Introduction to the Subscription Box Business Model
A subscription box business is a service that sends paying subscribers a box on a regular basis. The boxes are most often sent monthly but some services send them quarterly and others send them weekly or even more frequently.
There are subscription box companies offering boxes containing all sorts of different things. Some popular types of contents are:
- samples of beauty products
- food items (sometimes catering to people with specific food allergies)
- products for pets
But this is just the tip of the iceberg. There are many, many more!
What’s the History of the Subscription Box Business Model?
The idea of sending products by subscription isn’t new: long before the Internet there were companies offering various products, including books and wine, by subscription.
Around 2010, the world’s attention really turned to the subscription box business model when people started to see the huge success that companies like Graze were having in the UK with boxes of healthy snacks, and Birchbox was having with their beauty sample subscription boxes.
Venture capitalists quickly poured money into a number of high-profile subscription commerce businesses including ShoeDazzle ($66 million) and BeachMint ($74.7 million). People got even more excited on seeing newer entrants such as Dollar Shave Club with their hugely successful viral video:
(Dollar Shave Club have now raised a total of $147.8 million!)
Seeing the huge interest in the business model, a number of companies such as CrateJoy and Subbly launched to build dedicated subscription commerce platforms making it even easier for budding entrepreneurs to start subscription box businesses.
With setting up a subscription box business now even easier, we’ve seen thousands of subscription box companies launch, offering everything from dog treats to spices.
What’s Good About the Subscription Box Business Model?
Here are 3 reasons the subscription box business model is a very attractive one:
- Customers checkout once to buy multiple times: It’s really, really hard to get someone to pull out their wallet and pay for something. Subscription businesses only need to persuade each customer to buy their service once. If they’re happy with the service, they’ll continue to pay on an ongoing basis. Persuading customers once is generally a lot easier than persuading them multiple times.
- Simplicity: By their nature, subscription box services send customers a similar box every month. This provides a helpful regularity to the business and keeps operations relatively simple – they can iron out issues when they still only have a few subscribers and run a more efficient operation as the business grows.
- A Well-Trodden Path to Follow: With so many subscription box businesses now running, new business owners can follow in the footsteps of people who have been there before and already found good solutions to the common challenges in this business model.
What Makes a Successful Subscription Box Business?
- Product/market fit: Like any business, a subscription box business needs to be providing something that its target customers want at a price they are willing to pay.
- Profit margin: On average you need to be selling your boxes for significantly more than they cost you. So it’s important to find a market that will pay a good price and, ideally, find a way to get your products cheaply or even for free.
- Marketing: You need affordable ways to attract new customers.
- Operations: Successful subscription box businesses gradually build good systems to keep track of subscribers and suppliers and to process orders.
What are the Key Numbers Behind the Subscription Box Business Model?
These are some of the key numbers you need to think about for your subscription box business:
- Revenue Per Box: How much will you charge your customers?
- Cost of Goods Sold (COGS): How much will each box cost you, including all the contents and the box itself.
- Shipping and Handling Costs: How much will it cost you to prepare each box and ship it to your customers?
- Customer Acquisition Cost (CAC): How much will it cost you, on average, to get each new paying customer?
- Average Subscription Length: How long do subscribers stay subscribed on average? Another way to look at this is in terms of your churn rate (the percentage of paying subscribers that cancel each month).
- Customer Lifetime Value (CLV): How much money will you make per customer over an average subscription time?
- Fixed Costs: All the other ‘overhead’ costs of running your business that don’t change much each time you add a new subscriber.
To have a successful business you’ll need marketing channels through which your customer acquisition cost is significantly lower than your customer lifetime value. And you’ll need to find enough customers through these channels to at least cover your fixed costs.
What’s the Future of the Subscription Box Business Model?
There’s a huge amount of interest in the subscription box business model, and for a number of very good reasons. With the rise of subscription commerce platforms, it has never been easier for you or I to launch a new subscription box business.
And what’s more, interest in subscription boxes is still growing fast:
It’s an exciting time for the subscription box industry. With so much innovation I’m betting we’re going to see plenty more successes emerge over the next few years.
Where do you see the subscription box business model heading next?