DTC 113: Subscriptions or upsized bundles?
Subscriptions for recurring revenue and bundles for upsell. Right? Lovely, until you realise that subs are expensive and cumbersome to run. Subs is bad for cash flow. Plus it creates friction.
đ Hola! Welcome to Out of Singapore. I am Shan and I am building businesses from Singapore. The supplements brand, that I run, started last year. The first two months were bad. To survive, I pitched that we should pivot the business model to subscriptions.
I believed subscriptions would be great because -
Cost of acquisition is one time cost.
Once subscribed, there would be recurring revenue.
Monthly revenue would increase despite churn. (my dreams)
Customers commit for longer duration to experience benefits.
The plan was dismissed. Twelve months later, I am glad that we did not choose subscriptions.
Letâs understand the mechanics of subscriptions and upsized bundles. If you feel I am talking rubbish, please pay attention for next 5 minutes. If you are still not convinced, please write to me or talk to me.
Today, we will cover
ABCs of subscriptions (or subs)
ABCs of bundles
Digital goods vs physical goods?
Why we chose bundles over subscriptions?
Shall we get started? Letâs!
#1 Subscription is messiah biz model?
As per ChatGPT (with modifications because it didnât do a good jobđ)
The subscription business model offers goods or services on a recurring basis in exchange for a recurring fee (instead of one time payment).
Instead of making one-time purchases, customers pay regularly, typically monthly or annually, to access the product or service over a predetermined period.
Business owners and investors love subscription model (like they do AI). They love it because it provides -
Recurring predictable revenue every month or year.
Lower customer acquisition cost - Imagine you spend 200 USD to acquire one customer, but they pay subscription fee each month. Split 200 USD into 12 times and the CAC now looks to be USD 17. Mouth watering business metric. đ¤
Get loyal customers that commit to stay with the brand. Absolute fricking amazing customer retention! (I hope you sense the sarcasm here)
Invested customers - The captive subscriber base makes for a great feedback loop, complaining often and helping the brand improve fast.
Better inventory management - Simply put, you know what needs to be shipped out for next 12 months for certain (okay, almost!).
Thatâs the pretty picture we see. Before I tell you the dark sides of subscription, letâs understand bundles. Shall we?
#2 Bundles get you the cash right now.
Product bundling refers to selling multiple packs of the same product or different products together. McDonaldâs meals are product bundles.
Bundles are primary used to
Increase AOV - One item costs $30, 2 items cost $50 and 3 items cost $75. The customer pays $50 or $75 instead of $30. More revenue per order.
Upsell - Similar to the example above, however, there are more items in the order. Inventory sells out faster.
Cross-sell - Item A costs $30, Item B costs $20. Bundle of Item A and B costs $40 instead of $50. You sold two different items instead of one time.
The benefits are profound -
More cash upfront with each order.
Faster inventory churn with more products sold per order.
Easy marketing and promotion hook to excite consumers.
Customized product selection for specific needs.
#3 Digital vs physical goods subscriptions are not same
Quick definition from ChatGPT -
Digital goods: Intangible products or assets that are delivered electronically over digital channels, typically via the internet.
Examples: Software, e-book, digital music, digital services like Amazon Prime
Physical goods: Tangible products or items that have a physical presence. These goods are typically manufactured, stored, and transported through physical supply chains before reaching the end consumer.
Examples: Clothing, food, furniture (You as well đ)
Now here is the thing -
Digital goods cost nothing to make more.
Digital goods is cheap to scale- Low marginal cost of production and scale.
Physical goods is expensive to scale due to inventory cost- Marginal cost of production is high and does not significantly fall as you scale.
Physical goods need to shipped.
Cost of delivery of digital goods over internet is negligible. They can be sent to any country around the world without any change in delivery cost. Internet is cheap.
Delivery of physical goods costs money every for every shipment. Imagine SGD 5-10 for each order (this is cheapest rate). Shipping internationally is exorbitant. Further, customs make it prohibitory by stopping goods movement every now and then.
Simply put, digital goods cost almost nothing to produce more and nothing to ship to anyone in the world. Physical goods cost lot more to manufacture, store, package, and ship.
Now imagine a brand that operates a physical goods business on subscription model. They pay fulfillment fee (shipping) for every shipment. What happens to the gross margin? It goes poof!
Here is example - A consumer buys same amount of products in subscription model vs bundle model. The company makes $10 profit selling bundles while it loses $70 with subscription model.
The table above assumes higher cost of acquisition for subscription. Yes you will spend more to acquire consumers on subscription model. Even if you keep the marketing costs same, the fulfillment cost will kill the brand.
In the above discussions, I have ignored the high costs of building a digital good, for example Spotify and other software companies. They cost a lot to build, but almost nothing to distribute. Physical goods costs low to manufacture (comparatively) but are expensive to distribute.
Subscription makes great sense for digital goods. Not so much for physical goods.
#4 Why I chose bundles over subscription?
I found that subscription model is a vanity for physical goods business like ours. It sounds great but is extremely bad for our bank accounts. It adds additional complexity to the production and shipping schedules.
Here is why I went ahead with bundle pricing model (and did not add subscription to the mix) -
I get my revenue today with upsized bundles. This builds healthy cash flow.
I get more revenue due to higher AOV. A single customer brings more revenue than 3 customers buying 1 unit each.
Shipping costs come down since I ship only once instead of multiple shipments. The shipping fee as share of order value comes down drastically (5% instead of 20%). More money left on the table.
No friction of subscription payment - Customer needs to make only one decision - should I buy the product or not? They donât have to think about future payments, credit card bills or possible scams.
Customer use products for longer period. This means they observe the benefit and realise the value before making the next purchase. This indirectly pushes retention. Our repeat customers buy 3.5x of their initial order within 4 months.
No inventory liability - Subscriptions mean that delivery of orders must happen as per schedule. No inventory shortage, ingredient shortage and funds shortage will justify missing an scheduled subscription delivery.
No payment chargebacks - Subscriptions lead to chargeback. Chargebacks are payments disputed by customers. This complicates a brands relationship with its payment provider. They will force higher reserve funds, reducing the available cash flow each month.
Low friction to buy bundles - Unlike subscriptions, bundles are loved by customers. They love the idea to save more. We saw customers prefer upsized bundles before we loved the idea too (user validated, haha).
Each order becomes profitable - CAC per order remain consistent (generally speaking). Which means, you need to earn more per order to cover per-order acquisition cost. Bundles make it possible.
No need to manage an additional subscription system - Listen, payment processors and gateways are a pain to work with (except Stripe). On top of this, payment processors dislike subscription model. They put up difficult compliance measures. Inventory management and order processing for subscriptions has to be managed carefully. Tons of headache that subscription brings in for physical goods business.
Thatâs why I would rather stay away from subscriptions for as long as possible.
You may suggest - Why donât you combine bundle with subscription? Sounds great, but then who will manage the problems that come with subscription. Not me. Not at the moment. đ¤ˇđ¤ˇđ¤ˇđ¤ˇ
Thanks for reading another edition of OutofSG. Your consistent support means a lot to me. Thank you again! Please do like and share the post.đť
I had an interesting discussion with Jose, a friend and subscriber. He couldnât believe that products have to be marked up by 7 to 9 times their production costs. The hidden costs of selling products are huge. At low scale, higher price multiple helps a brand survive. At higher scale, the price multiple allows the brand to thrive. If you have read last weekâs edition, here it is -
As you already know, health has become the most mission for me. I would like to achieve a few challenges this year
Run at least one half-marathon (Singapore Marathon).
Run 10K to 15K at least once every month.
Grow muscles and move closer to a shredded body.
Measure my body vitals regularly. Will be starting with this either this month or next.
Jose suggested 7 day walk across Gobi desert. I am pumped already.
Let me know if I should take another challenge. Thanks đŤ
Total love from Jisoo đ
Okay, thatâs all for today. Hope you have a good week ahead!