10 Best Practices for Online Subscription Business Models
Last modified on August 7th, 2014
The benefits of starting a subscription box business are a plenty. To begin with there’s the obvious higher average customer lifetime value than traditional non-recurring business models. Then there’s customer momentum and loyalty rewards not to mention the future potential for future purchases and cross selling. So what are some best practises for online subscription business models?
We’ve spoken to subscription box businesses, industry insiders, investors and even customers to collate some best practises to consider when starting your new subscription business.
1. Take the Credit
Nope, probably not what you’re thinking so be sure to put your ego aside (theres a time and place for that). This actually has to do with your humble beginnings as an entrepreneur or startup when bootstrapping is a must and every penny counts… stock! It may not be applicable to some subscription commerce models but for those who are dealing with a supplier of any type (digital or physical) listen up! Approach as many suppliers as you can within your vertical and get them to give you credit. Right now you don’t have the capital to spend on filling those boxes and this is going to be your best chance. Approach with caution however as you obviously don’t want to let your suppliers know you don’t have cash in the bank. With a little tact and some firm metrics to backup your proposition (we’ll touch on the best ones to use later) you’ll be on your way to fulfilling and creating a subscription box business to excited loyal customers in no time!
2. Don’t Be a Fool, Cash-Flow Is King
When subscription business models work it’s like hitting home runs – every week! Subcom (Subscription Ecommerce) is all about turning that single purchase decision into repeat purchase behaviour. With this kind of model businesses can not only improve their cash flow through simple automatic payments (whether that be weekly, monthly, quarterly or even annually) but they can pretty much be guaranteed a recurring cash flow. So, with this holy grail of a business model, don’t be a fool and make sure you plan your cash flow smartly. It will give you the foundations needed to expand and scale your business if you desire as well as overall better business planning.
3. Be A “Hustler Baby”
Like all businesses, you’re going to need to hustle. Again, this may not be applicable to some of the more established businesses out there but if you’re starting your subscription box or subscription based business this is going to be key. From sourcing products and samples from suppliers to acquiring new customer signups you’ll need to think outside the box and be smart. Ryan O’Rourke, founder of UK based food and drink subscription startup Flavourly started with just $250 of his own cash and invested it smartly on one months rental of a small garage to store all his products. Smart thinking, but how did he source his products? Well, with a little more hustling and in line with our advice about ‘Taking the Credit’ he managed to find over 10 suppliers and convince them to give him all the products and packaging on credit. This allowed him to get his business off the ground and subsequently Flavourly now has over 5000 paying subscribers. Now thats a hustle!
4. Optimise Your Packing and Shipping Costs Carefully
So now you’ve decided to create a membership box perhaps one of the most challenging and most important part of the business is packing and shipping. You want to ensure that your shipping costs are as low as possible in order to increase your margins. Maybe you should try and negotiate with shipping companies to see if you can get discount rates for your boxes. As you grow and increase the volume of your products this should be more easily achieved. If you’re starting a new subscription box business you have to start somewhere, so perhaps explore ways to reduce the weight whilst still maintaining a good balance of high quality products. We spoke to a subscription box company who found that by reducing the size of their box by just 1mm they saved a huge amount in costs because now their boxes fit perfectly through a standard mailbox.
5. Presentation is Key
Your first shipments to your early customers are key. You know you never get a second chance to make a good first impression so consider this when designing your box. You want to keep marketing costs down to a minimum and subscription boxes are well known for generating virality through word of mouth. Branding, personalisation and authenticity should be carefully considered and play an important role with consumers who traditionally enjoy purchasing within their particular lifestyle. Step into one of your customers shoes for a moment, receiving a subscription box every month is the only opportunity you really get to treat yourself to a gift without knowing what exactly it’s going to be. However, you don know that you are most likely to be satisfied because you know the box matches with with your personality and lifestyle. Win win!
6. Have a Sense of Mystery
Recurring revenues are just one of the many benefits of a subscription box business. You therefore need to ensure that your retention rate is high and your drop off rates are low. We already know that personalisation is important but in terms of having a consistent retention rate you need to also ensure that the ‘mystery’ and ‘excitement’ of receiving a monthly box remain. The last thing you want is for you new subscription box business to be known as the modern day equivalent to the family member who gets you the same pair of socks for your birthday every single year! Mix it up as much as possible. Food based subscription boxes work so well because of the bizarre, intriguing samples often contained in them. From chicken flavored beer to chocolate covered cheese (they don’t exist but you see the point), get a good balance between exciting, cool products to sample and useful products that your customer expects and actually needs. A good example of this would be a cosmetics subscription box for women. Of course the customer wants to receive some exciting new nail varnish but they also need to replenish their nail polish remover. A balanced combination of both makes for a happy repeat purchase customer.
7. Quantity AND Quality
We talked about having a sense of mystery when thinking about the contents of your box. Something else to consider is the quality and quantity of the contents. The bad news is that unfortunately this isn’t as straight forward as choosing one over the other. The secret to a successful subscription box is to strive towards both. With retention rates being essential the last thing you want is for one of your customers to cancel their subscription because they feel like they haven’t got value for money. Stories are frequent of subscription box customers feeling rather like they have been taken for a ride after the first box they received seemed so abundant and the following 5 or 6 boxes weren’t so much. Yes, you need to mix it up. No you should not be inconsistent. It would be wise for you to create a specific blueprint for each one of your boxes that outline how many products should be in the box and the ratio of high valued products to lower valued products. For example the blueprint for a food based subscription box look like this:
- 3 x Self-Cooked products
- 2 x Organic products
- 1 x Fair Trade product
- 1x Juice Once you figure out a blueprint that works best for your business continue to use it every month. You are managing your customers expectations and setting the tone for future boxes so don’t get it wrong.
8. Know Your Metrics
Like any business metrics will be vital in the success of your subcom business. Knowing what metrics to look for and how to measure them should be high up on your priority list. Probably the 3 most important metrics of a subcom business are:
- Cost Per Acquisition (CPA) – is a method of advertising whereby the advertiser only pays when an advert delivers an acquisition. Moreover, CPA is very effective for an advertiser to pay because they only pay when the advertising has met its purpose.
- Life Time Value Of Customer (CLV) – customer lifetime value lifetime customer value is a prediction of the net profit attributed to the entire future relationship with a customer. In subscription commerce, this metric tends to be one of the best performing compared to traditional eCommerce businesses.
- Retention Rate – Measures customer loyalty of a product and is typically expressed as a percentage of long term clients. A high retention rate of customers leads to more revenues and positive word of mouth marketing.
A business that has more than one customer without doubt needs a CRM system. But the nature of your business (i.e customers making an online transaction) means communication is of absolute paramount importance. You need to establish trust with your customer, you need to reassure them at every opportunity and in the modern age a response time of 24 hours is expected. Communicate with your customers at every stage of their transaction process. Hold their hand as much as possible. The beauty of your subcom business is that you have to communicate on a regular basis (weekly, monthly or quarterly) with your customer: when they will be charged next, when is their next box due for delivery etc. You can view this as a negative but nowadays you can easily automate all your notifications saving you time and hassle and also use it as a smart opportunity to build the relationship with your customer and even cross promote other products.
10. It’s All about the Timing
This one may seem obvious but if you get this wrong it could have a serious effect on your retention rate. That one day every month is a very special day for your customers. Don’t forget it’s there little way of giving themselves a birthday every month from that one person they know best… themselves! So, don’t disappoint, nobody wants a late birthday gift!
Subscription business models are incredibly rewarding if you do them right and these 10 tips should help you on your way to a successful subcom business! Good luck!