Friday, April 21, 2017
Decoding The Secret To Success In Subscription Businesses: Georg Richter, OceanX
Story by Benjamin F. Kuo
What's the secret to creating a profitable, successful, physical subscription based business--and to do that at the scale of large, consumer product goods (CPGs) companies? Georg Richter, CEO and founder of OceanX (www.oceanx.com), tells us how he's applying what he learned in many years of experience in direct selling, most recently as President and COO at Guthy Renker, to help large CPGs decode how to succeed in creating their own, physical subscription businesses. xWe spoke with a few companies in the recurring revenue area space, ahead of the Recurring Revenue Conference (https://rrc2017.eventbrite.com), which we are helping to sponsor next week.
For those not familiar with OceanX, describe your business and background?
Georg Richter: OceanX is a technology platform, and a company, solely focused on physical subscriptions. I have a long history in physical subscriptions, and spent three decades working on only physical, recurring revenue companies, and have always been involved with some kind of physical products. The difference between a physical product and a digital product, is you might buy a digital product and not use it, but with a physical product, you're reminded that you have that product and if you don't like it, will send it back. For people who send things out, it's a chance to be in front of your customer. This business is all about big companies, CPGs and specialty manufacturers, who are hoping to conquer direct selling through subscriptions. We help them establish a direct selling channel. There's probably no board room at CPGs today which isn't looking at doing this, with retail going down, and thinking they ought to be looking at direct selling. We're working with some very large, extremely well known CPGs to help them establish that direct selling channel, and help them create a relationship with their customer. If you think about it today, everyone is selling through Amazon, but Amazon keeps all of that customer information. We're helping companies to instead build their own database of their customers, which they own.
How did you get into this?
Georg Richter: For the five years before I started the company in January of 2016, I was at Guthy Renker, which is one of the largest and biggest direct marketing companies in the world. I was there for five years, helping them to rebuild their technology from a legacy system, and use cloud-based technology. It was a logical system to start offering up cloud-based systems like those we had developed. At the end, it's all about systems, the knowledge behind the databases, and making smart investment decisions. So, we build that and started offering it to the market. We're only a year and three months old, and we're already running more than $1 billion through the platform, and onboarded about seventeen new clients this year. Our hands are full handling all of that growth. Direct selling is a very hot topic, and is enormously interesting to almost everybody. But, it's actually hard to do, and you hae to have the right expertise to do it right. If you try to patch something together from multiple vendors, you end up with lots of friction, and it's more likely you will lose money, and those operations are hardly profitable. We help people establish the direct selling channel properly, using technology.
It seems like Guthy Renker was very early to understanding recurring revenue and subscription businesses on the Internet, why is that?
Georg Richter: (laughs) Well, they actually figured it out 27 years ago. It's an interesting topic. I can tell you a story. Guther Renker invented two things. One, is the infomercial. That's not relevant here, though TV does work. But what they also did is figure out, is instead of talking about whether something is a good product, how it works, and how much it costs, they always have advertised how that product makes you feel. That's actually what we've done at OceanX. You need to understand what it means when a customer receives a product. It's all about the customer relationship, experience, and psychology. I use technology to do that, and what we do is teach the psychology of subscriptions. What that means, in today's world, is even though everyone is totally connected, through Facbeook and thousands of other types of social media, everyone now feels alone and disconnected. If a company gives you a selection of products which comes to your house, nicely packaged, and when you open it out you find what you want, and maybe even gives you a a surprise or inspires you to try something new, or if that product is well curated by a star celebrity or expert, that makes them feel very good. If it's a soft touch for subscribers, where they can cancel anytime, then it's easy and stress free. Of course, it has to be the right value, and convenient, and all these other things.
When you think about CPGs and manufacturers now, the only thing they are thinking about, is how much does that product cost, and how do they get it on the shelf at Walmart? They do not have people who are trained to think about what the experience is for the customer on the other side. What I do, is help them understand the experience of a package. If you think about how you receive something today on Amazon.com, it's in a brown box, maybe it advertises the Echo, and it arrives on your doorstep, fast. You get exactly what you ordered, and fast. But, what I am working on, is giving manufacturers a channel where the package arriving at the customer is a good experience, and not only branded, but where you get a selection of carefully selected products, and which inspires you to try something else. It's like a cliffhanger in a movie. You want to be a subscriber, because you're excited about what the next shipment will bring. I started thinking about this for a long time, and have spent 30 years in that channel. There are hundreds of tricks around that, ranging from dealing with credit cards, and not just authorizing them. There's a science behind everything. For example, there are different kinds of credit cards, different banks and issuers, and different kinds of credit cards, gift cards, and debit cards. We can see different patterns on how those cards are used, through data science. We have engineers and data scientists who help to capture the most money out of those cards, from making sure that addresses are correct, to working on detecting fraud, to logistics, and even customization. One of our specialities is customization. The ultimate goal is to be able to send people customized packages. If both you and your neighbor both are getting that package of six to seven items, we want you to get the items you want, which might be different from your neighbor. It's hard to do that in quantity. We specialize in sending you products you really want, and work with manufacturers to make sure those products arrive in pristine condition, all supported by systems and customer service.
It seems like there are lots of startups trying to build these kind of businesses, and obviously doing that for a huge CPG and scaling volumes is even tougher. What the key to make model work?
Georg Richter: I actually do not take startups. You can easily go to Shopify, and set up your own subscription service from your garage. It's very rudimentary, and you cannot scale. At about 20,000 customers, it just doesn't work anymore. Where we work with people, is when they get to a level, shipping hundreds of thousands, so they can bring it to the next level. Starting a subscription business is really easy, and the barriers to entry are very low, really you can do it in your garage with Shopify. But, at that level, it's very, very hard to make money. With a CPG it's all very different. In some sense, they are startups, but they have money to put behind the channels. They can come and start a product line and it's just a variable cost for them. They don't have to hire staff and make a huge investment, they just have to invest in their product line.
What's the biggest mistake you see in making a recurring physical subscription business work?
Georg Richter: I see several. One of the biggest, is by trying to test this with small quantities, and conclude that tells you what the bigger picture is. That's a big mistake. You can get orders at a low cost in the beginning using things like social media. You get a few people signing up, and you think—this is great! But that's an illusion. At the beginning, it cost very little to get people to sign up, and people buy a lot. However, as you ramp in quantity, you find you have to spend a lot more on advertising as you get away from your core customers. Advertising gets more and more expensive, and the last member you get buys a lot less than the member that joined before. Understanding that model and the curve is probably the biggest problem. Lots of people spent a lot of energy on this, don't know what they're doing, and end up not being able to make money. The other problem I see, is inventory purchasing mistakes. People get emotionally engaged with those products, and believe that 100,000 people will sign up, so they buy a lot of inventory, but it ends up being the wrong thing, the wrong type, or expires. Lots of people struggle to overcome those hurdles. I help people to avoid making fatal mistakes. The other thing I see, is trying to outsource all of this stuff your self. You try to oursource distribution, payment processing, and customer service all independently, when you really need one solution. That's why we built one solutions with everything included, to make it frictionless. Strangely enough, there's no competition there.
Finally, what's next for you?
Georg Richter: Next, is to get several large CPGs signed up. I told you about the big CPG we already signed up, where we are already involved with seven or eight different projects. It's really helping them break into this channel. So the goal is to convert large companies to use our product. The only frustrating thing there, is because they are so big, the sales cycles are very long. We want it so that in four or five years, someone has to buy the company because we have all the services and technology they need, but isn't that the dream of most entrepreneurs?
Thanks, and good luck!