The State of the US Direct-to-Consumer Subscriptions Industry Report is brought to you in collaboration with Rodeo. This report unpacks insights specific to the market, consumer, and technologies related to DTC subscriptions, estimates the TAM, and wraps up with forward-looking thoughts on the industry.

Notable Highlights

Subscription businesses are booming. The subscription economy has grown 5-8x faster than traditional businesses in the last decade. Moreover, the latest research shows that subscription businesses' QoQ revenue growth rate far outpaces that of the S&P 500 (21% vs 3%).

Today, there's a DTC subscription for literally everything! The pandemic in 2020 was primarily responsible for this massive proliferation of subscriptions.

Brands can quickly and painlessly set up a DTC website on Shopify, enable recurring purchases by integrating with third-party apps such as ReCharge or Rodeo, acquire customers through a mix of affiliate, influencer and referral marketing, and retain them through a combination of personalized customer marketing, flexible purchasing options, and/or membership perks.

On the consumer side, the Millennial and Gen-Z cohorts that have entered the working class in the last decade, particularly the affluent, urban clique, extensively value automated purchasing. They frequently discuss their interests on social media and other community forums.

Clarifying the term ‘DTC subscriptions’

The term is relatively new in PipeCandy and Rodeo's collective opinion and warrants scoping.
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‘DTC’ was until recently synonymous with ‘DNVB’ or Digitally Native Vertical Brands which refers to those brands that are born online and sell and ship their own products online. The meaning of DTC has since evolved. It is no longer limited to DNVBs.

A DTC eCommerce brand (not limited to DNVBs) that offers subscriptions is called a DTC subscription brand.

DTC subscriptions exist across different types of goods & services, but the scope of this 'State of the Nation' report is limited to physical goods, specifically boxes and memberships.

DTC subscriptions were mainly off the map until 2010. It wasn't until the birth of Birchbox that subscriptions became mainstream. In the last decade, several similar brands, such as Ipsy, Dollar Shave Club, Blue Apron, etc., have emerged, and venture capitalists have invested over $4 billion in such businesses.

The box subscription segment has the largest market share by GMV in the US, but memberships are fast-growing and already dominate the global DTC subscriptions market.

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Types of DTC subscriptions

DTC eCommerce subscriptions can broadly be classified into three classes: Replenishment, Curation and Membership.

Subscriptions and memberships are typically offered by three types of businesses:

• Pure-play subscription businesses whose business models are designed for recurring purchases.
• DTC brands offer subscriptions in addition to one-time purchases.
• Retailers, wholesalers, and marketplaces offer subscriptions as adjuncts to their existing retail model of one-time purchases.

Market size & TAM

Based on recent research by Univdatos, the global DTC subscriptions market was worth an estimated $58.3 billion as of 2021, growing at a CAGR of 68%.

At $22.5 billion, the subscription box is the largest segment, with a market share of 39%, growing at a CAGR of 20% YoY. The remaining market share could be attributed to membership subscriptions, which happens to be the fastest-growing segment within DTC subscriptions, as observed by Rodeo.

The US remains the most significant market globally with a 47% share of DTC subscriptions, followed by Europe (21%) and Mainland China (14%)

Research by digitalcommerce360 shows the US DTC subscriptions market was estimated to be worth $27.6 billion in 2021. At least $15 billion was attributed to subscription boxes, according to SUBTA, the largest online subscription community.

According to SUBTA, 5,000 DTC subscription boxes were selling physical goods in the US in 2018. However, PipeCandy estimates that the total number of DTC subscription companies today, including boxes, is around 27,000.

COVID-19 Impact

The monthly subscription box segment saw the most significant increase in GMV (among all other popular subscriptions such as OTT/Streaming, Software, and Media) during COVID with a YoY gain of 80%. However, as the economy opens up and the market normalizes, as we saw in the TAM section earlier, this growth is expected to drop to 20%-30% in 2021-2022.

According to Recurly, during the first week of the shelter-in-place restrictions (March 16-22, 2020), subscription boxes saw a decrease in new subscribers by 6% as compared to the pre-covid phase. After that, there was a steady increase at the end of March and early April. The rate of new subscribers peaked in mid-April, and lasted roughly until mid-May, showing an increase of 108%-148%. By the end of May, there was an overall decrease in net new subscriber growth, but it was still at least 25% higher than the pre-covid phase.

Of over 1,000 shoppers surveyed, 1 in 5 had purchased a subscription box to have products handy during the pandemic. The survey also showed the most popular subscriptions were HelloFresh (21%), BarkBox (20%), Blue Apron (19%), and Dollar Shave Club (18%).

What’s behind the boom?

The developments that primarily drive the growth of DTC subscriptions – are Shopify & the young urbanite.

Shopify

As we saw earlier in this report, the growth of Shopify is a factor in and of itself. Shopify has built considerable scale through the pandemic, with its customer base growing by over 200% between March 2020 and January 2022. Its GMV for 2021 crossed $175 billion, making it almost half as big as Amazon's marketplace.

PipeCandy's TAM estimates show that Shopify is home to 27% of all eCommerce companies and 50% of all DTC brands.

Population

Millennials and Gen-Zers together make up 42% of the US population today. They inherently value automated purchasing for its convenience, its ability to minimize store visits, and the opportunity to access perks like community and discounts that may come with a membership.

The Consumer

The typical consumer persona of DTC subscriptions is that of an urban woman, aged between 25 to 44 years, drawing an income between $50,000 and $100,000, and living on the East coast. She is also more likely to be an active Amazon shopper and reader of product reviews.

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Why subscriptions?

Consumers inherently do not want Subscriptions. Instead, they want to be able to purchase a product when they want and where they want and are willing to pay the price for an arrangement that facilitates that transaction and provides additional benefits. The Subscription model is that arrangement. However, there are some inherent reasons why consumers value automated purchasing over repeated one-time purchases.

Why consumers subscribe directly to brands?

McKinsey conducted a survey where it asked DTC subscribers what made them initiate, continue and cancel their subscriptions. The respondents were provided with a choice of answers, and the responses were documented for all three subscription segments outlined earlier in the report. Download the full report to access the survey answers to the following questions:

1. Why do consumers initiate a subscription?
2. Why do consumers stick with a subscription?
3. Why do consumers cancel?

Opportunities

With overall subscribers growing at an extremely high rate and LTV at a slower pace, it's clear that new shoppers are trying out subscriptions for the first time. Below are a few examples of successful brands to improve subscriber retention.

1. Strategic flexibility

Customers are increasingly seeking flexibility in purchasing their products.

However, merchants must offer strategic flexibility—providing customers with enough options to meet them where they are.

Those merchants that saw their AOV increase through Covid-19 also started providing customers with the opportunity to pause orders since their wallets tightened due to unemployment.

2. Integrations

The most successful merchants leverage integrations to better communicate, plan, analyze, and provide for their subscribers.

A sophisticated tech stack allows merchants to serve customers better, improve operational efficiency and enhance the overall experience.

Some of the standard integrations that are used by DTC Subscription brands include:

• Customer engagement
• Personalization
• Churn prevention
• Fraud prevention
• Operational success

3. Brand differentiation

A company should clearly define it's 'why' – something more than just the product, the purpose for which it exists. This could be a cause such as sustainability, diversity, or charity - that will mobilize its customers.

4. Rewards

Loyalty can also come in the form of community engagement and rewards.

For example, Black Rifle Coffee, run by veterans, ships free coins to long-time customers that create a sense of belonging and exclusivity.

Risks

Research projects that by 2023, as many as 75% of direct-to-consumer brands will have a subscription-based offering. However, while 75% of DTC brands may have a subscription model, some risks call their sustainability into question.

1. CAC

Just 55% of customers who consider a subscription ultimately subscribe. The cost of acquiring customers is at an all-time high. 3 years ago, digital CPMs were a mere $2. Today, it costs $30 or more, depending on your advertising objectives. That is 17.5x more expensive!

2. Cancellation & Churn

More than 33% of consumers who sign up for a subscription service cancel in less than three months. Over 50% cancel within six months. Cancellations are reversible, while churn is not.

A churn is when a customer leaves your site permanently. It's 5–25% more expensive to acquire new customers than to retain existing ones.

According to CrateJoy, a business:

• is doing great if the monthly churn rate is under 7%,
• good if between 8 and 15%,
• 'slightly under the norm' if between 15 and 20%, and unsustainable if over 20%.

Subscription boxes have the highest monthly churn rates at 10.5%, 90% of which is voluntary churn. Within subscription boxes itself, the curation segment has the highest churn levels.

3. Subscription Fatigue

According to NordPass, the average consumer's passwords grew from 75 to 100 in 2020. Now that is a significant enough number to induce fatigue; it increased by 25% in one year.

A study by Westmonroe on the status of subscription spending shows that consumer spending on subscriptions increased by 15% between 2018 and 2021, yet consumers underestimated their spending by 340%! In addition, a 2021 study by JP Morgan on consumer habits related to recurring payments revealed that 60% of respondents have forgotten about at least one recurring payment.

4. Funding

While the early 2010s saw a massive rise in the business of selling subscription boxes, PitchBook data suggests that venture capital funding into DTC Subscriptions may have hit its peak. There were a record-high 70 VC deals in subscription box companies in 2016, but 2017 and 2018 recorded only 56 and 50, respectively—numbers last seen in 2013 and before.

While the total funding amount for subscription boxes in 2019 topped at $426 million, it remained well below the peak seen in 2015, which indicates that the markets may have tightened. It's more complicated than before to acquire capital.

Memberships, NFTs and Co-ops

So, the idea of subscription revenue as smooth revenue can be appealing. But, truthfully, there are only so many monthly subscriptions a person needs, and most people don't think about desiring a physical 'subscription'. Instead, what they want is a product when they need it.

Subscriptions have also extended into web 3.0. For example, the first blockchain-based coffee membership was rolled out in January 2022 between Yes Plz, a craft coffee subscription brand and the Bored Breakfast Club NFT project.

Collaborative commerce could be another path that brands may veer towards. For example, some companies pay 2-4 months' revenue upfront to acquire a customer (given how expensive CAC is). They need the following month of renewals to actually break- even or make a profit on that customer.

Perhaps due to this pattern, we're beginning to see shared partnership models such as co-op commerce emerge, which allows multiple brands to partner together, tap into the same customer base, and scale together while moderating subscriber acquisition costs.