The subscription box business model has carved out its niche in popular culture and continues to grow each year. An increasing number of people and organizations have learned how to start a subscription box business and entered the market during the past decade.
With so many types of subscription boxes on the market, it can certainly be appealing to join in.
But, where should you start?
Keep reading to learn about the subscription box business model, how to make money with psychological pricing, and some examples of subscription boxes.
Business Model for a Subscription Business
The general business model for subscriptions is built around subscription billing and recurring payments. However, there are a few methods that subscription businesses use to reach their goal profit margin.
- The freemium model. Mostly used in the software industry, the freemium model allows customers limited access to the product for free. This is an effective B2B marketing and DTC marketing tool because it draws in more users than if there was only a paid version. It also highlights the value of the product without allowing total access. The only drawback is that many people will use the free version without ever converting to a subscription.
- Tiered pricing. One of the most common models for subscription boxes is the tiered pricing model. Multiple versions of each box are created with varying levels of value. This lets a business target a wide range of demographics with different needs and wants. It's also great for upselling customers to increase revenue with the higher margins on higher-end subscriptions. For food suppliers, BlueCart Subscriptions is a great tool for this model. They can sell multiple food subscription boxes with varying prices all-in-one, easy-to-use platform.
- Adjustable rates. The final option for subscription pricing features variable rates. These rates may increase or decrease between payment periods based on subscriber growth, the general economy, or rising costs. Most businesses will have to adjust their pricing occasionally, but doing it too often or too drastically will decrease customer satisfaction and increase customer churn.
Subscription Revenue Model
The subscription revenue model is built around product kitting and the compounding value of customer relationships. One-off customers are not particularly helpful to the business, only long-term relationships. This means that a customer's value to the business increases each month.
The key to this model is to ensure the customers always see value in your offerings. This will convince them to pay the subscription cost each month and let you maintain your margins. If the perception of value is lost, you won't be able to increase eCommerce sales.
How a Subscription Model Works
In the subscription model, customers receive products on a regular basis while making recurring payments to the business. Customers can generally choose how often they want to receive shipments and can renew or cancel their subscription at any time.
For the business, this is essentially a contract between your business and the customer. They agree to pay you on a recurring basis and you agree to provide products for a given period of time. When the contract is up, the customer has the right to renew or cancel the subscription.
A great example of this subscription in action is with streaming services like Netflix. Though you can purchase films or pay piecemeal, with these services you pay a flat fee to access all content for a certain period of time, usually a month. At the end, you can cancel the subscription or automatically be charged the same fee for another month of service.
How Do Subscription Boxes Make Money?
Subscription boxes make money in two ways: recurring payments and one-time purchases. Recurring payments are the basis of the model, and customers must pay a fee to participate in the model.
The one-time purchase fees are on top of the monthly fees and vary by industry. A good example of this is clothing subscription boxes. Customers pay a monthly fee for a box of curated clothing to be delivered. If they choose to keep any of the clothes, they then pay an additional fee to cover the cost of the clothes. Margins can be further increased by buying wholesale products.
How Much Do Subscription Boxes Make?
Though it varies greatly by industry, most subscription boxes have a profit margin of 40-60%. This number can further be increased if you offer one-time purchases or multiple pricing tiers.
Average Subscription Box Price
The average subscription box price varies by industry, but generally ranges between $10-$40 per month. Curated or higher-value boxes may go upward of $100, while some companies also offer the first box for under $10 to incentivize new customers.
How To Price A Subscription Box
Pricing a subscription box is based on a number of factors.
Here's what you need to consider:
- Total product cost. The most obvious thing to account for is your cost of goods sold. If the price you set doesn't cover what you spent on production or procurement, you'll never succeed. This is why many subscription boxes include products with varying values or multiple lower-cost products. You need a firm understanding of the costs associated with all of your products and the margins required to to cover those costs.You also need to account for costs associated with procuring products from outside subscription box suppliers.
- Fulfillment costs. eCommerce fulfillment isn't cheap, so your pricing will need to cover the cost of custom subscription boxes and eCommerce shipping. Remember, fulfillment costs tend to increase as order volume increases, so you may need to revise pricing models as you grow. These costs are often forgotten by startups, which lands them in hot water when sales start to take off.
- Customer acquisition cost. The final piece of the equation is factoring in how much it costs for you to land and retain a paying customer. These are both valuable eCommerce KPIs to stay on top of. If you spend more attracting customers than you make, you’ll be out of business before you know it. You can combat this by looking at your marketing efforts and associated subscription website costs.
Subscription Based Business Model Examples
If you're still confused about the subscription-based business model, here are a few examples to help. Remember, there are many different subscription box ideas that can turn a profit.
If you're a food supplier selling wholesale:
You may run a business that provides fresh fruits or meat to restaurants, but are looking for ways to make more revenue. You can start a fresh meat subscription box that delivers high-end cuts directly to consumers. This will let you increase sales, establish long-term relationships, and cover any lulls in your B2B business. Even better, you can do this by using BlueCart subscription management software, an all-in-one food subscription platform.
If you're a software developer:
Let's say you've created a new headless eCommerce platform or are using an online marketplace. Getting new customers is difficult, since you're not an established name in the business. You can offer a freemium subscription, so they can test out the platform, but not access every feature. This will help you grow your brand and lead to new paying subscribers.
The Very Model of a Modern Major Subscription Business
The subscription box business model is being adopted by more businesses each year. It's a valuable tool to add new revenue or as a primary model. It's even good for a DTC food company. Now that you know, you can invest more time in learning how to start a subscription box.
Luckily for those food suppliers, BlueCart Subscriptions is the best way to adapt the subscription box model. Whether you sell groceries, pantry items, non-perishables, pre-cooked meals, or are just learning how to start a coffee business, we can help you grow. we can even help you break into the dropshipping market.
Frequently Asked Questions About Subscription Business
Subscription businesses are all the rage now, and for good reason. You can design one product or offering, sell it to hundreds of people, and make recurring profit. But what does running a subscription business really look like? Learn more from the frequently asked questions below:
How much does it cost to start a subscription box business?
On average, it costs about $17,000 to start a subscription box business. Because subscriptions usually imply physical products, your initial cash outlay to get products manufactured and shipped is significant.
The typical subscription business has the following expenses: rent, equipment and manufacturing, IT and software, website fees, marketing and advertising, and labor. Some costs like marketing can be increased or decreased, whereas others like rent and equipment are fixed costs and require significant upfront investments.
Due to the large expenses involved, your subscription business goals should always be accompanied by a strong eCommerce marketing strategy. This helps you recoup your initial investments faster so you can reach profitability sooner.
How many items should you put in a subscription box?
There’s no right or wrong amount of subscription box items, but most industry professionals recommend between five and 10 items. This gives your subscribers a valuable amount of products for their money, but not so many items that it’s difficult to use up each month.
The more you consolidate what is in each subscription box, the less your shipping and handling fees will be too. Though it’s tempting to sell more products per box to land higher per-unit prices, this carries over to your expenses.
Aim for a healthy medium of valuable goods that justify a competitive price. You can also ask your subscribers what their favorite items are and optimize your subscription box around these products.
What is the difference between a membership and a subscription?
In membership business models, customers pay for access to content, services, or features that aren’t available to the public. In subscription business models, customers pay a recurring fee in exchange for physical products or exclusive content of some kind.
On the whole, memberships and subscriptions are quite similar. Their differences consist of what products or services a business sells, how said goods and services are delivered, and how payments are processed. Some memberships offer a lifetime account for a set fee, whereas most charge a monthly or annual fee.