How To Start a Subscription Box Service? What is the Pricing?
Let’s say you make your own candles at home and sell them at local craft shows. Everyone loves them, you always sell out, and people are constantly requesting new scents. They also ask if they can buy them online, since you live in a touristy area. You’ve really begun to make a name for yourself, so to increase your revenue, you decide to create an eCommerce service that will send a new scented candle to customers monthly – reaching those who can’t or don’t regularly attend craft shows. Congratulations, you’ve just started a subscription box service!
How the Subscription Box Business Model Works
So what is a subscription box service? It’s a revenue model built around product kitting – customers receive products on a regular basis and make recurring payments. This is also known as "replenishment" or "curation" subscription services, and according to McKinsey & Company, they make up 87% of the business. In this model, customers can generally select the frequency of their shipments and renew or cancel their subscription at any time.
The best subscription box services are all about building long-term customer relationships versus serving one-off customers. With a subscription box service, a customer's value to the business increases each month (or however often they receive shipments).
Whether you’re a food box subscription service or a makeup subscription service, the key to a successful subscription box business model is ensuring that customers continue to see value in your offers. If they do, they will continue to pay each month and you can maintain your profit margins.
Other Business Models for Subscription Box Companies
While the subscription model based upon recurring payments is the most common service, there are three other methods employed by subscription businesses.
- Tiered Pricing. This is a common subscription model that offers multiple versions of each box with varying levels of value. This lets companies target a wider range of people, with different income levels or varying needs and wants. It’s also a great way to upsell; someone comes in at a lower tier, loves the product, and then upgrades to the next tier.
- Adjustable Rates. This subscription model has fluid rates; prices may increase or decrease between payment periods based on subscriber growth, the general economy, or rising costs. While most people will accept some increases over time, if it happens too often or the adjustment is too drastic, they may cancel their subscription.
- Freemium Models. Also known as "access subscription models" and most common in the software industry, this model lets customers try a product for free but with limited access to features. The intent is to get them to upgrade to a paid version, which will allow them full access to the service. The drawback, of course, is that many people may opt not to upgrade.
Making Money With Subscription Boxes
So, can you really make money with a subscription box service? Certainly! Though it varies greatly by industry, most subscription boxes have a profit margin of 40-60%. This number is often greater if you offer tiered pricing as described previously.
While subscription box services are based on recurring payments, you may have an opportunity to make more with one-time purchase options. A good example of this would be ThredUp. This clothing subscription box company sends customers ten items of hand-picked clothing each month to try out. Customers can then return all the items after 30 days or can purchase items they love for an additional one-time fee. With this model, the business is guaranteed the monthly subscription fee and can make additional revenue when one-time purchases are made.
How to Start Your Subscription Box Service
Most subscription box services either provide people with an item they need regularly, without the hassle of trekking to the store, such as the Dollar Shave Club or the contact lens service Hubble. Others allow people to try out different products regularly; for example, Bean Box will send coffee-lovers different blends to try out each month, while Stitch Fix will send guys new attire to wear and return, always keeping them looking their best!
Here are some things to keep in mind when developing your subscription box business plan.
1. Find Your Niche
Although the subscription box business is booming, it’s only going to work if you have something to sell that someone needs fulfilled regularly, or allows them to try out something new. Figure out what your specialty is and then determine if it would make sense to offer it as part of a subscription service.
2. Mind Your Competitors
There is a lot of competition out there when it comes to subscription box services, but that doesn’t mean you can’t take on other companies (two of the top subscription box services, Blue Apron and Hello Fresh, offer a similar product/service).
For every BarkBox there is a Chewy, and for every Dollar Shave Club, there is a Harry’s. However, if you’re able to dominate a category from the start by offering something truly unique, you’ll be way ahead of the game.
3. Know Your Customers
As with any product or service, you need to know who you’re marketing toward and understand why they’d want this product or service in the subscription model format.
Is your customer a wine aficionado who wants to try out different flavors without the commitment of a purchase? What would motivate someone to subscribe? How much is your target audience willing to spend on a monthly subscription? These are questions you need to be asking yourself.
4. Price Your Box
Subscription box services can live or die based on price. You need to price your box low enough to be competitive, but you need to price it high enough to turn a good profit! That’s not all. You’ll also want to consider the cost of the box itself, packing materials, inserts, postage and shipping, and transaction and platform fees. Because of the importance of getting pricing just right, we've written a whole other section on it in the next section!
5. Determine Fulfillment Methods
Now that you know what you want to send, and who you’re going to send it to, how do you get it to them? Making regular trips to the post office or other carrier won’t sustain your business for long, especially as you grow. A fulfillment center can store your product, and ship it out at regular intervals to your customers. By allowing the fulfillment center to handle this task, you’re able to spend more time on efforts that grow your business!
Pricing a Subscription Box Service
The average subscription box price varies by industry. Curated or higher-value boxes may go upward of $100, while some boxes start at under $10 to incentivize new customers. Here’s a good rule of thumb for pricing boxes with a list of subscription box services that fit each bill:
- Low Cost ($1-15): Sample-size products or convenience commodities (Dollar Shave Club, Birchbox, MunchPak)
- Medium Cost ($16-25): Full-size items providing a premium experience (BarkBox, Bean Box, Vegancuts)
- High Cost ($26-50): Premium, artisan, or uniquely valuable products (Winc Wine, Prospurly, BattlBox)
- Expensive ($50+): Items priced high because of a differentiating factor (OwlCrate, Watch Gang, Warby Parker)
Of course, when pricing a subscription box, you can’t just look at comparable items (though that’s a good start). After taking a look at the competition, you need to determine your margin. There are two kinds of margins that will be relevant to your subscription box business.
- Gross Margin: Your profit before accounting for non-product expenses (the expenses that don’t go directly into your box).
- Net Margin: Your profit after accounting for all expenses involved in running your business, otherwise known as the percentage of sales that you’ll take home at the end of the day.
When calculating your margin, you can break expenses down into three categories: product costs, operational costs, fulfillment costs, and customer acquisition costs.
- Product costs. This is the cost of goods sold. To be successful, the price you set must cover what you spend on production or procurement. This is why you might consider subscription boxes with varying values or multiple lower-cost products.
- Operational costs. These are the costs outside of product procurement, such as marketing, accounting, web services, credit card and processing fees, and, of course, your time. Your net margin should cover all these costs and leave you with some profit afterward.
- Fulfillment costs. Your pricing also must take into consideration fulfillment costs, or the picking, packing, and shipping of your boxes. If you’re a startup fulfilling orders on your own, this would include the cost of packaging and postage; if you’re a more established business, this will be the fulfillment center expenses. Thinking of offering free shipping? Calculate your free shipping threshold here.
- Customer acquisition costs. Finally, you should consider how much it costs to acquire and retain a paying customer. If you spend more attracting customers than you earn, you’ll be out of business before you know it. So, be sure to monitor these eCommerce KPIs.
After you’ve crunched the numbers, here’s how to your calculation:
Revenue – (Product Costs + Fulfillment Costs + Operational Costs + Customer Acquisition Costs) = Profit
Profit / Revenue = Net Margin
The Popularity of Subscription Box Services
Offering convenience, personalization, value, and novelty, the subscription box industry is booming, experiencing an even bigger lift when COVID kept people at home, and it's not slowing down. Today the industry is valued at about $15 billion and people love their subscription boxes. “I love getting packages in the mail,” says Ramona Sukhraj. “It doesn’t matter what season it is, a package makes any day feel like Christmas morning. Fighting through bubble wrap, taking inventory of the goods, maybe laying them out for an Instagram photo.”
So, is now your time to get into the subscription box business? If so, The Fulfillment Lab can help! At The Fulfillment Lab, we can help you to save money on eCommerce subscription box shipping costs. We also offer fulfillment marketing – providing tailored customer experiences through customized packaging, inserts, labels, coupons, and more. This makes it possible to deliver a more personalized, unique customer experience that won’t soon be forgotten – it can even lead to a viral unboxing video, bringing more attention to your brand! Be sure to check out our blog 10 Reasons You Should Outsource Subscription Box Fulfillment and then contact us to learn more about how we can boost your business and your bottom line!