Ah, bulk discounts. The wonderful phenomenon responsible for $20 bags of trail mix that are so big they last for months in your cupboard or for keeping the checkout lines at Costco full of people with even fuller shopping carts.
For consumers, buying in bulk presents a clear opportunity for serious savings without necessarily sacrificing quality: all it requires is a little bit of foresight and a lot of storage space. For retailers, however, the benefits are arguably even more appealing. Bulk selling means more overall volume (and therefore revenue), but it also passes down some of the cost of holding inventory to the consumer, reduces the cost of customer acquisition, and presents an easily marketable value proposition.
It’s no surprise then to see e-tailers build on this principle and adapt it to their specific market. To compete with giants like Walmart, Amazon, and Alibaba, many smaller players (some of them not so small anymore) have been relying on a bit of creativity to enhance the consumer experience.
Three specific bulk-sales business models have attracted our attention: subscription-based, group couponing, and crowd purchasing sites. Each of these models comes with their own pros and cons.
From a business perspective, it’s evident why encouraging customers to purchase a subscription box is advantageous. You won’t need to forecast who will buy what this month or how much you’ll need to order, it helps keep storage cost down, and a new customer who signs up is almost guaranteed to be more valuable on average than if you were to offer a one-time purchase. If the quality of the selection is perceived to be high, subscribers also tend to be vocal about their contentment, with many influencers providing a large portion of the traffic directed towards subscription sites. This goes hand-in-hand with the unboxing phenomenon, which encourages subscription box businesses to invest in branding and packaging, along with selecting other brands to feature in their selection who do the same.
As of April 2017, the largest industry sector is beauty, followed by food and apparel. Beauty itself captures over 35% of the subscription-based online market, with two of the three largest companies fitting in this sector (Ipsy, Dollar Shave Club). Why is beauty dominant? A plethora of factors can be proposed:
- Beauty products tend to have a high emotional value to customers, which makes the experience of the purchase as important as the product itself.
- There is a risk factor associated with the use of new products, which increases the appeal of curation and the endorsement of authority figured (influencers).
- By default, subscription-based models favor the creation of a niche: sites are largely gender-centric to narrow down interest and simplify marketing efforts.
- The use of beauty products, just like the other dominant segments (food/cooking, apparel, and pet care), is part of a routine – a perfect fit for businesses based on repeat purchases.
Standing in second place, the food segment seems more uncertain as leader Blue Apron is struggling to keep investors happy and maintain subscriber numbers. While CFO Brad Dickerson is blaming marketing cutbacks put in place to automate their warehouses, other players like Goodfood are moving. Goodfood is planning to become a Canadian equivalent to Blue Apron and even surpass it. In the meantime, Amazon wants to do what Amazon does best: use its titanic influence and deep pockets (see the recent Whole Foods acquisition) to completely dominate the market.
The appeal of subscription doesn’t stop at consumables though. The apparel industry is slowly gaining grounds as shopaholics are considering adding an element of adventure to their e-commerce experience. Big player Stitch Fix is looking to secure founding through an upcoming IPO in the United States. FabFitFun is pooling multiple different sectors by offering a box satisfying your “beauty, wellness, fitness and fashion” needs, taking the curation aspect to a new level. A smaller competitor, the Wrist Society, aims to change the way consumers look at watches by having them try a myriad of different ones and educating them. Each timepiece is paired to a type of event or situation. Others are focusing on their local market, like Montreal-based From Rachel that sends pre-selected tights based on an online profile.
Group Couponing Model
Groupon is very well-known and one of the first online couponing websites to really make an impact. This website, who quickly became a behemoth (to the point of receiving, and rejecting, a $5.75B bid from Google), has largely faded from the news but not from the minds of business owners and consumers who keep using its services. Despite a near -$200M net income loss in 2016 and a stock with a poor performance, Groupon still has had over 48M unique users making a purchase in the past 12 months.
The second biggest competitor in the group couponing industry, LivingSocial, proposes a very similar model and user experience, but is limited to the United States.
The relationship between local businesses and group couponing sites is fairly simple: businesses get free online exposure without having to pay upfront for a web marketing campaign, but they lose a large part of their profit margin by providing significant discounts. In exchange, Groupon gets a cut for each deal purchased. This approach is somewhat different from retail couponing sites like RetailMeNot and DontPayFull, who are less service-oriented and focus on discount codes redeemed in online carts.
Finally, there’s crowd purchasing. At the moment, this is the most novel segment, with only one notable player: Massdrop. On this site, patience is a virtue (shipping tends to be longer than for regular e-tailers) and the selection is limited, but shoppers are rewarded with high-quality items found at exclusive prices.
Here, the business adopts a more collaborative rather than transactional approach, with both the brands it carries and its consumers. Items are requested by users, who create polls to gauge enthusiasm, then Massdrop contacts the sellers to negotiate an arrangement. These deals go from developing a new joint product to simply listing existing ones on the Massdrop site. The goods are then sold in the form of “drops” – organized discount purchases that are only valid if a certain amount of people commit to buying them. As such, drops can ‘fail,’ as insufficient volume wouldn’t allow for the promised discount.
Is such a business model viable? Sure, it requires partnerships and relies on keeping niche communities alive and finding new products that interest them, but there’s no risk of failing to sell current inventory, forecasting is essentially outsourced to the consumer, and having an engaged audience means valuable feedback is being given consistently. Since its inception in 2012 and success with audiophiles, the self-proclaimed “community-driven commerce” secured over $45M in funding and has expanded to offer products in 20 “communities.”
Whether you’re looking to save on your favorite brands or to take your business online, it’s important to note that the incredible level of accessibility which the web offers has many advantages, but some drawbacks as well. Creative business models based on bulk selling offer deep discounts, but this also means consumers get used to seeing low prices and become reluctant to pay full price, while some corners inevitably get cut to maintain margins.