75% of all direct-to-consumer brands will offer subscriptions by 2023, according to a prediction from a new report.
It's part of the DTC industry's response to a significant downturn in 2022 that has seen a collapse in success among retailers that sell straight to consumers through the internet, rather than through traditional outlets.
Together, operations like glasses company Warby Parker, shoe company Allbirds and others lost lost billions in market cap across the first few months of this year — underperforming even given the already-low standards of business success in 2022. But will subscriptions save them?
Why DTC Businesses Are Losing
Cutting out the middle-man outlets and selling directly to your customers sounds like a great way to save money by taking advantage of the all-reaching hand of the internet. So why isn't it working out?
More than one factor lies behind the DTC slump: Shipping costs are shooting up, the stock market is bearish, and, crucially, customers are trying to save money where they can as they deal with a recession, rising inflation, and hidden price hikes.
On top of all that, DTC companies as a group have low brand recognition, so they tend to heavily rely on marketing and advertising. But Facebook ads, one of the biggest ad markets, has boosted its prices dramatically.
“In two years, it’s basically doubled to tripled,” Social media ad buyer David Herrman told CNBC about Facebook, adding that the cost to reach 1,000 US Facebook users rose from $6 to $18 in two years.
Most recently, a longtime Shopify investor dumped his stock. Mawer Investment Management’s Vijay Viswanathan cited growing competition and the risks of the ecommerce industry as his reason for leaving the ecommerce service.
Shopify is home to an estimated 27% of all ecommerce businesses and 50% of all DTC brands, yet its stock has dropped 75% in 2022.
Are Subscriptions a Life Line? Or a Mirage?
A report from analytics service PipeCandy in collaboration with subscription platform Rodeo has predicted that three out of every four DTC companies selling physical goods will offer subscriptions by next year:
“Research projects that by 2023, as many as 75% of direct-to-consumer brands will have a subscription-based offering. While it is possible that 75% of DTC brands may have a subscription model, there are risks that call their sustainability into question.”
The reason why subscriptions might boost revenue lies with a younger generation: Gen Zers are starting to earn the money they'll need to shop DTC, and they're particularly fond of automated purchases compared to older generations.
But the cost to acquire a subscriber is higher than the cost to acquire less committed shoppers, and elevated Facebook ad costs don't help. In addition, keeping customer churn low is another challenge that needs to be faced head on.
Plus, with so many DTC businesses getting into subscriptions in the coming months, consumers may hit a subscription fatigue and stop considering new ones — a phenomenon likely familar to anyone with four or more video streaming services.
That doesn't mean subscriptions aren't well worth considering, of course, particularly for small businesses that won't need to generate massive amounts of revenue to break even.
In the end, the success of subscriptions depends on whether the audience is large enough and dedicated to the product. If you're launching your own online subscription store, our advice is to make sure your exact audience is eager for a subscription or membership service before you start tracking down the right ecommerce website builder.
