The Ultimate Guide to Subscription Box Business Models
If there’s one common struggle in the eCommerce world, it’s getting repeat customers. It’s actually up to five times more expensive to gain a new customer than it is to keep an existing one.
That’s why businesses put so much effort into customer retention and improving the overall customer experience. You don’t want a revolving door of customers coming and going. You want a loyal base that returns over and over again, with new customers adding to that constantly.
That’s the secret to profitability. It’s also why so many businesses are turning toward subscription-based business models. Streaming companies like Netflix and Disney+ make a lot of money from subscriptions, but they’re selling digital entertainment.
Businesses that sell material goods can package their wares together and sell them in the form of a subscription box service. These popular eCommerce subscriptions deliver a variety of products to customers on a regular basis, and customers pay for these products with a recurring charge.
Whether weekly, monthly, or yearly, ecommerce businesses can create an ever-growing base of recurring revenue by adopting a subscription box model.
But how do subscription box business models work? How can you implement one? And what are the challenges that come with such a venture?
In this article, we’re going to answer all of those questions, plus more.
What is a Subscription Box Business Model?
A subscription box business model is marked by the charging of recurring payments for customers in exchange for a regularly delivered box of services.
This could be daily, weekly, monthly, quarterly, or even yearly. As long as there is an automatic recurring charge, you have a subscription business model. It’s similar to how Software as a Service (SaaS) products work, only with boxes of products in place of software services.
Renewal is the backbone of subscription box profitability. You want to see your customers renew their subscriptions and continue to receive your products regularly. Some services have a commitment period, offering lower prices for a longer subscription. However, others work on a month-to-month basis, with customers able to renew at certain times. You can also set your subscription box service to auto-renew. In this case, the customer takes no action to re-up their purchase. They would only take action if they wanted to cancel.
The concept of subscription boxes is built around product kitting, where you package several items together into one purchase. This also allows you to streamline your order management process by creating ready-to-ship product sets.
A great example would be BarkBox, a monthly subscription box service tailored to pet owners. Instead of buying individual products like dog treats and toys, BarkBox packages them together and sends them to you like one product.
So, why would you want to offer one of these subscription box business models? Simply put, they create a steady income stream that builds over time.
Let’s take a quick look at how that works.
You only have one customer paying $10 for your subscription box in your first month of operations. In the second month, you’ve added two more customers, each of whom is paying you $10. Because the customer from month one has continued, you’re now getting $30.
Fast forward to six months in. The business has been growing, and you have 600 customers, each of whom is paying you $10. You’re now getting $6,000 per month, with unlimited potential for more profits.
The monthly subscription boxes business model is also highly convenient for customers because they can continue receiving the products they enjoy without renewing manually or making a new purchase every month.
This also ensures regular revenue for your business on a recurring basis, which ideally will grow month to month. The value of your customer relationships will compound over time, creating a higher lifetime value. You can keep your subscription box business model growing by keeping the value of your offerings obvious.
How Does the Subscription Box Model Work?
The basic principle here is that the customer pays a business regularly and receives a package of products at their door. If you wanted to implement a subscription-based model for services in your eCommerce store, you would be charging customers on a recurring basis. This is not a simple one-time add-to-cart option like you’d find in your typical eCommerce shop.
Whereas in a regular eCommerce store, you’d have to worry about wooing your customer back to make additional purchases, subscription box eCommerce makes every purchase that much more valuable because of the probability of recurring revenue.
Some subscription box models carry a commitment period. This could be six months or a year, usually paid for upfront. This is typically followed by a month-to-month subscription. Once a subscription plan moves to a month-to-month basis, the customer can cancel it at any time.
Typically, it’s a good idea to have your subscriptions auto-renew. This ensures that no action needs to be taken by the customer to re-up. Services like LootCrate and HelloFresh offer this option. If the customer doesn’t take action to cancel the service, they’re charged again automatically.
The average profit margin of a subscription-box business is 40-60%. The basis for profitability in this model is recurring payments; however, one-time payments can also be applied on top of the recurring subscription price. A great example of this would be a delivery service like HelloFresh.
When customers pay the base subscription price for HelloFresh, they’ll receive their chosen meal kits. But, certain menu items carry an additional price point. So, if the customer was in the mood for something a little different one week, they can add this meal to their purchase and pay a one-time premium.
Benefits of Having a Subscription Box Model for Your Traditional Ecommerce Business
If you’ve been running a successful traditional eCommerce store up to this point, you might be wondering whether adopting a subscription box model is the right move for you. There are several benefits that eCommerce business owners can reap by turning to this increasingly popular option.
1. Introduce New Products
You can use your subscription box business model to introduce new products to your customer base.
If you have certain products that you’re looking to get eyeballs on, a subscription box can be one of the most efficient ways to get them out there. You simply package the item in question with other more popular products.
2. Attract New Customers and Forge Stronger Customer Relationships
A subscription box business model is going to help you attract more customers.
Due to the recurring nature of these subscriptions, you can offer a variety of products at a more affordable price point. If the people you’re marketing to want your eCommerce products, bundling them together at a lower price is a great way to get them coming back for more.
By doing this and creating a recurring monthly connection with your customers, you create stronger customer relationships. You become a trusted source of quality in the eyes of your subscribers, and the delivery of your subscription box becomes a regular part of that customer’s life.
3. Accurately Forecast Revenue
Subscription-based business models also allow eCommerce business owners to forecast revenue more accurately.
By understanding both the number of subscribers you currently have and your average churn rate, you can accurately predict how much money will be coming in over a specific period. This will help you identify periods of high churn, which could mean there are issues plaguing your service that need to be addressed.
Once you notice a difference in revenue from what was initially forecasted, you’ll be able to figure out what’s wrong and determine how to fix it to hold onto as many customers as possible.
4. Convenient for Customers
Finally, one other major benefit of offering subscription boxes through your eCommerce store is increased customer convenience, which, in turn, improves the customer experience. People can have the product they want at a price they enjoy, and they don’t have to remember to make a purchase manually.
How to Build a Successful Subscription Box Business Model That Works for You ?
If you’re looking to create a subscription box for your eCommerce business, there are several steps that you’ll need to take. We’ll go through the process briefly here, but if you’re interested in starting such a business, we invite you to check out our in-depth guide on how to start a subscription box business.
First, you’ll need to determine whether you’d actually benefit from such a service. It has to make financial sense in order to be a viable business option, and the financial needs of every business are completely different.
To determine whether running a subscription box business model makes sense for you, you’ll first have to determine your goals and what you’re trying to accomplish.
For example, if you’re trying to raise profits by 35% in the next quarter, you’ll have to analyze how adopting a subscription box financial model will help you get there.
There are several steps you can take to figure this out.
1. Work Out Your Pricing
The first thing you’ll have to figure out when starting a subscription box business is the total cost of the product.
When determining pricing, you will have to take a long, hard look at everything you’re including. The price you’re charging needs to cover operating costs and leave some room for profit while still being affordable.
Since they include various products with differing values, operating costs for subscription boxes can be difficult to nail down.
You also need to look at your fulfillment costs, meaning what you’ll have to spend to ensure that your box arrives for the customer in a timely manner.
Ask yourself how much the packaging will cost and what you’re paying for shipping. Remember to keep the future in mind here as well. Fulfillment costs will only increase as your sales volume grows.
It’s also important to figure out your customer acquisition costs, as they are a major factor in profitability. You obviously can’t spend more to attract customers than you’re making off the boxes. So figure out your average cost per new conversion and see what you can charge to remain competitive while pulling a profit.
2. Determine Your Subscription Pricing Method
Every subscription box business needs to understand how it will offer its services. There are three different tried-and-true methods that businesses turn to when displaying options to consumers.
First, there’s the freemium model. This is where customers are given limited access to a product or service for free. They can then convert to a paid subscription to get full use.
The project management SaaS product Trello is a great example of a subscription-based business that uses a freemium model effectively. Trello allows users to use its service for free for as long as they’d like. But if you want to integrate the service with the other tools that you’re using, you’ll have to upgrade to a paid subscription. Businesses thrive on efficiency, and integrations create enhanced efficiency and save a ton of time and money.
While the freemium model doesn’t lend itself fully to a subscription box model, you could take some of its concepts and make them work for you. This could be offering a free trial with sample-sized items for people who want to try your products. However, you’ll still need to cover shipping costs.
Then you have tiered pricing, where you offer different subscription levels that are all priced differently. The more you spend, the higher quality products you’re receiving.
LootCrate is one of the most famous examples of a subscription box service with tiered eCommerce pricing. The typical base model LootCrate, which features various pop culture items from shirts to collectibles, currently costs $24.99 per month, plus shipping. However, if you wanted more premium gear, you could order LootCrate DX, which is $49.99 per month, plus shipping.
On the other side of the coin, if you only wanted whimsical pop culture-inspired socks and had no interest in LootCrate’s other items, you could subscribe to LootSocks, for only $9.99 per month, plus shipping.
When working on a tiered pricing model, you can focus some marketing efforts on upselling existing customers and retaining their business at a higher price point.
Finally, there’s adjustable pricing. This is a pricing model that changes with the market. As the industry shifts, you would adjust your pricing and communicate these changes with your audience. This should not be done too often, as it may cause longtime subscribers to churn.
Allure Beauty Box is a prime example of adjustable pricing. This beauty product subscription box was priced at $15 per month, but that price went up in 2020 to $23 per month. However, Allure Beauty Box tried to justify this increase with new benefits meant to establish more value.
3. Keep Customer Satisfaction High
Once you’ve got your subscription box up and running, you’re going to want to ensure that you can keep people coming back for more. Getting the business off the ground is one thing, but sustaining it is even more important.
If you want to improve customer satisfaction, it’s important to avoid changing your pricing too often. People should be able to rely on your pricing. Don’t make them shell out even more just to stay with you unless it’s absolutely necessary.
You’ll also need to simplify the ordering process to avoid checkout abandonment — when a shopper begins the checkout process but leaves before completing their purchase. If people can’t easily and efficiently sign up for your subscription box, they’ll take their business elsewhere. That means clear calls to action, a straightforward checkout process, and no hidden fees.
The products they’re purchasing also need to be of a certain quality if you want your customers to return for more. Nothing screams “unsubscribe” louder than cheap products that don’t hold up under pressure.
Customer support is essential for your subscription business to thrive. A massive 83% of eCommerce customers require customer support when making a purchase online. On top of that, 55% of consumers have said that they wouldn’t mind paying more for a service with excellent customer service.
Finally, and most importantly, you need to ensure there are no subscription box billing mistakes. If your recurring charges aren’t consistent and accurate, people will unsubscribe from you in droves.
That’s where a service like Chargebee comes in handy. Our subscription management and recurring billing will be the ultimate partner you need for maximum profitability in the subscription box industry.
Things to Consider While Introducing the Subscription Box Business Model
When turning your eCommerce operation into a subscription box business, there are a few things you’re going to need to consider as you introduce your audience to this new offering.
1. Packaging Costs
The first thing you’ll have to consider is packaging costs. Typically, subscription boxes come in vibrant branded packaging. This helps your customer feel as though they’re receiving something unique that’s of a higher quality.
But what is it going to cost you to send out your boxes in specialty packaging? What kind of shipping costs are associated with them? And when your customer opens their box, how will they see their items displayed?
Everything needs to be arranged neatly, and some subscription box businesses even throw in some extra decorative items like confetti or colorful paper to improve the experience.
2. Production Costs
Production costs are another area for consideration. When putting together your monthly offering, you want to make sure that the items you include work within the confines of your pricing. If you’re considering including an item with a high production cost, then perhaps that item should be an add-on that subscribers can receive for an additional cost.
The production cost of every item that goes into your box altogether should be far less than the money you’re charging for it.
3. Market Demand
Ask yourself whether the market has a demand for what you’re offering. If you’re marketing another meal kit service, you must realize that there’s a lot of stiff competition. But if you’re marketing allergy-friendly meals or specifically gluten-free items, you might be able to carve yourself a piece of the market.
4. Fulfillment Costs
You should also keep a close eye on fulfillment costs, including shipping. How high will these costs rise as time goes on?
As we said before, fulfillment costs rise as volume increases, so make sure that you’re pricing your subscription products correctly to adjust for this increase. It’s also important to factor marketing costs into the pricing process, as this will be essential to your market penetration and ultimate success.
5. Industry Pricing
Finally, you’re going to need to do some market research to understand the average industry pricing. You don’t want to price yourself too far above your competitors. You also don’t want to price yourself too low and limit your profitability.
Take a look at what your competitors are charging, then figure out how you can either beat that price point or offer more value for the products included in your subscription box.
Subscription Box Business Model Challenges
Starting a subscription box business isn’t easy, even when you already have a successful eCommerce operation.
Many eCommerce subscription challenges can stand in your way.
While no one wants to hear it, price increases will sometimes be necessary. Whether your shipping or production costs have gone up or the market has suddenly changed, you’re not going to be able to keep your pricing static forever.
When this happens, there will be customer outrage, and some might even cancel on you.
Then there’s the issue of data security. Cybercrime is a huge threat to the eCommerce world, and subscription-based services have to hold onto the financial information of subscribers. If you don’t have adequate security in place and malicious actors manage to breach your system, it can cost you in terms of both money and reputation.
The average cost to a business from a data breach is a massive $4.24 million. On top of that, 60% of small companies go out of business within six months after experiencing a data breach.
Subscription-Based Ecommerce Businesses Examples
If you were looking for proof that the subscription box business model works, look no further than these major success stories.
These four companies have shaped the landscape of the subscription box business world and carved a huge piece for themselves in their respective markets.
1. Birchbox
Birchbox is a beauty product subscription service sent out once per month. Boxes can be personalized to fit the needs and preferences of individual customers. Subscribers receive five handpicked miniature beauty products every month. They also receive an instructional guide on their use.
Birchbox items come in a keepsake box that can be reused around the house.
The average cost of Birchbox is $15 per month.
2. HelloFresh
HelloFresh is the largest name in the home meal delivery subscription box industry. It’s a weekly subscription box with a preselected menu of meals, separated into individual ingredients.
The ingredients are pre-measured, meaning that you’re receiving everything you need in the proper quantities. The menus you can select from can be upgraded with premium offerings for an additional one-time charge.
All HelloFresh meals arrive in a branded insulated box with a large ice pack at the bottom that helps keep perishable ingredients from spoiling.
For two people, a starting price for two recipes per week comes out to $47.96 per week, plus shipping.
3. BarkBox
BarkBox is a monthly subscription box featuring treats, grooming products, and toys for dogs. Pet owners who subscribe to this service will receive a themed box that can be personalized to the breed and size of their dogs.
The contents of each box adhere to a monthly theme, like Marvel or Star Wars.
BarkBox starts at $29 per month and comes packaged in a branded box.
4. ButcherBox
ButcherBox is a subscription box service that sends raw meat to subscribers. The cuts and recipes offered vary month to month and include items that subscribers may not have tried before.
ButcherBox promises that all of the meat it supplies is high quality, coming from humanely raised animals. Its offerings include beef, chicken, pork, and fish.
Prices for ButcherBox start at $159.
4 Metrics to Track When Growing a Successful Subscription Box Business
Once you’ve launched your subscription box business, there are a few metrics you’ll need to monitor to ensure continued success.
Here they are, in no particular order.
1. Churn Rate
Your churn rate is a percentage that details the number of subscribers you’ve lost during a given period. If you’re experiencing a period of abnormally high churn, there’s likely some large underlying issue that needs to be addressed.
To determine your churn rate, you need to identify the period you’re measuring for. Let’s say you choose the first quarter of 2022. You’d need to subtract the number of customers you had at the end of the quarter from the amount you started with.
You then divide the number of customers you lost by your starting number and multiply the result by 100. That will give you the percentage of churn you experienced during the quarter.
2. Monthly Recurring Revenue and Annual Recurring Revenue
Your monthly recurring revenue and annual recurring revenue shows how much dependable revenue you have. This is highly important for understanding the profitability of your subscription business.
To determine your monthly revenue, multiply the number of customers you have by the rate they pay every month. Multiply the result by 12 to figure out your annual recurring revenue.
This provides insight into the financial state of your business in real-time. While monthly recurring revenue is useful for determining where you are now, annual recurring revenue can provide a long-term outlook for your business.
3. Average Revenue Per User
The average revenue per user (ARPU) removes the skew that comes from differently priced service tiers when trying to analyze your monthly recurring revenue.
To find your ARPU, divide your monthly recurring revenue by the total number of customers. This figure could vary based on geographic information or demographics, but it’s good to set targets based on your ARPU to better inform your marketing campaigns.
4. Customer Acquisition Costs
The customer acquisition cost for your company details the amount of money it takes to acquire one new customer.
You can calculate this metric by adding up all of the costs associated with customer acquisition and dividing it by the number of new customers you’ve acquired during a specific period.
FAQs on Subscription-Based Business Models
Do People Still Like Subscription Boxes?
Yes, subscription boxes are still very popular, with the market expected to see a compound annual growth rate of 18.3% between 2022 and 2027. It reached a total value of $33.7 billion in 2021.
What are the Benefits of Using the Subscription Box Business Model?
There are many benefits to using a subscription box business model. These include the ability to:
Introduce new products to your audience
Attract more customers with a more affordable price point
Create strong customer relationships
Lower your cost per acquisition
Predict revenue more accurately
Increase customer convenience
How Profitable Is a Subscription Box Business?
The average profit margin enjoyed by subscription box businesses falls between 40% and 60%.
How Do Subscription Box Models Make Money?
Subscription business models can make money through recurring revenue over time. As long as your customer acquisition exceeds customer churn, the business is experiencing growth, and you’re able to make more money.
If you are already considering moving to a subscription box model, Chargebee is here to help. With Chargebee's subscription box billing software you can eliminate all complexities by automating operations, from checkout to retention, coupons to customer communication, billing to shipping, and taxation to accounting.
Chargebee has the right integrations and platform support to help you increase and streamline your recurring revenue.
