convenient for us to use our multitude devices and near-constant connectedness to make an increasing number of our daily, weekly and monthly purchases. Another key factor is the subscription/recurring revenue business model that’s driving massive influxes of venture capital and is rapidly being adopted in segments and industries where you might never have expected it.
Subscribing to services and buying products on installment plans isn’t new. One of the greatest innovations of the early 20th century was the introduction of “lay-away” payments during the Great Depression, which opened the doors for the average (at that time, struggling) American to buy higher ticket items – such as the Model T – in installments. Subscription billing also has a long history, used for decades in industries like publishing and utilities (“bill-pay”).
In recent years recurring billing has been applied for “20th century” services such as web hosting, digital media, social networking, and B2B services. The business model continues to break out of its mold: for example, in the past 3-5 years we’ve seen a rush by non-profit organizations to attract “sustaining donors” it’s clearly the new preferred “ask” for charitable gifts. Perhaps the most innovative application is the “subscription retail” category, where merchants who have traditionally sold hard goods products on a “single-pay” basis are now selling them via subscription plans. More about that in a bit…
So why is the subscription business model so attractive? Why do venture capitalists value businesses using it at 10x that of non-recurring businesses? The bottom line is that it delivers more value, both to the consumer and to the merchant. For consumers subscription billing delivers:
- Budget predictability
- Affordability of larger ticket items since payments can be spread over longer time period
- Convenience, as you don’t have to make incremental purchases of frequently used products.
For merchants recurring billing offers:
- Predictable revenue streams
- Opportunity to extend and enhance customer relationships
- Ability to reach broader demographic (affordability)
- Inventory management, as it’s easier to forecast the demand for raw materials.
With the high cost of customer acquisition, a business model that enables merchants to increase customer lifetime value yields higher profits and a better return on investment.
Internet Retailers as well as omni-channel merchants are jumping on board. Big name retailers including Sephora, Starbucks, Macy’s, and Adidas have launched “subscription boxes” with monthly shipments of beauty supplies, coffee, apparel, and shoes.#_msocom_3They#_msocom_4 join more several thousand smaller companies that have been disrupting markets and upending our buying patterns for the past five years or so.
At Vantiv eCommerce we’re helping some of the leading and most innovative subscription box merchants achieve astounding growth. Here’s a sampling:
- JustFab - - Customized selection of shoes, handbags, jewelry and denim
- Dollar Shave Club - High quality razors and grooming products
- Candy Club – Premium candies
- Birchbox -- Curated beauty samples
- Naturebox -- Nutritionist-approved snacks
- Julep Beauty – Customized selection of beauty products
- bluum -- Mom & baby products, hand-picked for each child's age, gender and developmental stage .
- Aquasana -- Water filtration products
- Wine of the Month Club – Curated quality wines#_msocom_5#_msocom_6
The applications of the subscription retail model and the growth and daily changes in eCommerce are thrilling to watch (and facilitate). Check out Vantiv eCommerce to see what we can do for your business!
- Allusion to the 1996 film classic “The Cockroach That Ate Cincinnati”, http://www.imdb.com/title/tt0115919/
- Other Citations
Alibaba sells $14.3 billion in goods on ‘Singles Day’
Cyber Monday 2015 sales top $3 billion, up 16% from 2014
Wayfair grows from $380 million in revenue in 2010 to $2.25 billion in 2015
Netflix revenues more than double from $3.2B in 2011 to $6.8B in 2015
http://ir.netflix.com/annuals.cfm (2015 Annual Report)
Dollar Shave Club valued at $615M after their first three years in business