With 2 Million Captive Shoppers, FabFitFun Sets Its Sights On A Future In E-Commerce

Four times a year, Valerie McKellar waits near her front door, peeking through the blinds and double-checking the FedEx mobile app for status updates on the delivery of her FabFitFun subscription box. When it’s finally dropped off on her porch, she heads to her living room table, one big enough to host each of the products she carefully opens one at a time: A Vera Bradley CompactOrganizer. An Alice + Oliva duffle bag. A Short Stories LED indoor planter.

“It’s just so exciting,” McKellar says. “A lot of people relate it to Christmas and that's very much true. It feels like it's this great gift that I've given myself.”

The financial analyst is one of more than 2 million members paying $50 a box per quarter (or $180 pre-paid for all four boxes in a year), to get $300 to $400 worth of full-sized products from over 1,000 different brands, from ModCloth to MAC Cosmetics to Vince Camuto, shipped to their door. FabFitFun takes the margin hit on the pre-selected stuff, which customers cannot return, hoping it can drive them back to the site to buy other discounted merchandise, which brands provide at below cost.

This kind of captive audience—hooked even more deeply during the pandemic lockdown—has made booming business for Los Angeles-based FabFitFun, which last year saw revenue jump 200% to $600 million. Now one of the leading subscription box players in the country, the company is working to pivot away from what has been a retail fad for years that has boomed during the pandemic. 

Ipsy, which sells a monthly subscription box for cosmetics for $12 a month, generated more than triple the revenue between mid-March and July of last year compared with the two and a half months that preceded it, according to DigitalCommerce360. Hunt A Killer, which sells a murder mystery subscription box, nearly doubled revenue last year to $50 million. Stitch Fix, which offers a clothing subscription box and is the largest player with revenue of $1.7 billion for 2020 and a market cap of $5.6 billion, said sales rose 11% in the six months ending January 30, 2021. Its stock fell more than 20% after its latest earnings report, however, when its results came in lower than expectations.

But as Covid restrictions relax and consumers start spending less time at home, FabFitFun is moving fast to go beyond what could quickly slip back into fad mode. Today, the company announced its latest and most definitive pivot toward e-commerce, which started six years ago: This summer, members will have the option to either choose every item in their box or forgo it completely for credit in the amount of their membership to shop FabFitFun’s various seasonal e-commerce sales. 

“Over the next six to 12 months, we’re going to evolve into this concept of a shopping membership, and really transform from the original idea, where we started a subscription box in 2013 and added e-commerce in 2015. We made tons of technology investments to be able to do this kind of bundling and customization at scale,” cofounder Michael Broukhim says.

The reason for the push is clear. The subscription box industry as a whole has been plagued by “ridiculously high churn,” says Forrester retail analyst Sucharita Kodali, who sees the model’s value eroding unless companies can find a way to keep their customer acquisition costs low, she adds. 

In FabFitFun’s case, which wouldn’t disclose retention rates, the solution rests on squeezing more out of its current members instead of chasing new ones. 

Broukhim says FabFitFun has doubled the number of subscribers it has since the company last disclosed financials in 2018, and says the business is both EBITDA and cash flow positive. It was last valued at just under $1 billion after a Series A funding round in January 2019. Most of the company’s sales come from those recurring subscriptions, but it also generates revenue from running sponsored content on its website and purchases that subscribers make online.

The latter is where FabFitFun has seen growth—and underlines the company’s strategy. According to Broukhim, its e-commerce segment has grown 50% year-over-year (though he won’t say how much that is) as more subscribers come to the site to make purchases in between deliveries, often drawn to special sale prices only available to them. One iteration, according to McKellar, is the company’s Edit Sales, open to members only for a limited number of days, with the promise of discounts of up to 70% off and automatic checkout at the end of the sale, leaving shoppers who forget to modify their shopping carts before the end of the sale with extra charges. 

The model, despite the criticism around it, is a successful one, according to GlobalData retail analyst Neil Saunders, who credits the boost to the “little surprises” the quarterly shipments offer shoppers.

“They’re something that provide a nice set of products for consumers at a time when they can't get out to stores and discover and look at new things,” Saunders says.

For McKellar, though, that’s just one part of the appeal. She’s been a member for three years, and what’s really kept her (and others) coming back is a sense of belonging. Members have access to an exclusive online forum and message boards.

“(The subscription) comes with this entire community,” McKellar says. “I just started realizing that it was far more than a box.”

FabFitFun is hoping its new members feel the same. Count loyalty a much more consistent revenue stream.