Recurring revenue is your ticket to true profitability. No ecommerce entrepreneur reaches the stability and success they’re after by making one sale at a time—it’s all about repeat business. Even better, it’s about making one sale that keeps paying off every month with a subscription renewal.
When you have awesome stuff to send to your carefully targeted customers, they’ll hardly even notice that blip on their monthly credit card bill. Get them hooked once, and you can keep reeling in the revenue for years. Meanwhile, those hardly noticeable monthly charges to your customers add up to a healthy and growing bottom line for your business.
They get great products they wouldn’t know about without you. You get cash flow that practically takes care of itself. Everybody’s happy!
And subscription boxes are one of the best ways to turn your ecommerce business into a recurring revenue machine. Solid data is hard to find, but one analysis suggests that subscription box adoption by companies and consumers has grown 200% annually for the past five years, and was responsible for generating $5 BILLION in ecommerce revenue in 2014 alone.
Thinking Inside the Box
The subscription box concept is simple. Find products that your customers will enjoy receiving on a monthly basis, put them in a box, set up monthly billing and make sure you ship on time.
Seems easy, right?
Building the right subscription box (and sales funnel) can be the easy way to sustainable ecommerce profits. Getting the right box together means answering a couple questions, though, and getting the details juuust right.
Why Do Your Customers Want Subscription Products?
You need to make your subscription box more than a set of products. Receiving, opening, and enjoying the monthly delivery needs to be an experience, and to give your customers a compelling experience you need to understand why they’d subscribe in the first place.
Customers have three primary motivations to sign up for an ecommerce product subscription (as opposed to a media subscription):
Dollar Shave Club is a great example of a subscription box addressing the “replenishing” motivation. Subscribers get new razors, shaving cream, and lotion delivered right to their door—they never have to go to the store, and they never run out. Customers save time, effort, and potentially money, all while getting a high-quality shaving experience that reinforces the brand and the subscription box’s value.
Collectible boxes tend to require more of a niche audience than replenishment boxes, but the tighter the niche—and the more effectively you target it—the easier it is to lock in your subscribers. Bam Box has tapped into geek culture and substantial profitability with its monthly collectible deliveries. Keeping each box’s contents a surprise makes the collecting experience even more exciting for subscribers.
Experimenting is a compelling subscription motivator for many customers, too. Birchbox is probably the most famous example of subscription boxes in this category; every month, Birchbox subscribers receive trial sizes of several curated health and beauty products. When they find a new product they love, they can buy more of it on Birchbox’s site.
This subscription box model is often more of a marketing tactic than a substantial revenue driver in and of itself, but if you’re careful with your subscription pricing you can have your cake and eat it, too!
How Can You Deliver High Value at Low Cost?
Here’s where things get a little technical. You need to create the experience your customers are after, sure, but you need to do it in a way that leaves you a healthy profit margin. That means considering everything from your customer acquisition cost to the shipping costs for each completed box.
The price range for most successful subscription boxes is somewhere between $10 and $40 a month. Obviously, boxes at the higher end give you a little more wiggle room to achieve a decent margin, while boxes at the lower end might see higher adoption rates. Set a price point that speaks to your customers’ budget comfort—are they looking for bargains or the latest and greatest?—then work backwards to fill each box at a cost that gives you the positive cash flow you’re looking for.
Things to consider include:
- Shipping and packaging costs. Smaller, low-weight items are cheaper to ship. Buying standard-sized boxes in bulk will also help you save (and will keep your subscribers’ experience consistent). Plan your subscription boxes’ contents with this in mind.
- Product costs. Don’t forget to calculate your costs for the products you put in each box. Obvious, perhaps, but easily overlooked with all of the other subscription box details you need to pay attention to.
- Customer acquisition costs. How much are you spending on marketing and advertising to get each new subscriber? Measuring acquisition costs is vital for every aspect of your ecommerce business, and that goes double when it comes to pricing your subscription boxes.
- Average subscription length/subscriber lifetime revenue. It’s all but impossible to project your subscription churn rate before your subscription is up and running, but it’s definitely a metric you need to pay attention to. Average subscription length estimates from current subscription box providers range from just six months to almost a year and a half; start with a conservative estimate of 6-8 months and multiply that by your target price to determine the lifetime revenue of each subscriber (not counting any additional purchases they may make).
Once you have your subscriber lifetime revenue, subtract your one-time acquisition costs and your monthly shipping charges. That will give you an idea of how much you can spend on filling your boxes with great products before you eat up your profits.
You’re aiming for a margin of 70-80% over the average subscriber lifetime. If you’re way off base after your calculations, try to adjust your box size and/or the size and cost of the products in the box while maintaining the target price to customers you set at the beginning.
Psychologically, people are often more willing to go for a lower price tag even if it means getting less product, especially for the subscription boxes targeting “collecting” and “experimenting” customers. For boxes built on the “replenishing” model, your product size and selection will be determined by your subscribers’ monthly needs, so you might need to play with other variables to get the perfect profit margin (this model can also see higher retention—longer average subscription rates—which will increase your profit margin over time).
Don’t Forget to Add Some Drama
Last but certainly not least, be sure to add some branded flair to your subscription boxes—on the outside and when customers open them up. Remember, it’s all about creating a memorable experience that will have them eagerly anticipating each month’s delivery, and your brand’s personality needs to come shining through if you’re going to create that experience.
Take another look at the boxes above, and see how each clearly illustrates the brand. Dollar Shave Club is all about simple rugged manliness, and its plain yet sturdy cardboard boxes adorned with nothing but the brand’s logo fits that image perfectly. Birchbox’s more colorful and inspirational approach is decidedly more feminine, and creates a celebratory, pampering experience from the moment the box lands on the porch. And Bam Box’s all-black look enhances the secret, clandestine, uber-chic appeal its geek base is looking for.
Build your box around your brand. Don’t let design and production costs ruin your margin, but don’t assume you can’t create a compelling experience on a budget, either. Get creative, and get your subscribers hooked.
That’s the way to get the recurring ecommerce profits you’re looking for.