‘Small Box’ Retail: Passing Fad or ‘Eureka Moment’ for e-Commerce?

birchbox

Now that consumers can shop online for goods and services at any time of the day or night, the next challenge is how to navigate through the bewildering array of product choices available in almost any category.

A recent phenomenon called ‘discovery commerce’ is trying to help. Using subscription services, companies are offering a unique and personalized buying experience: Sign up with us, and once a month a thoughtful surprise will land on your doorstep.

It could be a box full of cosmetics, snacks, blouses or shoes. Variations on the format are rolling off the line. For $20 a month, NatureBox promises healthy, minimally processed snacks — cranberry almond bites, vegetable chips and whole-wheat figgy bars. Stork Stack, for $27.99, will send a box of items for baby “selected with love by our team of Moms.” JewelMint flashes monthly choices from “a versatile collection inspired by the runway, vintage jewelry and on-trend celebrity style.”

Discovery commerce ignites an emotional charge that’s key to the experience. “Why do people buy?” asks Wharton marketing professor Barbara E. Kahn, director of Wharton’s Jay H. Baker Retailing Center. “They have a need or a want …. But the subscription model introduces you to a new fun treasure hunt for things.” For others, it is more practical. Parents and others are busy and not necessarily equipped to research everything out there. So why not let someone else sort through new products and customize choices for you?

“We’re selling a solution,” says Katrina Lake, founder and CEO of Stitch Fix, a San Francisco-based service that, for a $20 monthly “styling fee,” sends five hand-picked garments and accessories to try on. Any number can be bought or sent back, but customers get a 25% discount if they keep all five. “There is so much choice — how do you even begin to navigate it all, how can any one person be an expert in everything? As the Internet becomes an endless catalog, how do you help people find things?”

Some consumers clearly relish the help. “I am obsessed with Birchbox,” says Emily Cheramie Walz, a young mother and nonprofit consultant from Elkins Park, Pa. Birchbox is the discovery platform that managed one of the neatest tricks in retail: divorcing from each other the long-married words in the phrase “free sample.” For $10 a month, a box of lip gloss, shampoo, face cream and the like is tailor-assembled according to a profile developed through a questionnaire. “It’s marketing that women actually pay for,” read a headline in PandoDaily, the Silicon Valley web publication that covers start-ups.

“As the Internet becomes an endless catalog, how do you help people find things?” –Katrina Lake

“I don’t have the time or interest to invest in beauty products for myself, and I am not all trendy, but I love getting it,” says Walz. “Every month it comes, and all the products are individually wrapped and perfectly presented. Out of every box, there are always one or two products that I love and use until they are gone.”

The manufacturers whose products Birchbox packages consider the platform a way to whet appetites so customers take the next step and buy more. Birchbox says that more than half of its subscribers have purchased a full-sized item from its site. But Walz has a different calculation in mind: “I would never go out and spend $100 on a full-sized product, so I get everything I need by spending $100 over the course of a year.”

For her, the surprise element is important. “I love coming home every month [and finding] a package waiting for me. I love getting letters, and I don’t get letters from people anymore because of email.”

Wharton marketing professor Peter Fader, co-director of the Wharton Customer Analytics Initiative, recognizes the emotional element, but as far as discovery commerce being a true innovation, he puts himself down as a skeptic. A good deal of the interest around discovery right now, he says, is simply because some people are, well, just discovering it.

“Yes, it is tapping into a whole psychic question of the discovery, the surprise, the delight — all that stuff is true, but it is being over-hyped. I remember way, way, way, way back in the 1990s, the first time I ever got an email from a company, from Borders or something, I said, ‘Wow, they sent me an email!’ People look back now on that and think how naïve we were. I’m not going to write it off it completely. There will be a set of people as well as services that are extremely well-suited to it, but I don’t think it will ever achieve market domination.”

It is, however, a market some consider worth dominating — which is to say, still small but promising. E-commerce in 2012 accounted for 5.2% of total retail spending in the U.S., up from 4.7% in 2011, according to the U.S. Commerce Department. Sales totaled $225.5 billion in 2012, up 15.8% from $194.7 billion in 2011.

To Fader, there is something about discovery commerce that rings a bell. “I was thinking of the Avon Lady — a person who comes to your door with a set of items just for you. [That’s] a model that worked for a long time. Sometimes it was a really, really good sales person who would be able to match and shape your preferences. But all too often, they convinced you to buy whatever junk they were pushing that month.”

There is an even earlier analog to the Birchboxes and GlossyBoxes of today. An educational program called Things of Science used essentially the same model, shipping science kits to homes and science clubs across America to satisfy young appetites for adventures in optical illusions, fossils, aerodynamics and crystals. A non-profit venture, it had a good run — from 1940 into the 1980s.

Gaining Momentum

The size of the current crop of discovery platforms is hard to measure, but the format, several years old, appears to be gaining momentum. ShoeDazzle was founded in 2009, enlisting television personality Kim Kardashian as its “chief fashion stylist.” It has racked up several rounds of capital funding worth tens of millions of dollars and undergone many reinventions. Birchbox’s 2012 revenues were just under $40 million, up from $5.5 million the year earlier, according to Crain’s.

NatureBox co-founder Ken Chen declined to be specific about sales or profits, although he says that the number of boxes shipped this year is expected to grow 20-fold, to one million from 50,000. “Since raising a couple of rounds of capital, the brand has really taken off,” he notes, adding that the average subscriber stays a little more than a year.

Some say that after the initial novelty wears off, discovery platforms will need to evolve. “How do they continue to bring customer value after that sixth or seventh box of new stuff arrives?” asks Seattle retail consultant Sally McKenzie. “Is it through new categories? Moving to more traditional non-subscription methods of selling? I think the code has yet to be cracked, but there are some sharp companies making a go of it.”

“How do they continue to bring customer value after that sixth or seventh box of new stuff arrives?” –Sally MacKenzie

You can’t rely on your first hit to sustain a true, long-term business, says Eurie Kim, a principal at Forerunner Ventures, an early Birchbox investor. “Subscription may always be a feature some companies offer, because it makes sense in relation to the product they are selling or the demographic they are catering to. But in the end, it’s all about developing authentic relationships with customers and creating a brand that they connect with — ideally [one] that they want to be a part of beyond … the individual products. Without this more elevated bar, customers will tire quickly of the same proposition and find another company that will satisfy their needs more holistically.”

Chen sees potential ways of growing the business, including diversifying into different kinds of products. “But we are focusing on snacks now. It’s a $64 billion industry. The goal is to become a household brand in America.”

The success and visibility of Birchbox, according to Wharton marketing professor David Bell, has inspired other companies to get into the act. The format, though, has the greatest promise in certain specific product categories.

Wine, Cheese and Shaving Cream

“The characteristics are, first, something regularly needed for consumption, like contact lenses or shaving cream,” says Bell. “Second, it could be a product base in which there is variety to it and it is ‘giftable’. I gave Citrus Lane [care packages for parents] to some people who recently had kids. The third category is for people who want to learn something, like wine or cheese, that’s hard to navigate. That’s more of the sample model — sort of, ‘Help me curate my tastes.’”

“The idea of paying a company to help me discover products that will likely appeal to me is very attractive,” adds McKenzie. “At the same time, bringing this kind of discovery shopping to the web gives manufacturers and retailers an amazing opportunity to capture and use valuable customer data and insights that make the discovery experience highly enjoyable for the shopper and allow the retailers and manufacturers to develop better products in a more efficient manner than traditional offline methods.”

The successful model is also built on a high degree of trust — making sure that the customer feels he or she is being sent products truly customized to tastes and interests, and providing access to human contact when needed. Several online reviewers vent about occasional frustrations when customers attempt cancellation but the subscription service “auto-renews” credit card billing.

“No matter how much we capitalize the B and D in big data, most of the factors going into your next decision about what to buy are going to come from some random factor.” –Peter Fader

Stitch Fix’s Lake says that the platform unravels mysteries for both the business and customer. Having items at home allows the customer to try on a prospective garment with already-owned ones to see how they might complement each other. Through repeated points of contact with the customer, Stitch Fix gathers information about taste, size, what has worked and what has not.

“We borrowed a lot from Pandora [personalized Internet radio] in terms of algorithms and how that works behind the scenes,” she says. For example, “does this fit on somebody with large hips, or [is it] for someone who loves classic clothes?”

Fader doubts that this kind of knowledge is ultimately discoverable. “This is going to sound really strange, but there is a metaphor to the human genome project. There’s this belief that once we get into people’s DNA, we are going to know everything there is to know about them. It has not worked out that way. There are so many contextual factors [that] it’s really hard to know what any one human being is about.

“No matter how much we capitalize the B and D in big data, most of the factors going into your next decision about what to buy are going to come from some random factor, maybe something that occurs to you on the street or your kid tells you,” Fader adds. “Detecting a eureka moment is very different from trying to create a eureka moment.”

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