The subscription box industry has been booming for the last several years. In fact, the subscription industry has grown by over 100% year after year… and this growth will only continue in the years to come.
Because of the success of the subscription box business model, it has many large companies looking at how to incorporate subscription services into their preexisting business, and it’s attracting many start-up entrepreneurs.
If you’re looking to be a part of the subscription box boom, it’s important to choose a business model that ensures profitability and long-term stability. That’s why we’re diving into how to source products for your boxes, how to price your subscription, and more.
Subscription Box Business Models
Overall, subscription box businesses operate on the same structure of subscription billing — whether you have a local business subscription box or massive worldwide subscription box company. This just means a customer signs up to subscribe to receive a monthly or quarterly box of curated products. They only need to input their billing information once, and you’ll receive recurring payments and business.
It’s convenient for both parties involved.
Subscription box businesses take advantage of the fact that long-term customers spend more with your company than a one-time customer. In a subscription box company, building those high-value customer relationships is essential.
However, despite the fact that subscription box businesses generally share the same overall business strategy, there are a few different ways you can execute your strategies when it comes to pricing models, including:
Fixed Price Model
In the fixed price business model, all of your subscribers pay the same price for the same product. It’s a very simple model, because there are no variables. If you’re overwhelmed by making start-up decisions for your subscription box business, this may be a good place to start. However, down the line, you’ll likely want to look into prepay pricing or tiered pricing to offer your customer more flexibility — and create greater, more stable revenue for your company.
Prepay Pricing Model
The prepay pricing model offers your customers a lower price tag on their subscription box. With this model, if a customer signs up for a month-to-month subscription, they’ll be paying the highest price for your products… but they’ll have the freedom to cancel their subscription any time.
If someone signs up for a 3-month, 6-month, or yearly subscription, they’re committed to receiving your subscription boxes and paying a lower price. When a customer does this, you get to enjoy more predictable revenue, because you won’t have to wonder if all of your customers will cancel their subscription next month. You’ll know who’s locked in and committed and who you still need to win over.
For even more diversity, you could pair the prepay model with the tiered pricing subscription model.
Tiered Pricing Model
When you offer customers a tiered pricing model, you offer multiple different box options. For example, let’s say you own and operate a wine subscription box. Tier one may offer customers two wine bottles a month at the lowest price to them. Tier two may offer customers three wine bottles a month at a median price point. Tier three could provide customers four wine bottles a month at the highest price point. You can then market each tier to distinct customers.
This pricing model offers your customers flexibility. One option (like tier one) would be more suitable for a single person, while an option like tier three may be better for a couple who enjoys entertaining in their home. You can reach a greater audience by offering more diverse options with the tiered approach.
A lower priced tier can also serve as a stepping stone for a customer who is trying to decide if they enjoy your service and would like to invest more of their money in it. There are several benefits to this subscription box business model.
How Do Subscription Boxes Make Profit?
In most subscription boxes, customers are receiving products at a lower cost than what you would pay at retail price.
Because of this, many entrepreneurs interested in running a subscription box business often ask the question, “How do you make a profit?”
It’s a logical question, because making a profit is important for the longevity and success of your company.
Subscription box businesses have a few different options when it comes to making a profit. It depends on whether the subscription business pays for the products or receives them free through a brand partnership.
Paying for Products
When a business pays for products, it’s pretty simple. They purchase the items they’d like subscribers to receive in their subscription boxes. This option gives you a lot of freedom over what to include in your subscription box, but it makes your profit margins much smaller. Oftentimes, subscription owners won’t start making money off of this model until at least a year into running the business, and most of your profits will come from customers who’ve signed up for a six month or yearly prepaid subscription versus month-to-month subscribers.
Receiving Free Products
The other option when it comes to sourcing products for a subscription box is to build partnerships with brands that will send you free products. Why would they do that? Well, putting their products in your subscription box is an excellent way for them to reach new customers. It’s a form of advertisement and builds brand awareness. Brand partnerships are also beneficial for you as a subscription box owner, because these free products increase your profit margins greatly.
However, there are cons to this model. You’ll have less control over which products go in the subscription box because you’re at the mercy of what the brand wants to send you. You’ll also have to work with several companies with a wide assortment of products to avoid repeat products. This can be a challenge. You can, however, offer a mix of paid and free products to balance freedom with profitability.
How to Price a Subscription Box
There is no one-size-fits-all approach to pricing a subscription box. The best price for your subscription box will depend on your industry and the value of the products inside your box. A company offering full-sized products will likely charge more than a company offering sample-sized products, for example.
The average subscription box price, in general, is around $10-$40… but don’t be fooled. You could charge over $100 for a subscription box for a highly curated, high-quality box of products.
How much do subscription boxes make? That will depend on your margins and pricing. To make sure you’re setting yourself up for success, you may want to consider using a subscription box profit calculator.
Several factors that go into pricing your subscription box as well as the future profitability of your business include:
Product Cost
Accounting for the cost of the goods in your subscription box is one of the biggest factors to consider when pricing a subscription box. Like we mentioned earlier, if you’re able to build brand partnerships and receive free products, this cost will be lower than sourcing and paying for the goods yourself. Whichever method you choose when sourcing products, keep this cost front of mind to ensure you don’t undercharge for your subscription.
Fulfillment Cost
Your expenses don’t end with the goods inside your subscription box, however. When considering the price of your subscription, factor in how much it costs you to purchase shipping material, like a custom box, for example, how much shipping itself costs, and how much you need to pay yourself or someone else to pack and send off your orders.
Customer Acquisition Cost
Last but not least, consider how much you’re spending on marketing to acquire and retain customers. This can be an easily forgotten but very important step! Think about ads you may be running, whether you’re sending out free boxes as part of subscription box affiliate programs, and how much upkeep on your website and subscription box app costs.
To calculate your acquisition cost per customer, simply take the total cost of marketing divided by the total number of customers acquired. The result will tell you how much it costs you to win over each new customer!
Conclusion
Customer retention and healthy customer relationships are at the heart of every subscription box business. Your customer lifetime value and churn rate will determine the success and sustainability of your business venture.
That’s why we want to be a part of protecting your customer retention.
Did you know 50% of overall customer churn is caused by failed payments?
Gravy uses human-to-human communication (no, not your average dunning software) to retrieve failed payments, restarted lapsed subscriptions, and increase customer loyalty.
We’ve already recovered over $300 million in failed payments for businesses we serve by providing full-time focus to your business.
Getting your subscription box business off the ground is no easy feat. Partner with Gravy from day one to safeguard your hard-earned revenue and increase customer retention and profits.
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