The send-a-box boomJuly 9, 2013: 3:26 PM ET
A slew of young startups have embraced a subscription model wherein customers receive a box of items at their doorstep -- but can the model have lasting success?
By Andres Vaamonde, reporter
FORTUNE -- Maybe the best things do come in small packages. In an age when consumers can get nearly everything they want online, a number of small new companies are gaining traction not by sending consumers precisely what they've ordered, but by surprising them with curated boxes.
Birchbox, Merchbox, NatureBox, and BarkBox all make use of the marvel of surprise. Even without "box" in the name, Quarterly.co and, to an extent, Dollar Shave Club, do the same.
One part of the process is similar to how the big mainstream e-tailers function: People can place orders and see precisely what they'll get and when. But in contrast to an Amazon (AMZN) or eBay (EBAY), with these companies -- call them "send-a-box" services -- signing up is, in most cases, the full extent of the customer's participation in selecting products. Then they receive a package in the mail every month or few months (varying by company) filled with anything from little-known vinyl records (Merchbox) to makeup samples (Birchbox) to dog treats and toys (BarkBox).
The founders of these businesses are hoping that the pure joy of getting a package will sustain growth. As Mitch Lowe, a Netflix co-founder and CEO of Quarterly.co -- which employs influential people such as musician Pharrell Williams and author Timothy Ferriss to curate collections of their favorite things (influencers are offered a percentage of revenue) and ships them to subscribers -- tells Fortune, "When I first saw people receiving [Netflix's] little red boxes in the mail, the looks on their faces reminded me of Christmas."
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The success of the send-a-box model is somewhat hard to calculate. Social media reach tends to be ambiguous, and sales are mostly undisclosed and insufficient due to only a few months of operational activity. Their subscriber growth, however, is compelling. Quarterly.co, which launched in November of 2011, says it doubles in size every six months. NatureBox's subscriber base has grown by 50-100% every month since it launched in January 2012. BarkBox has gone from 1,500 to 55,000 subscribers in one year. And after launching in March 2012, Dollar Shave Club -- which sends out razorblades, shaving cream and butt wipes -- already maintains upwards of 250,000 subscribers.
Boxes for your dog, boxes for your face, boxes of music, boxes of makeup -- in the early stages of this space, it almost seems anyone can target a niche and succeed. That begs the question of what is fueling the growth in the send-a-box model, and whether it can stay fresh as copycats begin to appear. Answers vary, even among the men and women at the helms of these companies.
Gautam Gupta, co-founder and CEO of NatureBox, believes the explosion in the space is reflective of a shifting web market. "Whereas the first wave of e-commerce was very much centered on products you could buy anywhere, with sites like Amazon," he says, "I realized the second wave of e-commerce would be centered on products you couldn't buy elsewhere."
While NatureBox has found a niche in a distinctive market (it sends organic, healthy snack foods) not all of these businesses target a niche. Some take pride, in fact, in having jumped into a crowded, even utilitarian market. Mike Dubin, founder and CEO of Dollar Shave Club, tells Fortune that while the other companies that share his model might sell products that are "nice to have," Dollar Shave Club is successful because its product is "essential." (Most men need to shave.)
Though they go to great lengths to differentiate themselves, send-a-box companies have strikingly similar skeletons: They all launched in 2011 or 2012, required little or no initial VC funding, and carved out a niche in as-yet uncompetitive markets.
The entrepreneurs behind these businesses hope that they are so far only scratching the surface of their potential. Mitch Lowe of Quarterly.co aims to have "perfected our infrastructure" by August and then broaden the contributor list to include politicians, athletes, chefs, and actors. Merchbox, which is currently music-oriented, plans to expand to all genres of entertainment. Of course, much like Amazon getting into publishing or selling groceries, or Airbnb's stated goal of venturing into renting out more than just rooms, almost all web marketplaces want to expand into multiple verticals. But attempting too much has been the death of many a focused idea.
Perhaps the most intriguing aspect of these companies is to dismantle the system that is in part responsible for their success. Many are eager to distance themselves from the subscription model. As Dubin stresses, "We don't like the word 'subscription,' we like the word 'membership.' The word 'membership' is warm, whereas 'subscription' is much colder. Membership feels like you're on the inside." The concept of membership is Dollar Shave Club's bread and butter -- the first package a member receives contains a notecard: "Welcome to the club."
Matt Meeker, founder and CEO of BarkBox, says, "It's hard to make a big successful business out of the monthly subscriptions model, so we see it more as a way of accumulating customers that will then lead into other business opportunities." It's unclear what other opportunities there would be for a business whose members joined in order to be surprised on a regular basis.
What these companies are really attempting to do is bridge the gap between analog and digital. There's an inherent irony in utilizing an e-commerce platform to send consumers a physical, tangible box of "stuff" -- especially with the more whimsical offerings like handmade items from Quarterly.co or vinyl from Merchbox. The send-a-box companies promise a vague sense of counterculture that people crave in the digital era. Though Amazon can ship the same products to thousands of homes across the country, when a subscriber receives a Merchbox with music tailored to her interests, or a Quarterly.co package with a personalized letter, she feels a connection.
But as these send-a-box businesses grow, the coat of intimacy may melt to reveal one of expensive advertising and weak profit margins. The costs of packaging and shipping can be high and are hardly offset by the enticing low fees for subscription. It may be tough for send-a-box services to innovate so frequently that they avoid an expiration date.