This post originally appeared in my newsletter Digital Culture where I discuss the evolution of commerce. 

On Monday, Fab, the biggest thing that happened to e-commerce since Zappos, will unveil its 3^rd pivot, a shift in business model, in 24 months of existence. In parallel, there are growing rumors that they are raising another round of funding at a $1Bn valuation. 

Fab’s foundation and growth is one of those fascinating stories that the Internet has made possible. They originally started as a social network for gay men known as Fabulis before launching a flash sales website focused on design. Since the launch of their flash sales website, they have progressively evolved from a drop ship model to an inventory model becoming a demand fulfillment website just like Amazon. In the meantime, they acquired 12Mio members across 26 countries. In 2012, their sales grew by 500% and they now generate more than $200,000 per day. They are selling a product every 7 seconds. Two years ago, Fab had just launched.

Now in three days, they will reveal the next iteration to their business model with the objective to get one step closer to “becoming the world’s alternative to Walmart & Amazon” according to co-founder Bradford Shellhammer. While Fab CEO, Jason Goldberg, says that there will be 5 major announcements, it is widely expected that Fab will announce that they are going to start designing and manufacturing in-house a large of their products. Basically, they will become a vertically-integrated retailer. 

From both a strategic and economic perspective, this move would make a lot of sense. Strategically, online retailers know that the best way to compete with Amazon’s scale is to sell products they don’t have. Economically, vertically integrated online retailers enjoy much healthier margin than flash sales websites. Moreover, by taking control over their sourcing, they can also make sure that they will continue to surprise and delight their community with quirky products.

There are of course multiples factors that explain how Fab managed to build such a fast-growing and flexible business in less than 24 months. A large part of their success is due to an incredible ability to execute fast and well. They also made the wise decision to not compete on prices but to focus on sourcing unique products. However, I think that Fab’s success is firstly a great reminder of the value of a brand in today’s flat e-commerce world. Before they even launched their website, the founders started building a brand that was aimed at being bigger than the products they would sell. Many start-ups wait to have a business before they build a brand. Fab’s founders did the opposite: they used the brand to build the business. Thanks to their brand, independent designers were happy to work with them and it helped Fab to source exclusive products. They also collaborated with the Andy Warhol foundation to sell a version of the Brillo box as a pouf. Designing their own products and selling them under the Fab label is the natural next step.

A few weeks ago, another event acted as a reminder of the value of a brand: On April 3^rd, Moleskine, the famous Italian maker of cardboard-bound notebooks made its debut on the Milan stock exchange at a valuation whose multiples can easily compare those of luxury brands. Moleskine bankers justified the high valuation with the high margins and…the brand. As Quartz reported, Moleskine actually acknowledges itself in its IPO prospectus that they sell more than notebooks: they sell an identity and culture.

Building a brand is probably one of the strongest assets a company can have. As Seth Godin explains: “Do work and get paid once. Build an asset and get paid for as long as it lasts”.This is exactly what Fab did from day 1, they didn’t just “do the work” of a flash sales website (selling goods at a high discount). They built an asset and it looks like on Monday they will start to capitalize on this asset more aggressively. 

Smile Fab team, you seem designed to succeed*

*Paraphrasing Fab CEO

Every once in a while, a new business idea gets copied and replicated into new verticals everywhere. A few years ago it was Groupon and the promise of daily deals website. Now subscription commerce is all the rage.

Subscription commerce is a twist on the traditional ecommerce model: instead of paying for an item when you need it or want it, you pay a periodic fee (typically monthly) to get a box of goods delivered right to your home. Today there is a subscription box for literally everything:cosmetics, shoes, condoms, coffees, razors, clothes, pet goodies, flowers, etc. Is subscription the future of online retail or just a fad?

The subscription business model is of course not new. As a kid, many of us subscribed to magazines and we remember the excitement of receiving something new every week or month. What is new here is the type of goods that those companies want us to subscribe to. The growing popularity of the subscription model has been very much in line with the digitization of goods such as books, music and movies, etc. As those goods became digital and moved to “the cloud”, accessing them has become more important than owning them and therefore a subscription makes sense. As investor Fred Wilson explained in a blog post, over the last two decades, the subscription business model has been adopted in other industries like software and content.  

In comparison, the consumption of tangible goods like the ones that are delivered in a box has not really changed. Therefore, the sustainability of the subscription business model to sell physical products has yet to be proven.

Describing its startup as a “Netflix or Spotify for cosmetics” might be a catchy elevator pitch but it doesn’t tell the full story.

The challenges of selling tangible goods through a subscription model

It’s widely recognized that the number one rule for a successful subscription business is to have a low churn rate (= number of people who cancel their subscription). In other words your customers have to commit to your product/service for a very long time. The best way to achieve this is to develop a strong value proposition as well as a powerful brand. 

Value proposition

As Kevin Kelly explained in one of his visionary post, subscription is a bit like renting: you’re paying a fee for something you don’t want to own. On Spotify, you pay a subscription because you want to access your music immediately whenever you want, wherever you are.

In the case of subscription commerce, a consumer is paying a monthly fee to receive (and own) tangible goods. Every month corresponds to a new purchasing decision and the objective of the subscription is to have the pain once (when you subscribe) and then to enjoy the product on a regular basis. In order to prevent the customer from questioning the value of the product or service every month, you need to keep customer satisfaction high. That’s where it becomes interesting to make a distinction between two types of boxes:

• The curated box: help the customer to discover something new (it can involve the use of sampling). Example: Birchbox = hand-picked beauty samples for $10/month
• The convenient box: deliver usable goods that are consumed on a regular basis. Example: Dollar Shave Club = quality blades sent to your door for $1/month

Discovery is great for the consumer but is difficult to satisfy in the long run; as quality fluctuates, people can get frustrated and then unsubscribe. People who subscribe to a box for convenience are easier to satisfy because they know what they will get.

Perceived consumer value

What helped software and digital content companies like Dropbox and Netflix to scale is the nature of their product. They are selling non-subtractable goods, which means that one customer using the service does not exclude another customer and at scale the marginal cost becomes close to zero. As a result, for a fixed amount, these companies often offer an unlimited use of their service. In comparison, tangible goods are by nature rival goods; the consumption by one customer prevents the consumption by another. It seems obvious but each customer needs to receive his or her own box and each box has the same cost. Moreover since the box is delivered physically, the shipping fees increase the price of the box compared to what the customer would pay at the retail store. Birchbox has solved this by going into a vertical where sampling is a common practice. They probably don’t pay for the content of their box because the brands are happy to give them for free.

Customer acquisition

Customer acquisition is one the biggest (if not the biggest) challenge of web startups and customer acquisition costs can make or break a startup. Subscription commerce companies are no exception and since most of them are in a low margin – high volume business, they need a very large customer base before turning a profit. Leveraging social media and producing great content is definitely the route to go but not everyone will be able to replicate the success of Dollar Shave Club. Their (fantastic) launch video went viral in a couple of hours, crashed their server but they eventually got 12,000 orders in their first two days.

The subscription model in itself is also a great customer retention tool. Delivering a box to your customer on a monthly basis is a fantastic way to keep consumer mindshare.  

Subscription based business are attractive to both entrepreneurs and investors because when successful they offer recurring revenues and predictability. Dropbox, Mailchimp, Netflix , are all great examples of companies that have successfully built a subscription business. In the case of online retailers, the subscription model can help those with a compelling value proposition and a great brand to grow by attracting and retaining customers.  In the long term, however, subscription commerce is likely to be more a marketing technique than a scalable business mode

This is a guest post by James McBennett, co-founder and CEO of Fabsie, a London based e-commerce startup allowing anyone to easily buy bespoke ready-to-assemble furniture. Follow him @mcbennett Fabsie has launched ‘This Stool Rocks’ on Kickstarter bringing digital to physical production to furniture, please back them!

Digital to Physical (d2p) production is any set of machines that are controlled by digital files to assemble matter. Their aim is to take on manufacturing, disrupting several concepts that were cornerstone to twentieth century production. Most of these machines are based on Computer Numerical Control and were pioneered at MIT in the early fifties. An extrusion device whose position is controlled by a computer is known as a 3D Printer. A laser whose position is controlled by a computer is known as a laser cutter and a router whose position is controlled by a computer is known as a CNC router. Each machine works with one material such as wood, metal, plastic or resin. Any tool can be placed in the hand of a robotic arm turning a twentieth century tool that performs a single routine into a twenty-first century tool that performs any routine.

The various types of computer numerically controlled tools are as old as the computer, two challenges held back their development. The first was the cost of the machines that has dropped enormously from prices between $100,000- $500,000 per machine down to $1,000 - $50,000. Secondly, computer drawing skills were difficult to find, restricted to top-tier university graduates with access to expensive software. Software has dropped in price, most universities around the world are teaching students digitally, making digital skills widely accessible. As the visionary system comes closer to reality, new questions are being asked and remain to be solved. “Who is responsible in the case of an accident?” “What happens to quality marks?” “How do I protect my design data from spreading?” or alternatively “How do I gain viral growth to spread my design data?”

Digital Wants to be Distributed

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It’s the good old story of a technology being made available - like blogging, turning into a service and adapted by companies. But because technology always moves towards zero costs it will eventually cross over to become available as a consumer service, first for the early adopters and then for the mainstream. And when consumers and companies play with the same tools, in the world of the social media, the best content and the best service will win. Which is a perfect segway over to the state of e-commerce today.

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Steve Jobs once famously said that “computers were the equivalent of bicycles for our minds”. Over the last few years, with the rise of the iPhone and the iPad, smartphones and tablets became our new bicycles. Now, with Google Glass targeting a consumer release by the end of 2013 and growing rumours of Apple working on an iWatch, it looks like a pair of glass and a watch will replace all this. Wearable computing has been dubbed the next big thing in consumer tech and some are already predicting the death of smartphones.

The promise of wearable computing is to take technology out the way and “to save us from ourselves”. While tech gadgets have enhanced our life in many ways, the smartphone in our pocket is also a constant source of distraction and can drive awkward social behaviors (who’s never checked his/her emails while at a dinner party?). At the latest TED conference on Wednesday, Sergey Brin said that “Google Glass will help you to fight the antisocial and emasculating habit of compulsive smartphone checking”. The ambition of Google is what computer scientists are calling ubiquitous computing - “the idea that computers will no longer be devices we turn on, but will be so integrated into our everyday environment that we can ask them to do things without ever lifting a finger” according to a NY times article. In others words, it’s when technology stops interfering in your life but is instead seamlessly integrated in it. If wearable computing devices deliver on such a promise, they could replace smartphones in the next decade. The new gadgets will replace the “old smartphones”.

But then comes a surprising truth: “technology is aging in reverse and thinking that the new is about to overcome the old is just an optical illusion”. These words are from Nassim Nicholas Taleb, the author of the Black Swan. In his new book, Antifragile, Taleb explains that for anything informational or cultural (technologies, ideas, books, etc), as opposed to physical, the old is likely to overcome the new. Think about the bible, the fact that it’s has been there for centuries can make you confident that it will still be here for another couple of centuries at least. If we stick to Taleb’s theory, Glass has actually a higher probability of failure than smartphones. The idea, however, is not to say that Google Glass will fail. After watching the mind-blowing video released last week by Google, it’s difficult not to have the feeling that a future, once only possible in sci-fi movies, has finally arrived. However dismissing the future of smartphones would be as dangerous as predicting the failure of Google Glass. Smartphones and tablets emerged as extensions of our computers. It’s very likely that smartwatches and Google Glass will also work as extensions of our smartphones and without them they could quickly become obsolete. 

It’s fashion week season and the biggest trend coming from the runway is not the color to look out for next winter season but the growing relationship between fashion and technology. This is not a new trend but over the last few years fashion and technology have merged at an accelerated pace. From livestreams to interactive smartphone photography, brands and designers are making their fashion shows more accessible.

Luxury fashion retailers are leading the way in digital innovation and among them Burberry has emerged as the most technology advanced. The iconic UK brand was one of the first brands to live-stream its fashion shows and while many of its competitors are progressively elaborating their online strategy, Burberry recently opened a new flagship store in London designed as a physical manifestation of their website. The store includes the world’s tallest retail screen, 550 hidden speakers and smart mirrors turning into screens when needed. This week, they announced a new concept, “Made to order with Smart Personalization”, allowing customers to order coats and accessories directly from the runway. While some argue that the impact of their digital strategy is yet to be seen on their top line, Burberry’s management is convinced that deeply embracing the digital age is the way forward. Technology offers many opportunities for fashion retailers: they can engage with their audience, tell stories and grow their brands through social media. They can also use the ever-increasing amount of data to get insights about their customers and can use those insights to learn what to produce. Finally, they can develop in-store technologies to create unique shopping experiences.

However the growing relationship between fashion and tech works both ways: technology companies are also getting closer to fashion brands. If purchasing an iPhone has become a fashion statement, not everyone is Apple. In a growing but competitive consumer tech market, fashion brands represent the opportunity for tech companies to add a new key dimension to their sophisticated gadgets: the cool factor. At NY fashion week in 2012, models walked the runway at Diane von Furstenberg show wearing Google Glass, the Internet-connected glasses that will show digital information right in front of your eyes. According to the NY times, Google is also collaborating with Warby Parker, a successful e-commerce startup selling trendy eyeglasses at affordable prices, to help them design fashionable frames

The reason why tech and fashion work so well together is because they are both highly aspirational products that are about self-expression. With the rise of wearable computing, described as the next big thing in consumer tech, we’ll be carrying new mobile devices other than smartphones. The style and design of those devices will be as important as their technology.

While some think that the future of fashion lies in a marriage with technology, the opposite could prove to be true as well.