How Does the Subscription-Based Business Model Work?
The subscription box business model is built around a recurring monthly fee and item delivery.
Subscription boxes are a subset of subscription businesses focused on curating a selection of products for customers.
Customers pay for and receive products tailored to their wants, needs, and budgets on a regular basis.
In exchange, they make regular payments to the subscription box business. Typically, customers can choose how often they want to receive their boxes.
Source: Freepik
The subscription-based business model generally involves 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 where the customer commits to recurring payments while you provide products for a certain period.
At the end of the contract, the customer can either renew or cancel their subscription.
Choosing a Subscription Pricing Strategy for Your Box
As a subscription box service owner, establishing your pricing strategy is one of the most important decisions you will make to set your business up for success.
Your subscription-based pricing model is the foundation of your payment structure. Here are some of the main subscription pricing models you can choose from to price your box:
➡️ Flat-rate pricing model
Also known as fixed pricing, a flat-rate pricing model offers one box with a fixed selection at a standard monthly price.
This is possibly the easiest subscription pricing model to establish, as you only have to consider one box and its value.
You may choose this model if your box has limited features—such as a select few products—and a defined buyer persona.
Due to its simplicity, this pricing model also gives you more time to focus on other areas of the business, like customer acquisition.
An example is Rocksbox, a jewelry rental subscription that offers subscribers three hand-selected pieces of jewelry per month—with preferences you can indicate—for a flat fee of $21 per month.
Source: Rocksbox
➡️ Tiered pricing model
Also called multiple-tier pricing, this subscription-based model allows you to offer multiple boxes with different products and features at different price points.
This strategy allows you to target a bigger audience with a wider range of income levels or more diverse needs.
It also allows you to upsell if a customer loves the product and decides to upgrade to the next tier.
One such example is Bitsbox, an educational subscription box for children that offers its customers three separate tiers:
Source: Bitsbox
Another example is BusterBox, a pet products subscription that offers different tiers, from small to large, based on the size of your dog.
Source: BusterBox
A good example of a subscription box pricing table is Bump Boxes:
Source: Bump Boxes
➡️ Cost plus pricing model
In this model, you would calculate the total cost of packing and shipping your subscription box and then add a markup percentage.
The markup is added to cover the overhead expenses of your subscription box business and have a decent profit margin.
Using the cost-plus model means you would add up all your variable costs, like materials and labor, as well as your fixed costs.
This strategy is more suitable for subscription box businesses where costs are relatively stable and predictable, like if you offer the same products each month.
For example, if your subscription box sends the same coffee to your customers each month, you’ll know that your product cost will remain the same. You can then add your markup to calculate your final price.
➡️ Competitor-based pricing model
Competitor-based pricing is when you set your subscription prices in line with the pricing structures of your competitors.
This is done as an alternative to determining your cost based on what’s included in your subscription box.
This pricing strategy is best suited to subscription boxes that fall within a specific niche that is quite competitive.
To implement a competitor-based pricing strategy, you would need to conduct a market analysis to understand the pricing of subscription boxes similar to yours.
You can then choose how you want to position your box compared to your competitors in three ways:
Price matching
This involves setting your subscription box price to the same value as your competitors.
Price undercutting
A strategy that includes setting your box’s price slightly lower than your competitors to attract price-sensitive customers. This can also help you gain market share.
Premium pricing
In this case, you would set your subscription price higher than your competitors and market it as a premium alternative.
An example of a subscription box that may be using premium pricing is Mouth. Their snacks subscription box is $40.95 per month.
Source: Mouth
Munch Addict, however, which also provides a snack subscription box, charges as little as $15.00.
Source: Munch Addict
➡️ Value-based pricing model
Instead of basing your price on what it costs to pack and ship your subscription box, value-based pricing is based on your product’s perceived value to your customers.
This involves understanding what customers value most about your subscription box. You might need to conduct market research, customer interviews, and data analysis to understand perceived value.
Once you understand your customers, you can segment them into different groups and provide tiered pricing structures that cater to each segment. The price points for each tier would be based on the value your products deliver to the customer.
An example is Bespoke Post, which offers several different subscription boxes, each aimed at a unique segment within its audience.
Source: Bespoke Post
➡️ Freemium pricing model
In this model, you provide basic products for free and, for example, offer more sought-after items that require a subscription to your box.
This model is typically used in the software industry, so it will not be applicable to most subscription box businesses.
However, freemium can still be a great strategy in some cases.
For it to work, you first need to create a free tier offering that provides enough value for customers to use your products and build a relationship with your brand.
Due to the costs involved with sourcing and shipping products, you probably won’t be able to provide a free level of your subscription box itself.
However, you can, for example, offer access to an online game that is free to play.
You can then give players the option of subscribing to a box where they receive physical items like t-shirts and action figures related to the characters in the game.
This strategy aims to convert your free customers into paying customers by highlighting certain limitations of your free offering and upselling them to subscribe to premium products.
➡️ Usage-based model
A usage-based pricing model is when a box’s price is based on how much of your product a customer orders.
For example, you may want to offer a special price to a customer who subscribes to several of your boxes or reinstated their subscription after your initial contract has ended.
Rather than charging a flat rate, you would charge a special price based on how much of your product a customer orders.
You could also consider offering customers who order several of your boxes discounts on any other products they purchase from you.
An example of a subscription box service with a usage-based pricing model is Blue Apron.
The price you pay per box will change depending on how many meals you order weekly.
Source: Blue Apron
How to Calculate the Right Price for Your Subscription Box
Now that you understand the different pricing models available, it is time to calculate the ideal price for your subscription box.
While there isn’t a hard and fast rule for how much you should charge for your box, you should consider a few factors when deciding what to charge for your subscription service.
Step 1 – Understand The Landscape
💲 The industry average
The industry average is a useful starting point for deciding what price you should charge.
While you can’t set a price based solely on the industry average for subscription boxes, it is important to understand how much customers are willing to pay for boxes similar to yours.
This gives you a benchmark against which to set your own price, as you don’t want to be the most expensive box in your industry, but you don’t want to be the cheapest, either.
We’ve conducted an in-depth study on industry averages by comparing the prices of thousands of subscription boxes in the U.S:
💲 Your customers
Before you can determine the price of your subscription box, you need to analyze your customers.
First, identify the customer segments your box caters to, their specific needs, preferences, and what they’d be willing to pay for your service.
You’ll also need to determine how customers will perceive the value of your subscription box, which will help if you’re going to use a value-based pricing model.
Read our marketing guide to find out how to get to know your customers.
💲 Your product
You’ll need to understand your product’s perceived value before you can set a price.
If your product is unique and unavailable from other subscription services, it can be perceived as more valuable, and you can charge more per box.
On the other hand, if a product is fairly generic, you won’t be able to charge a higher price than similar boxes.
There are a number of other ways you can try to increase the perceived value of your product, including making the product seem scarce, setting a higher price, emphasizing quality or authenticity, and working on design to make the products more visually appealing.
💲 Your competitors
You need to analyze your competitors, specifically those in your niche, and understand what they’re charging and the value of their subscription box.
This is especially necessary if you’re opting for a competitor-based pricing model.
Analyzing your competitors will also give you a good idea of the demand for your product or service, which will impact the price you choose for your boxes.
Step 2 – Understand Your Costs
💲 Product purchase price
The average cost of your products will likely be your highest expense and will often be one of your recurring monthly costs.
However, this may not apply if you are already a product supplier who is now adding a subscription option as part of your offering.
You might want to begin by planning what you will include in your subscription box a few months in advance and calculate the average cost of the items for your box.
This is especially relevant if you buy wholesale and keep items in stock.
When pricing wholesale products for subscription boxes, you can use the cost of these products to calculate a total product budget for your box and then be careful not to exceed that.
If you think that your product budget should remain stable over time, you could potentially use a cost-plus model to help you set a price for your subscription box.
💲 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’ll use to give your subscription box that ‘wow’ factor.
💲 Shipping, delivery, and fulfillment costs
Your shipping costs will vary based on the size and weight of your box and where it 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 box services will choose to limit included shipping to non-international addresses.
There are several ways to save money on shipping, such as:
- Using USPS’ commercial service: Commercial Plus bases price on volume instead of weight. This means you could save money if your box is heavier.
- Using slower shipping: The box may travel slowly, but you’ll ship it to the carrier earlier. This means paying less for shipping, and the customer still receives their box on time.
- Choosing a postal carrier closer to most of your customers: Look at which areas most of your subscribers live in and choose suppliers closest to those zones.
💲 Labor and fulfillment
Estimating your labor costs is important so that you’re not working for free, especially if you’re a solopreneur.
You might be happy to pack your subscription boxes yourself for free initially, but as your business grows, you will likely invest in an outsourced solution where your boxes are packed for you.
You’ll want to factor this in from the beginning of your subscription box business to avoid increasing your prices later, which could lose you your loyal customers.
💲 Transaction fees
Transaction fees from credit card payments can quickly accumulate, especially as you gain subscribers. That’s money that could be injected into your business instead.
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 paid ads, search engine optimization (SEO), flyers, or marketing emails, you need to know how much it costs to acquire new customers.
If you’ve hired a marketer, their service costs will also need to be factored in. 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 track as it may fluctuate over time.
Be wary that you’re not paying more to attract customers than you can afford, whether that’s through offering products that are more premium than they need to be—a key consideration in product selection—or spending money on marketing channels that aren’t leading to conversions.
Step 3 – Decide on the Profit Margin for Your Subscription Box.
With all this information in mind, you can start estimating the right subscription box price for your business. This is the point where you need to start considering your profit margin.
Two types of profit margins apply to your subscription box business:
💲 Gross margin
This is your profit after direct product costs (everything in your box), but non-product-related expenses (marketing, labor, and transaction fees) are excluded.
💲 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 were deducted. 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 50% or more just yet, 30-50% 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 due to unforeseen issues that 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% profit margin.
Wrapping Up on Subscription-Based Pricing Models
The best pricing model for your subscription box depends on your total business costs and target profit margin.
Here are a few key takeaways to remember as you determine the right subscription pricing for your box:
- Take the time to decide which pricing model is right for your business.
- Your time is money—don’t forget to put a dollar value on the time you spend on your business.
- 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 to make sure you’re set up for success.
Set your budgets, track your fixed monthly costs and surprise expenses, and watch your revenue grow. With the help of an all-in-one subscription platform like Subbly, it’s even easier to do this. Get a two-week free trial of Subbly to see the difference for yourself!
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