How the subscription box business model works
The subscription box business model is built around recurring payments and item delivery. Generally speaking, subscription boxes can be seen as a subset of subscription businesses focused around curation, sitting alongside memberships, digital subscriptions, and services, among others. Customers receive products tailored to their wants, needs, and budget on a regular basis and, in exchange, make regular payments to the subscription box business. Usually, customers can choose how often they want to receive deliveries.
The subscription box business model generally means either a fixed-term contract between your business and a paying customer, or an ongoing agreement that continues until it’s canceled by one of the parties involved. It’s an agreement whereby the customer says they will make recurring payments if you provide products for a certain commitment period. At the end of the contract, the customer may renew or cancel their subscription.
Creating a subscription box pricing strategy
As a subscription box owner, establishing your pricing strategy is one of the most important decisions you will make to set your business up for success. Your subscription pricing model is its foundational payment structure.
Subscription businesses have two main pricing models to consider:
Model 1: Fixed pricing model – One box type, fixed selection of products in each box, and a standard price per month. This is the easiest pricing model to establish as you’re only considering one box and its value. Your business may choose this model if it has limited features and a defined buyer persona. Due to its simplicity, it also gives you more time to focus on other areas of the business like customer acquisition.
Example: Rocksbox, a jewelry rental subscription that offers you 3 hand-selected pieces of jewelery per month (with preferences you can indicate) for a flat fee of $21 per month.
Model 2: Tiered pricing model – This allows business box owners to offer multiple boxes with different products and features at different price points. By doing so, you can target a wider audience with a bigger range of income levels or more diverse needs. It also provides a path to upsell if a customer loves the product and decides to upgrade to the next tier.
Example 1: Pure Roasters Coffee: Coffee subscription that offer different tiers based on desired frequency of delivery, from weekly to every 6 weeks.
Example 2: BusterBox: Pet products subscription that offers different tiers based on the size of your dog, from small to large.
How to calculate the right subscription box price
While there isn’t a hard and fast rule for how much you should charge, there are a few factors you should consider when deciding the price of your subscription service:
Product purchase price
The average cost of your products will likely be your highest expense and will often be one of your recurrent monthly costs. However, this may differ if you are already a product supplier who is adding a subscription option as part of your core producing business. In any case, you might want to begin by planning what you’re going to include in your subscription box a few months in advance and calculate the average pricing of those items. This holds even more true if you are buying wholesale and keeping items in stock/in a warehouse. When pricing wholesale products for subscription boxes, you can use these totals to calculate a total product budget for your box – and then be careful not to exceed that.
Packaging and box materials
You’ve probably put a lot of thought into the presentation of your box, and packing materials costs quickly add up. When calculating subscription box packaging costs, remember to include the price of the actual box, tissue paper, stickers, labels, and any other packing materials you’ve used to give your subscription box that ‘wow’ factor.
Shipping, delivery and fulfillment costs
The cost of shipping will vary based on the size and weight of your box and where your box is being delivered. Consider searching different addresses through your postal service to determine an average shipping cost. You can then choose to include shipping in the price of the box or charge an additional flat rate on top of the subscription box price. (Most subscription boxes will choose to limit included shipping to non-international addresses).
There are ways to save money on shipping, such as:
- Using USPS’ commercial service, Commercial Plus, which bases price on volume instead of weight. This means you could save a lot of money if your box is on the heavier side.
- Using slower shipping. This sounds counter-intuitive, but hear us out. The box may travel slowly, but you’ll ship it to them earlier. This means paying less for shipping and the customer still receives their box on time.
- Choosing a postal carrier that is closer to the majority of your customers. Take a look at which areas the majority of your subscribers live in and choose suppliers closest to those zones.
Labor and fulfillment
We’re guessing you don’t want to work for free, so it’s important to estimate the costs of your own labour. This is particularly relevant to solopreneurs. You might be happy to pack your subscription box yourself for free initially, but as your business grows you will likely invest in an outsourced solution where your box is packed for you. You want to factor this in from the beginning to avoid giving your customers a nasty surprise and potentially losing loyal subscribers.
Credit card fees can quickly accumulate, especially as you gain subscribers. That’s money that could be injected into your business. Your transaction fees will vary based on the platform you’re using. If you don’t know what your credit card fees are, find out and consider adding this to the cost of your subscription box.
Customer acquisition and marketing costs
Whether you’re using social media ads, SEO, flyers or marketing emails, you need to know how much it costs to acquire new customers. If you’ve hired a marketer, the costs of their service will need to be factored in as well. If you’re doing your own marketing, then the cost of your time matters, too.
Customer acquisition costs may vary and it’s an important subscription metric to remain aware of as it may fluctuate over time. This metric corresponds with customer churn; the rate at which your business loses its subscribers.
We’ve gone over the difference between the two main kinds of churn in another post, but a key point to note is that every customer that leaves provides a learning opportunity. If they’re choosing to leave, find out why? It could have something to do with the products themselves, or with the price point you’ve set.
Be wary that you’re not paying more to attract a customer than you can afford, whether that’s through offering products that are more premium than they need to be (a key part of product selection), or pumping money into marketing channels that aren’t leading to conversions.
Conduct an assessment of other subscription businesses in your industry. Consider what their box includes and how much they cost. It’s important to know how much customers are paying for a box similar to yours. You don’t want to be the most expensive box in your industry, but you also don’t want to be the cheapest.
What is the profit margin for subscription boxes?
With all this information in mind, you can start estimating the right subscription box price for your business. This is where you will start to consider your profit margin.
There are two types of profit margins which are relevant to your subscription box business:
- Gross Margin – This is your profit after direct product costs (everything in your box) but not non-product related expenses (marketing, labour, transaction fees, etc).
- Net Margin – This is what you take home at the end of the day; your profit after all costs associated with running your subscription box business.
To calculate your net profit, you can use the formula below:
Revenue – Product Costs – Fulfillment Costs – Operational Costs = Net Profit
Then, to find your Net Margin, use this formula:
Net Profit / Revenue = Net Margin
If you can’t make it to a profit of more than 50 percent just yet, 30-50 per cent is still a good range for most subscription boxes. This can vary based on your subscription model. It’s wise to leave yourself with enough margin for error and unforeseen issues which could increase your expenses periodically.
As your subscription box business grows, so will your profit margin and a good goal is eventually achieving a 50-70 percent profit margin.
As a subscription box owner, it’s important to know your numbers. How much you charge for your box depends on your total business costs and your target profit margin.
Here are a few key takeaways to remember as you determine the right price for your box:
- Take the time to decide whether the tiered or fixed rate subscription box pricing models is right for you
- Your time is money – don’t forget to put a dollar value on your personal hours
- Take all business costs into account before trying to calculate your price
- Leave yourself with enough room in your profit margin for unforeseen expenses
While calculating your subscription box price can be time consuming, it’s worth getting it right now to make sure you’re set up for success. So set your budgets, track both your fixed monthly costs and surprise expenses, and watch your revenue grow. With the help of an all-in-one platform like Subbly, it’s even easier than you think – your first 2 weeks are on us… you’ll soon see the difference!Start for free today