WeWork: Building Community, and Burning Cash.

It’s hard to talk about budding subscription players, without mentioning a nine-year-old company, that at one point in 2019, was on the verge of a $50 billion valuation. WeWork, the SoftBank-backed community workspace company started by two visionary founders in 2010, now occupies more Manhattan office space than any other company, renting 5.3 million square feet in Manhattan, and knocking the previous title holder, JPMorgan Chase, off its throne.[1]

WeWork, the hottest brand in coworking, has spread like a virus. In 2017 alone, the company opened ninety buildings across the globe. As of Spring 2019, WeWork locations numbered over 600. The company has attracted over 260,000 monthly paying members since inception– and the demand is increasing. Occupancy rates rose to 84 percent across all establishments in 2018, up from 78 percent occupancy one year prior. In certain cities, WeWork is close to 100 percent occupancy, with prospective members waiting for vacancies.

WeWork, rooted in a subscription membership model birthed by founders Adam Neumann and Miguel McKelvey, has nearly perfected what a community co-working space should be: festive, trendy, aspirational and community oriented. Both men seem to have come by the vision honestly—McKelvey grew up in a hippie commune in Eugene, Oregon, and Neumann spent his early years in Israel living on a kibbutz.

Although SoftBank has invested over $10 billion in WeWork, the company, which announced plans to go public in early 2019 as The We Company, has since delayed its IPO (as of September 2019) as a result of tepid investor interest and plunging valuations.[2]

Since the company’s S-1 became public, it has faced scrutiny over the state of its finances, and more specifically over the behavior of Adam Neumann, who recently stepped down as CEO. Under pressure from the board, the eclectic executive left the throne after a report from the Wall Street Journal highlighted his alleged drug use and desires to become Israel’s prime minister (among other behaviors.


WeWork’s fundamental business model isn’t unique. In fact, the idea to create shared space for profit was brought to the mainstream in 1989, when Mark Dixon launched Regus, a company that offered tenants community office space complete with maintenance, staff, and a flexible lease term. When Regus went public in October of 2000, it was valued at £1.5 billion and was considered the first large-scale shared office space pioneer. But, like many first movers, Regus fell into unforeseen business ditches. Namely, the first big dot-com bubble burst, which saw many tenants vacate Regus offices around the world in favor of more affordable options like home-based set-ups and coffee shops. Having inked long-term leases with landlords, the firm was left holding the bag with too few tenants to cover the gap. After a near collapse, Regus re-emerged from bankruptcy and remains a formidable player. However, new entrants, like WeWork, have surfaced with competing offerings.

WeWork’s MO, much like that of Regus, is to sign long-term leases, renovate, and then rent out desks and closed-door offices to members on a per-month basis—taking enough margin along the way. On the consumer side, the no-lease, subscription-based model provides WeWork members with a low-risk option to get access to state of the art office space for as low as $500 dollars a month.

Critics of WeWork suggest the company could face a similar fate to that of Regus. And in many respects, the flag raising is warranted. At the beginning of 2019, WeWork had about $34 billion of lease obligations, was nowhere near profitable, and was shown to be losing about $2 billion a year.[3] Despite the sobering financials, some bulls still argue that the company has crafted a strategy to mitigate the downside risk.

In the event of a weakened economy sparking a member exodus, WeWork has  spread its corporate risk across different entities. Rather than holding each property under WeWork’s main corporate entity, the company has used corporate shelters, which it calls “special-purpose entities,” to isolate the parent company from a possible blow-up. More important, the firm is inking lease deals that split profits 50/50, where incumbent landlords pay for the build out and share in the revenue. WeWork is also adding buildings to its asset list, setting up a new division called ARK that purchases buildings outright, and leases them back to WeWork.[4]

Perhaps the most important source of stability may be the firm’s diverse profile of paying members. Initially, 95 percent of WeWork occupants were start-ups (the segment most likely to fail in business), but the pie is now sliced three ways—only a third can be called start-ups, while the balance is equally split between small-to-medium-sized businesses, and corporate-enterprise-level clients like Shopify, Microsoft, HSBC, Samsung, Lyft, and Facebook, which WeWork claims save about $18,000 a head when they move into a WeWork office.[5] The big-firm movement into “We Space” means a more stable set of tenants to help weather any volatility in start-up entrances and exits.

Meanwhile, Regus is doing its best to stay relevant through its core brand, as well as its other co-working outfits like Spaces. IWG, the parent home to both companies, touts its Regus banner as having both more locations (about 3,000) and members (over 2 million) than WeWork—yet the publicly traded company is valued at “only” $4 billion, prompting plenty of analysts to both question Regus’s future, and that of WeWork’s whose valuation should be closer to $3 billion.[6] In other words, investors who were willing to put money into WeWork at a $40 billion valuation had to have believed that each of the company’s members is worth about $156,250; by comparison, Regus’s members are worth roughly $11,000—leading skeptics, including Scott Galloway of NYU’s Stern School of Business to call WeWork “the most overvalued company in the world.”[7]

Unlike IWG, WeWork doesn’t believe it is a real estate company; and therefore, its executives suggest it should not be valued on comparable multiples. Yet, it’s hard to imagine WeWork as anything but a real estate play with a sexy story and a whole lot of risk.

If we look beyond unit economics for a moment, WeWork deeply understands who it’s serving. Progressive Millennials (one key customer segment), are socially conscious, environmentally responsible, and hate the idea of commitments, contracts, and lock-ins—which explains their contempt for leases peddled by commercial landlords, and their love of the flexible, more community-based WeWork. As for Gen X, another big WeWork consumer cohort, a recent study claimed that 67 percent of Gen X leaders are effective in “hyper-collaboration,” and value the freedom to innovate and the flexibility to manage their work/life balance.[8] As such, WeWork’s coworking spaces, which appear to break down metaphysical and metaphorical walls, is a natural fit.

Yet,  the WeWork narrative feels a lot like that of Uber and others, where growth and vision trump conventional metrics like profits. However, stock performance of recent public offerings from these so called “sexy” companies suggest a possible new profit-first paradigm shift. In the wake of concerns related to mounting financial losses, Uber, which IPO’d on May 10, 2019, saw its shares drop 11% in one day, resulting in the biggest first-day dollar loss in IPO history in the U.S.  As of Oct 1, 2019, shares in the world’s largest ride sharing giant are trading nearly 30% off its IPO. Lyft has seen a similar story play out, with its stock price down a whopping 47% since its initial public offering back in March of 2019.  The halting of WeWork’s IPO looks to not only be a company issue, but a broader indication of investor sentiment not only labelling these venture darlings as less attractive, but outright dangerous investments.      


[1] Keiko Morris and Eliot Brown, “WeWork Surpasses JPMorgan as Biggest Occupier of Manhattan Office Space,” Wall Street Journal, September 18, 2018, https://www.wsj.com/articles/wework-surpasses-jpmorgan-as-biggest-occupier-of-manhattan-office-space-1537268401.

[2] Angela Moon, “Wework Gets $2 Billion after Softbank Cuts Planned Investment,” January 8, 2019, https://www.reuters.com/article/us-wework-m-a-softbank/wework-gets-2-billion-after-softbank-cuts-planned-investment-idUSKCN1P21OH; Eliot Brown, Maureen Farrell, and Anupreeta Das, “WeWork Co-Founder Has Cashed Out at Least $700 Million Via Sales, Loans,” July 18, 2019, https://www.wsj.com/articles/wework-co-founder-has-cashed-out-at-least-700-million-from-the-company-11563481395; https://www.bloomberg.com/news/articles/2019-09-16/wework-is-said-to-likely-delay-ipo-after-valuation-plummets.

[3] Herbert Lash, “WeWork's Starry Valuation Dazzles Landlords, Reaffirms Doubters,” Reuters, May 10, 2019, https://www.reuters.com/article/us-usa-property-wework-value/weworks-starry-valuation-dazzles-landlords-reaffirms-doubters-idUSKCN1SG1VD; Konrad Putzier, “WeWork’s Mounting Lease Debt Looms Over IPO Plans,” Wall Street Journal, June 18, 2019, https://www.wsj.com/articles/weworks-mounting-lease-debt-looms-over-ipo-plans-11560855601.

[4] Troy Wolverton, “WeWork is Setting up a $2.9 Billion Fund to Buy Buildings that It Will Lease To Itself,” Business Insider, May 15, 2019, https://www.businessinsider.com/wework-ark-fund-to-buy-commerical-properties-2019-5.

[5] “WeWork Economic Impact Report,” WeWork Newsroom, press release, May 8, 2018, https://www.wework.com/newsroom/posts/2018-wework-economic-impact-report.

[6] Matthew Yglesias, “The Controversy over WeWork’s $47 billion Valuation and Impending IPO, Explained,” ReCode, May 24, 2019, https://www.vox.com/2019/5/24/18630126/wework-valuation-ipo-business-model-we-company.

[7] Ainsley Harris, “Is WeWork Worth $40 billion or $3 billion?” Fast Company, July 3, 2018, https://www.fastcompany.com/90179736/is-wework-worth-40-billion-or-3-billion; Jacqui Frank,” Scott Galloway: WeWork is Arguably the Most Overvalued Company in the World,” Business Insider, May 15, 2017, https://www.businessinsider.com/scott-galloway-wework-overvalued-company-world-2017-5.

[8] Stephanie Neal and Richard Wellins, “Generation X—Not Millennials—is Changing the Nature of Work,” CNBC, April 11, 2018, https://www.cnbc.com/2018/04/11/generation-x--not-millennials--is-changing-the-nature-of-work.html.





Clubs, Exclusivity, and “Access”

In the late 1950’s, Playboy leveraged its early subscription traction selling magazines to begin expanding into other business lines, including a new entertainment concept called The Playboy Club. The chain of exclusive nightclubs and resorts officially opened its first location to paying members in 1960. A typical club featured a dining area, living room, bar, and occasionally a casino where members could hang out and be waited on by Playboy Bunnies who had appeared in the magazine for $25 per year ( about $220 per year in today’s dollars) —that is, if the members actually visited; in fact, only about 21% of members had set foot in a club.

For most, membership to Playboy club offered a status symbol more than any kind of tangible benefit; but for Hefner and the business, the lack of membership usage helped boost bottom line profits. As the chain expanded internationally membership peaked at 750,000, only to gradually disappear by the early 1990’s.

Interestingly in 2018, Playboy opened its first new location on Manhattan’s West Side; the first in New York City in 32 years. Fees to this era’s version of the club, start at $5,000 a year and run up to $100,000 - those who opt for the top-tier, get some cool perks that include chauffeur services to and from the club, 10 complimentary nights at a local boutique hotel, 10 VIP sports tickets a year in the Playboy seats for either Giants, Jets, Knicks, or Rangers games or the US Open, and a VIP table with bottle service at Playboy events. As of late 2018, women made up 45 percent of all memberships sold.

The likelihood of success for this next attempt at selling “bunnies” is questionable, given the failure of the initial chain and the brand’s positioning in today’s #MeToo era. But there are several modern-day iterations of this long-standing type of subscription model that are booming, running on the same chassis as Playboy (with different branding and offerings, of course), including private health clubs, yoga studios, golf clubs, supper clubs, and upscale business lounges.

While the core offering is different, each of these businesses operates on a member/subscriber access model that relies on both analyzing subscription revenue from their exclusive enrolments, and predicting “breakage”—a term that refers to revenue gained by a merchant through services that are never claimed (or used). Beyond industries like insurance products, home security, and most loyalty card programs—which make a killing off of a lack of redemption—lifestyle and fitness clubs have made fortunes using the access model, measuring overall business health by how little their members actually use what they’ve paid for.

Take a typical gym chain for instance, which charges on average $50-$75/month for dreams of a slimmer waistline. The big chains and the boutiques alike all rely heavily on passive consumer behavior (i.e., breakage) to generate profit. The statistics are pretty telling. Gym chains are inundated with new sign ups in January, driven by new years resolutions to get in shape. Of the cohort of new entrants, 80% cancel their memberships within 5 months; only 20% use the gym consistently, while about half who sign up never pass through the turnstiles, period. Gym occupancy, or lack thereof, is therefore key to the business model. In fact, to be profitable, fitness chains need about 10 times as many members as they can actually fit through the doors. In other words, the perfect gym customer is the one intends to work out, pays to do so, but never does. Sound familiar?

The mix of subscription revenue and consumer laziness is big business. California-based LA Fitness logs about $2 billion in annual revenue. New York-based Equinox Holdings, which includes brands Equinox, Blink Fitness, Soul Cycle and Pure Yoga, does over $1 billion.

Although traditional private club memberships across the U.S. have declined since 2011, as ageing baby-boomers hang up their putters and five-irons, millennials are driving some impressive growth for a new generation of urban and athletic clubs, sans golf. Soho House, a group of private clubs founded by English entrepreneur Nick Jones, is among the most successful examples: Jones opened the first location in London’s Soho neighbourhood in 1995 and now has almost two dozen clubs around the world, from Los Angeles to Mumbai.

Soho prides itself on crafting a membership list that values creativity over financial success; industries like fashion, media, and the arts are well-represented, for example, while membership committees purge applicants like bankers and lawyers, who don’t fit the image the club wants to portray. This contributes to long waitlists, and could be seen as a ploy to boost interest through the fundamental marketing principle of scarcity. Worldwide, Soho has over seventy thousand members who pay a grand or three in annual dues for access to a “House,” its events and restaurants, the in-house Cowshed spas in certain locals, and more. The group posted $371 million in operating revenue in 2016 (up a fifth from a year earlier), with about half of that coming from food and beverage sales, which of course is not included in membership fees.

Source: “The Subscription Boom” - Why an old business model is shaping the future of commerce , (2020)

Preorder: https://www.amazon.com/Subscription-Boom-Business-Future-Commerce/dp/1773270710

Loot Crate: Geeks, Gaming, and Profits

Need a gift idea for your teen this holiday season? How about a subscription to Loot Crate, a curated box of apparel and other swag aimed at geeks, gamers, and nerds alike? Sound odd? Maybe. But, while Loot Crate might seem on the surface to be too “niche”, think again. Boxing stuff up for geeks is huge business.

Founded in 2012 by Chris Davis and Matthew Arevalo, Loot Crate has amassed over 200,000 subscribers across 10 countries. In 2016, the company was ranked #1 on Inc's Fastest Growing Private Companies. Earlier this quarter, Loot Crate announced a partnership with Amazon that will see its box featured right on Amazon's subscription box store home page (yes, Amazon now has a dedicated store for subscription boxes).

Loot Crate targets super fans of entertainment franchises. The company partners with major studios, game companies, comics publishers, professional sports leagues and personalities in a shared curation of premium and exclusive consumer products in themed mystery boxes, delivered directly to subscribers' doorsteps.

Loot Crate has done an incredible job of not only curating boxes, but building an entire community around it all. The original version of the crate was a kind of “comic-con in a box,” containing four pop-culture related items valued at around $45. Boxes were, and still are to a large extent, centered around a theme, like “future,” “anti-hero,” and “origins.”

But, since its early roots, Loot Crate has expanded its offering. There’s a Loot Crate DX subscription for the truly dedicated nerds out there, with premium items worth at least $100. There’s an Anime box, featuring exclusive items from the best anime & manga series. There are also plenty of other options, including Loot Gaming a themed box gear from my favorite video games and a thing called Loot Fright, which features a bunch of horror collectibles and apparel. Strange yes, but plenty of value-added upside for passionate gamers and horror junkies.

The list of curated options also extends into other apparel subscriptions for socks, underwear, t-shirts, wearables, and random gear. Moreover, the company also has film and TV themed crates, built around shows like DeadPool and StarTrek.

And, Loot Crate has done well to carve out its place in the subscription economy. But its strength and prowess in the space goes beyond just boxing stuff up for nerds. As part of its capability to properly execute themed subscription boxes for loyal fans of things like Marvel and WWE, Loot Crate has also broadened its horizons by partnering with Major League Baseball (MLB), and the National Basketball Association (NBA) to power Sports Crate - a bi-monthly subscription box of licensed team merchandise and collectibles targeted at sports fans. Although not all teams are available as of yet, the company plans to roll out the balance in the near future.  

With the kind of constant variety this company is churning out year after year, there’s no competitor coming close to Loot Crate in the collectibles category in subscription – and that says something about the industry in general.

Box companies like Loot Crate that do well to carve out a specific niche, and then expand horizontally, will have the most runway with which to grow; attracting plenty of capital along the way - the guys have raised over $41 million to date.

Chris Davis, LootCrate’s CEO says that "Over the past 6 years, Loot Crate has grown and evolved from a single subscription to offering multiple subscriptions spanning the best of pop culture, sports and gaming, ….”  He goes on to say that the company provides "a unique opportunity for fans to connect with their passions.”  He’s right.





Columbia House: Why big subscription businesses fail

In 2011, a nationwide class action suit was filed against Columbia House (Direct Brands Inc.) seeking monetary damages and an injunction stopping Direct Brands and its business practices on the basis of unauthorized credit card charges, inability to cancel, lack of customer service, unwanted products mailed to homes and several other alleged issues.

In 2015, Rolling Stone published an article titled “Columbia House Files for Bankruptcy, Blames Streaming.”  The company’s assets at the time, valued at $2 million, were smothered by the $63 million it owed to creditors.

The failure of Columbia House, once considered a foremost leader in music subscriptions, in fact, has nothing to do with streaming. Rather, the storied fall from grace provides a stark example of a subscription failure rooted in customer acquisition greed.

Back in 1955, the Columbia Record Club, turned the music industry upside down when it launched. Tied directly to this pivotal decade in music, Columbia’s one free monophonic record incentive provided the perfect hook to get consumers on board the new subscription service. 

By the end of its first year, the Record Club had attracted 128,000 members. Two years later, it was shipping 7 million records to subscribers. Soon, the club accounted for 10 percent of the recorded music industry.

Not unlike Netflix which began decades later selling DVDs through direct mail, Columbia too was investing early in analyzing and optimizing for customer preferences. In fact, Columbia Record Club was one of the first to leverage data processing and computers to anticipate changing musical tastes.

But, as Columbia House (its rebranded moniker) scaled to millions of members by the mid 1990’s, the leadership team shifted its focus solely to the front-end funnel, and away from the customer; making the club not only an early pioneer in subscription selling, but also a business case in subscription failure.

While competition from Napster, Kazaa, and Walmart in the late 1990’s explain some of the challenges, the root cause of Columbia’s demise stems from its aggressive incentivized marketing tactics, lack of customer service, and brutal exploitation of negative option billing - a practice whereby a customer is provided goods or services automatically, and charged accordingly on a recurring basis.  

Most subscription companies use negative option billing appropriately. They pay attention to marketing and promotional material, the communication of billing terms, and overall customer service and satisfaction. Issues arise however, when businesses, like Columbia House, ignore these pillars.

Columbia’s opaque incentivized marketing tactics, such as the famous “first album for a penny” worked brilliantly as a front-end hook; but caused all kinds of customer satisfaction issues on the back-end since important offer terms were purposefully buried in the fine print. As a result, thousands of customers who fell for the trial incentive didn’t actually understand what they were signing up for.

By the time a customer realized they didn’t want the high-priced second, third, or fourth lot of CD’s, Columbia House had already dinged their credit card multiple times. As complaint levels increased, attempts from consumers to dispute these charges went unresolved.

For years, Columbia got away with ignoring the backlash from its subscriber base, because consumer protection watchdogs like the FTC, had prioritized other mandates over consumer rights efforts. That is, until the emergence of online shopping prompted the protection agency to seek out not only Columbia House, but thousands of other online charlatans selling all kinds of stuff using similar free trial hooks - from teeth whitener, and weight-loss items (remember Acai berry?) to business opportunity scams, free credit reports, and more.

As consumers flooded the Federal Trade Commission with complaints of fraudulent, deceptive and unfair business practices online, the agency began levying the bad apples with significant fines, lawsuits and in rare cases, imprisonment. Columbia House soon became public enemy number one among online music services.

Whether it’s a music service like Spotify, or a traditional cable provider, the Federal Trade Commission now takes just about every subscription model seriously, requiring any service offering a negative option plan to clearly and conspicuously indicate purchase obligations, cancellation procedures, and related terms and conditions. Failure to do so, means harsh punishment.

While several industries operate under the same negative option umbrella, the companies who stay out of trouble have learned a lesson from Columbia House by striking a balance between marketing and acquisition, customer service, and overall customer satisfaction.










Stitch Fix: The future of Retail is Personal

Stitch Fix has created a real buzz around what makes a great apparel business work in today’s retail landscape, where Amazon looms high and mighty in online commerce. The company, which has focused on a profit-first approach since day one, may be the most innovative and cash efficient e-commerce retailer in the modern digital era.

As Amazon devours an increasing amount of the online purchasing economy, companies like Stitch Fix that have focused on profits and premium personalized service, have developed a way to differentiate themselves - no easy feat with Bezos lurking in the background.  

The company, which began operating as Rack Habit, got started out of founder Katrina Lake’s Cambridge MA apartment in 2011. Later changing the name to Stitch Fix, Lake, who was studying at Harvard Business School, partnered up with Erin Morrison Flynn, a former buyer at J Crew to hash out a new “assisted commerce” concept targeting fashion forward females. 

The business works as follows: When customers sign up to Stitch Fix, they fill out a form detailing style preferences, clothing needs and price points. Algorithms then churn out a set of potential choices, which one of the company's stylists then tailors to the individual customer before shipping five items for a $20 fee. Anything a customer doesn’t want can be returned free of charge. Should a customer keep any of the items, the $20 styling fee is applied toward the purchase - customers who keep all five items, receive a 25% discount. What they get each time varies, but typically items from trendy brands like Citizens of Humanity, Scotch & Soda and Barbour fill each box.

While Stitch Fix shies away from calling itself a true subscription company, customers can set up automatic deliveries for subsequent boxes, choosing desired shipping frequencies. Perhaps not the “norm”, the automated shipping option, creates a nice derivative on the traditional sub-box model.

Stitch Fix is not the first company to try this out. In 2009, Trunk Club found a real demand for assisted commerce, specifically with curated apparel targeting men. The Chicago-based company was ultimately sold to Nordstrom for $350 million in 2014.

Trunk Club’s success planted early seeds for the category online – in a way, allowing Stitch Fix to watch from the sidelines, and later carve out a better version of their own.

By the numbers, Stitch Fix has surpassed expectations. The company has doubled sales every year between 2012 and 2017, becoming the 11th-largest U.S. online apparel retailer in the e-commerce market. And, the ramp up was quick, with Stitch Fix tallying $73 Million in revenue in 2014, followed by sales of $343 million in 2015, $730 million in 2016 and just shy of $1 billion before filing to go public in October of 2017. Its stock price has more than doubled since.

There are several factors contributing to the Stitch Fix upswing. The company nailed obvious business fundamentals early, like product-market fit, fulfillment, customer service, and profitable growth. Yet, Stitch Fix’s killer moat is its lethal combination of subscription, with a resounding emphasis on hyper sophisticated data science.

The leader driving the data bus at Stitch Fix is Eric Colson, the company’s Chief Algorithms Officer. Colson, a former VP of data science and engineering at Netflix, was largely responsible for architecting the Netflix recommendation engine, so you can bet it was a real coup when Lake convinced him to come over to the world of data-driven fashion.

In addition to things like recommendations, human computation, resource management, inventory management, algorithmic fashion design and many other areas, Stitch Fix’s data driven centricity pushes this company way beyond the status quo.

How serious is the company about data? Stitch Fix provides a full Algorithms tour of how everything works, and how data is woven into the very fabric of the company on its website. If you’re a real nerd, you can geek out here: 


Under Lake and Colson, the more than 75 data scientists have helped Stitch Fix to become a technological pioneer in retail fashion, painting a clear picture of what the future of personalized shopping looks like. The company’s robust execution has left Stitch Fix in a league of its own. Forget the Trunk Club for women. Stitch Fix is the Netflix of fashion – a moniker that properly underscores what distinguishes this great company from the rest.





Ipsy's Ivey league play

Birchbox, headquartered in New York, has grown primarily through the traditional Ivey league formula: smart founders from a top school (Harvard), a good idea, and a bunch of venture capital. The company’s recent moves into traditional television advertising, and retail brick and mortar, provide positive optics the media loves to write about.

IPSY, on the other hand, has flown a little under the Birchbox radar; despite near tripling its subscriber count. And, they've done so on the back of founder Michelle Phan’s social influence. Phan parlayed an early passion for cosmetics into one of the biggest things on YouTube, and ultimately, into one of the most successful stories in the subscription space.

Subscribers to Ipsy, which the company calls “Ipsters”, are charged about $10 per month for glamour bags (not boxes) full of sample-sized beauty products. There are over 100,000 new subscribers joining Ipsy every month, alongside an estimated 2.5 million base.

While Phan never went to Harvard, she did learn something about the value of scarcity. Phan's YouTube videos have been viewed more than 1 Billion times collectively. She’s been on the Forbes 30 Under 30 list, and is often described as one of the most watched talents in the digital space. Her starpower on YouTube is unique, rare, and scarce. In other words, Michelle is what VC types might call, a unicorn.

How to clone a unicorn:  

How do you clone a unicorn? In 2015, the company came up with a unique way to ‘scale’ Michelle.

Seeing the opportunity across the sum of the parts, Ipsy launched the Open Studios initiative: a community play to help budding content creators access resources they’d need to become the next Michelle Plan. Ipsy OS provides studio space with production, lighting, and editing technologies, mobile tools and apps, and experienced mentors to aspiring Ipsters seeking to channel their “inner Phan” - without any commitments, fees, or exclusivities. Creators retain 100% control of their channels, CMS, and revenue. 

What’s in it for Ipsy?

By helping launch the next generation of beauty gurus, Phan’s profile becomes even more prominent. Moreover, as Ipsy latches on to the next generation of ‘Phans’, the company scales much faster, riding a rising tide of next-gen beauty influencers – oh, and Ipsy also benefits from ads that feature these up and coming celebrities and the tutorials they do; that include of course, products Ipsy sends out. 

With plenty of ambitious Kardashian types itching for an opportunity, Ipsy Open Studios received more than 1,000 applications within hours of launch. While communicating an “everyone is welcome” narrative on the website when Ipsy announced the program, the company was “playing Harvard” .... anyone could apply, but admission comes to very few - the very rare. 

Subscription Snapshot! (Thoughts and Trends)

Historically, a traditional retail shopper learns about a product, considers whether to buy it, decides to do so, and goes to a shop to get it. If he likes the product, he might decide to return to the store to buy it. Data geeks in corporate cubicles everywhere run spreadsheets and formulas attempting to dive deeper into customer behaviour – seeking analytics to better understand how to get a buyer to make a repeat purchase. As retailers claw at one another in an attempt to gain more market share, and perhaps a repeat purchaser in the process, a new phase of e-tailing is on the rise.  Progressive retailers are betting on a future in which shopping for any product or service becomes fully automated.

What do Netflix, Spotify, Amazon, IPSY and Dollar Shave Club have in common? They are all pioneers in this changing world of electronic and new age digital commerce, where customers are not just one-time buyers; they are subscribers.

Netflix is the global leader in the world of video-on-demand, with over 125 million members across 190 countries. All of its customers are loyal, recurring revenue generating, subscribers. 

An Amazon Prime membership, which includes unlimited free 2 day shipping on over 100 million items, access to unlimited instant streaming of movies and TV episodes, Alexa voice shopping, Amazon Fresh, and more, is helping Amazon crush retail competition.  And, with membership count at over 100 million, Amazon Prime seems unstoppable.

While Pandora, Apple Music, and Google Play make some waves, Spotify sits on top of the music streaming industry today. The company has over 160 million active monthly users, about half of which are paid subscribers; double that of rival Apple Music. 

IPSY is widely considered to be one of the biggest start-up subscription success stories in the past decade. The glamour-bag cosmetics company has over 3 million loyal subscribers, and was recently valued at $500 million by Forbes.

The Dollar Shave Club is propelling the men’s grooming space to new heights, putting legacy firms like Gillette and Schick on their heels. The company grew its subscriber count exponentially in just 4 years before selling to Unilever for $1 Billion in 2016.

The bet on subscription has paid off for not just the aforementioned, but other major players as well. The likes of Salesforce, Blue Apron, Hulu, Stitch Fix, Birchbox, Starbucks, Sephora, Barkbox, DropBox, Skype, The Honest Company, and others have all grown revenue through subscriptions. 

The trend is looking up. The subscription e-commerce market alone has grown more than 100% a year over the past five years according to McKinsey & Company. The strong growth has attracted more established consumer brands and retailers. P&G's Gillette on Demand, Sephora's Play!, and Walmart's Beauty Box show a defensive response to a fast moving space in the hopes they can keep up!  In addition, there is some good M&A activity—in particular, Unilever’s $1 billion acquisition of Dollar Shave Club (2016), Nordstrom’s $350 million acquisition of Trunk Club (2014) and Albertsons $200 million-plus deal for meal-kit company Plated.

The future outlook for the next phase of subscription is inching closer, thanks to Amazon. While meal kit subscriptions like Blue Apron and Chef's Plate seem novel, Amazon's ability to leverage Prime and its distribution channels (thanks to its recent acquisition of Whole Foods) will force many of these meal box fighters out of the ring. Mix in a little Alexa with some Amazon Fresh, and we’re heading for a time when all groceries will be replenished by the touch of a smartphone button:  “Yes Alexa, you’re right – I’m out of broccoli, eggs, and 2% milk. Send them ASAP.” 

The Netflix Juggernaut

Netflix is a juggernaut and the most likely candidate to join the Big 4 (Amazon, Facebook, Google, Apple) as a true global dominator with stratospheric valuations  – its niche: entertainment. When consumers think streaming, they think Netflix – not Hulu, not HBO, and as of yet, not Amazon (holding breath here). Original content like House of Cards, Orange is the new Black, and The Crown has helped the company keep a firm lead as the world's best Internet TV provider. The lethal paid wall subscription model comes equipped with the perfect combination of solid MRR, low attrition, and loyalty from customers.

How loyal? Millennials spend more time watching Netflix than they do all of cable TV combined. Netflix now has nearly 118 million streaming subscribers globally, adding 8.3 million subscribers last quarter alone. About 55 million of those are U.S. subscribers, but international growth rates are up 11% with subscriber numbers surpassing domestic for the first time in the company's existence. Churn rates are low and the stock price has done nothing but climb since the early 2000's when it IPO'd at $15 USD. 

If we press rewind, back in 2000, Netflix was a relatively small upstart, with 300,000 subscribers opting for movies by mail and slow delivery times. Profit numbers were absent, and operational issues gave rise to concern from analysts covering the company. So, Netflix founder Reed Hastings flew to Dallas to propose a partnership with Blockbuster for $50 million, whereby Blockbuster would acquire the DVD subscription mail order company and represent their brand in stores. Blockbuster balked at the offering, and sent Hastings and his team back to California with a bag of insecurity around future positioning. Today, Hastings’ failed attempt at a deal is nothing but a strike of good fortune, as the streaming service carrying a market cap of $140 Billion has grown into the entertainment operating system of our lives. 

In an article published by INC.com in 2005, Hastings' vision for the future was to reach 20+ million subscribers, and become a company like HBO - one that transforms the entertainment industry. Producers and directors would be able to find the right audience, and Netflix would be the gateway for changing the experience of helping people find movies they love. Mission accomplished! And, while Amazon now owns RETAIL (sorry Walmart), Netflix has become the cornerstone of the ENTERTAINMENT industry as loved ones get together to “Netflix and chill”. 

Affiliate Marketing – Yesterday and Today  

We often get questions from clients regarding affiliate marketing. Here's some insight for those interested in exploring AM as a possible solution for their online campaigns.

Affiliate marketing has been an online force since around 1994. One of the early innovators of affiliate marketing is Amazon.com, who in 1996 launched its associate program permitting associates to place banners or text links on their own sites for individual books, or to link directly to the Amazon home page. While it was not the first affiliate marketing program, it was one of the most successful and served as a good model.

In the digital age, affiliate marketing is a method of promoting a brand’s products or services across the Internet through a network of online independent marketing publishers (also known as “affiliates”). Affiliate marketers are compensated for helping a business achieve certain marketing or sales objectives. The overarching value to the advertiser is that affiliate marketers can offer a pay-per-performance compensation model, meaning the merchant only pays for a desired result. More specifically, advertisers can compensate an affiliate, or an affiliate network on a cost per acquisition/sales (CPA, sometimes known as CPS) basis. Conversions are generally tracked using a link with a personally identifying code, or SUB-ID embedded, enabling the advertiser to track where conversions originate.

The affiliate channel is regarded by many marketers as the predominant direct response channel across all forms of media for sales generation (Hewiston). Moreover, as we track on through time, there are significantly more requirements that advertisers must meet to execute a successful online marketing strategy - those requirements are becoming excessively burdensome for the merchant to manage in-house. Therefore, an increasing number of merchants are seeking alternative options through outsourced affiliate program management, provided by affiliate networks. Industry veterans include names such as CJ Affiliate, ShareASale and Canadian based, Max Bounty.  As the affiliate marketing industry continues to mature, there are emerging opportunities in the marketplace for networks to deliver differentiation to their clients in the form of quality, better customer service and of course, greater transparency.

CPA in the New Age

Anecdotally, it seems smaller advertisers routinely pursue affiliate marketing partners who can execute their acquisition mandates on a pay per sale basis. Although this worked increasingly well for all parties between 2007-2010 when CPA campaigns were booming, affiliate earnings per click were high, shifts in payment terms, media costs, regulations, and publisher expectations have put pressures on both networks and publishers. Smaller networks that couldn’t innovate with the industry shifts fell to the sidelines, while only the larger names survived; this consolidation of the masses was a good thing for the health of the industry on the whole, but did reduce the total number of CPA/ CPS networks. 

Growth in the industry does remain strong, increasing at a compound annual growth rate of approximately 16%. But, we do see continuing amalgamation of network players.  In 2017, AWIN acquired US-based ShareASale, presenting a new, unified AWIN brand, which brought together Affiliate Window and Zanox. Affiliate Crossing merged with Nutryst. There's been a long list so we won't bore you further. 

While good CPA networks may be tougher to find and possibly more expensive, more fully integrated value-added solutions are available on a cost per click and/or CPM basis. Robust reporting tools, and analytics have improved dramatically allowing advertisers to take additional risk on a CPM basis, since they’re quickly able to determine a media campaign's potential. More importantly, advertisers can identify marketing sources and affiliates who are effectively producing the desired outcomes as mentioned earlier (ex: conversion tracking via SUB-ID).  The optimization of marketing metrics, profit percentages per transaction and other KPI’s are now readily available to an advertiser.