How to Build a Successful Subscription Box Business Model

Difference between one-time purchase and subscription

People usually buy a product in a single purchase when they know the product’s usability is such that it would be used once or twice and there might be no will to buy it again. Like a particular dress. No one would buy the same dress again. While having a product that needs replenishment frequently getting it delivered regularly to your doorsteps would be so convenient. That’s what subscriptions are made of.

For one-time purchase models, businesses need to spend on customer acquisitions by creating awareness or advertisements. These customers might buy from you once and never return leading to increased costs of customer acquisition. Since the customer may or may not return, the lifetime value of the customers is also less in one-time purchase models. Also, the subscription model has longer customer retention, unlike a one-time purchase, making the customer retention costs lesser.

When it comes to marketing the product and investing in advertisements and promotions, subscriptions are more efficient. For one-time purchases, you must market to every prospect even after the purchase has been made. But for subscriptions, no extra effort for marketing the subscribed product must be made. If someone has subscribed once, he just needs value for money and maintaining quality. Advertisements work for the top of the funnel. Though you need to put in efforts to keep your subscribers engaged to avoid cancellations.

Another difference is that one-time purchase models allow no predictability of sales; if one sold 500 units of a product in a particular month, he might sell only 350 or maybe 700 the next month. While subscription models have easy-to-forecast revenues as the billings are repetitive.

Types of subscriptions models

Subscription models can be of many types but can be broadly categorized as follows:

Curated model

The curated subscription model is the most popular type of subscription in which the customers receive a selection of products based on their interests or preferences. These boxes are either the customer’s choice or random selections curated based on some questionnaire or survey.

Curated subscriptions offer personalisation to customers and make them feel exclusive. Cosmetics, books, and apparels are some of the most subscribed categories of the curated model.

Replenishment model

Replenishment subscriptions allow customers to replenish regularly used products or commodities at better prices. Subscribers receive recurring deliveries of such products making it a hassle-free experience for them with these automated shipments.

The most common examples of such a model are pet food, vitamins, supplements, and toiletries.

Access model

The access model works as subscribers pay a recurring fee to gain access to perks like exclusive offers, discounts, or early access to new products.

Subscribers feel special when they gain access to things before others and can have perks that others can’t, like getting member discounts. This model finds its use mainly for digital services or products. 

For example, a Zomato Gold membership allows subscribers to avail of exclusive offers and added discounts.

Digital Content Subscription Model

With digital content at an all-time high, various platforms offer engaging content, be it podcasts, series, movies, audible stories, music and more. Netflix, Amazon Prime and Hotstar, are some of the giants that offer subscriptions to access content on their platforms. Also called streaming and media services, they offer consumers monthly, quarterly, or yearly subscriptions.

Publication model

The publication model is one of the oldest subscription services. It offers consumers physical or online publication at a recurring fee which can be paid monthly, quarterly, yearly or at other intervals created by the publishers. Examples are newspapers, magazines, and journals.

What are the Benefits of a Subscription Model?

Improved brand loyalty and Customer LTV

Customers that are already buying from you automatically contribute to the income every month. Subscription retail sees a high retention rate which in turn leads to a better customer lifetime value. LTV is the value a customer has for a business throughout the association of the two.

The subscription model also benefits from brand loyalty, as once customers like the products and subscribe to them, they are highly likely to stay loyal. This might help with cross-selling and up-selling.

Better ROI on customer acquisition costs

The longer the customers associate with a business, the more they become a consistent source of recurring revenue. These high retention rates of customers lead to lesser marketing investments as they are regular payers and hence a better value for customer acquisition spending.

Inventory management

Since a business knows how many subscribers it has, it’s easy to predict inventory way ahead of time. Even if there are new subscribers, it’s easier to manage as the business must already have enough buffer. This makes inventory management swift and the business process more efficient as inventory might also be ordered from suppliers at special prices.

Customer relationships

Customers are associated with a subscription business for a long time compared to a one-time purchase where it’s not certain if the customer would return after the sale. Subscriptions allow for an enhanced business-customer relationship as the customers pay regularly, while the business caters to their needs and provides subscription plans accordingly.

Reduced customer retention costs

Subscriptions make customers pay regularly automatically so; the businesses don’t have to spend a fortune and make extra advertising efforts.

Customers who are paying regularly are already content with the product and wouldn’t unsubscribe just like that. Subscriptions are very convenient and put an end to all the hassles one must go through to buy regularly used products. Hence, subscription models allow for reduced customer retention costs.

Better revenue forecasting

One-time purchase sales fluctuate and can’t be predicted as it depends on many factors, like festivals, discount days, seasons, and so on, while subscriptions allow a stable flow of income. The recurring payments by customers make it easier to predict the revenues and help plan the inventory and expenses as well.

Better marketing opportunities

Subscription models offer an opportunity to stay engaged with customers over long periods. This incessant engagement lets businesses understand customers better and create enhanced and specific marketing campaigns for the targeted segment. 

What challenges you may face in a subscription business?

The subscription model certainly offers many benefits, but there are a few challenges that one might face in the process:

Invoicing

While subscriptions allow a plethora of customisations like choosing products as per convenience, add-ons, billing cycles, and more, it gets challenging to keep a track of invoices and manage them according to the customisations. Many customers cancel their subscriptions in between a cycle while some pause them. Hence automating the billing cycle is the best way you can deal with this challenge.

Product add-ons

The number of products needed by customers may change at times due to various reasons. Your subscription business must have the flexibility for customers to add or subtract the product quantity or add other products without having to cancel the subscription and signup again. It becomes a hassle to cancel the subscription and then subscribe again for the same product but for a different quantity. It might make you lose customers because anyone who must do the process all over again would likely consider other options too.

Technological competencies

Not all businesses may be big already, some start small. Technological capabilities become a challenge as it is expensive to manage the subscribers’ data. The model requires a plethora of integrations which in turn needs a good amount of investment. These integrations or deployments might not be possible for small businesses.

Keeping customers happy

Subscription cancellations are unavoidable. The only thing that can stop it is a happy customer. You need to put in extra effort to keep your customers engaged throughout their journey to avoid cancellations. If you are not able to provide value to the customers, subscriptions will suffer.

Increased efforts to get subscribers

Usually, customers when exploring options, give a try to new stores on a trial basis rather than going all in to buy a long-time subscription. So one-time purchase suits them the best as if they do not like what they paid for, they don’t have to buy again from there. But once subscribed and paid for a product or service, even if they don’t like it, they’ll have to continue it till the time they have paid for it. Hence, convincing customers to subscribe to a product or service becomes hard at times.

How to plan your subscription business

Before getting into a subscription business, you must have a road map. Let’s follow some basic steps that you need to have for a successful subscription business.

Research

Before starting any business, the most important step is to conduct industry research. Understand the market size, what is trending, and what people are spending their money on. It would play a vital role in building a roadmap for your subscription business.

A map without directions is futile!

Your Solution

The most important question that you must ask yourself before starting a subscription plan is what solution you are offering your customers.

Understand the problems people face and how you can solve them. Get the answers to questions like - Are your target customers unhappy with the fact that they must purchase a product repeatedly at high costs, is it a hassle for them to replenish products they buy regularly, and so on?

If your subscription plan offers value to customers, they would be more than happy to invest.

Target customers

Another important question that you must answer for yourself is who is your target audience? Who are you solving the problem for? Whether your customers are readers who like different genres or women who have a rigorous skincare routine. Understanding the customer persona is vital. This helps you offer the best to your customers as you would understand them better by being in their shoes and what they need.

Choosing your niche

Choosing a niche that can keep you going even when you don’t feel motivated enough is crucial. A shared mistake that people do is to get into niches that they don’t know about. Choosing something you’re passionate about and aligning it to the market requirements would prove to be beneficial.

Your competition

You’re not alone when it comes to having unique business ideas. Many others are doing the same and for a longer time than you. You need to have an idea of your competitors, what they are doing, and what’s working for them and what’s not. it would help you plan better and avoid the mistakes your competitors are committing.

Packaging

Product packaging is the first thing a customer sees once he has ordered something from your online store. Packaging that catches attention is a critical aspect of sales. Good packaging connects customers emotionally as they feel exclusive, and it also reflects the brand’s quality. Packaging also helps the brand create a unique identity and adds to the customer experience.

Customer touchpoints

Today, it’s imperative to have a user-friendly website and a good social media presence. Whether you own a physical store or not, if you haven’t gone digital, you’re already out of the competition. You’ll find most of your customers on social media who are constantly looking for unique things to buy. It is the best place to capture a significant customer base and grow your business. Reach out to them where they are most available by conducting your study about where you’ll find your target customers.

Marketing and Promotions

once you decide on your business plan, you would need to communicate with your target customers and make them aware of the solutions you’re offering them through your subscriptions. At times good products don’t work out because brands can’t convey their message well. Hence, plan out you’re marketing and promotion strategies well that can reflect your brand identity and let the audience know your subscription is worth it.

Implementation

Just a plan isn’t enough, no execution means no achievement. Let’s dig deep into how we can implement the plan efficiently:

Creating a website

The first step towards selling online goes without saying- Creating a website. One needs a good eCommerce website to start selling. It’s important to check for the allowed integrations and what tools exactly to integrate. There are many tools that one would need to carry on a subscription business like

• An email marketing tool
• CRM
• Customer support
• Payment gateway
• Shipping management tools

The most important integration for a subscription model would be a tool that can manage subscriptions and recurring payments functionalities.

Product pricing

Price planning is one of the most crucial steps of a subscription business. Low initial pricing to gain customers is a common mistake that businesses make. Pricing has a major role in setting up your brand identity as it determines the value of your brand. Businesses often think of beginning with low prices that they think of gradually increasing but it usually comes at the cost of subscribers. So, you must be meticulous while you price your subscription box as it would decide the lifetime returns for your business.

You can decide on the subscription pricing in different ways. One of the most common ways is to calculate the cost price with overheads and add a profit margin to it. But this is not mostly a successful way in a competitive market.

Another way is to price the subscription on value. The value your subscription holds is directly proportional to the price customers pay. For example, paying for data consumed. There can be other ways to decide your pricing but analyse first from all aspects. 

Billing can be planned in the following types-

• Single rate- All subscriptions cost the same amount be it of any kind
• Pay as you go- It allows customers to buy a subscription box a single time and pay for it. This helps to give them a chance to customers to decide before they commit to a subscription.
• Tiered- Different boxes cost differently.
• Freemium- Users start with a free basic plan and can upgrade to get access to exclusive features or add-ons.

 Operations

The most crucial part of a subscription business is planning where will you get your products from. How will the distribution and fulfilment take place? Will your packaging and shipping be done from your business location, or will it be outsourced?

One may include products from different brands in a subscription box. Some vendors are willing to give sample products at very minimal prices or for free. Look out for such opportunities as this way you can introduce new products to the customers and give them a chance to experiment.

Marketing and Sales

In today’s highly competitive world, it’s imperative to make your products as unique as possible. It’s it is important to keep a marketing budget aside and decide on what channels will the business market the product.

There must be a sales plan that aligns with the goals. The team must be decided effectively and metrics to monitor results must be created. There are some key factors to take care of:

·      Product awareness through various campaigns

·      Deciding the channels for marketing

·      Marketing budget

·      Plan offers, promotions, and competitive rates

Managing finances

The most important thing to plan for a new business is the financials. Many costs are involved like

• Start-up costs
• Procurement
• Packaging
• Shipping
• Fulfilment
• Website development and maintenance
• Advertising costs
• Miscellaneous

These investment demands must be carefully analysed, and one must forecast how these finances will be managed, whether investors will be required, if yes then how much investment would be needed initially and so on.

Conclusion:

Subscription businesses find it hard to retain customers as to a survey by McKinsey the cancellation rate is nearly 40%. So, you must jump through hoops to keep your subscribers engaged and happy. Plan out your course of action well and define your subscription box accordingly.

Keep your customers engaged with your offerings and try giving them surprise deals or messages. It’s important to make them feel exclusive.

Subscription retail is certainly a lucrative business idea but requires a great deal of planning and the right execution. A major challenge that subscription businesses face is choosing the right product or service and keeping your customers engaged. People get bored of repetitive and bland ideas as they seek something new and exciting to be delivered to them.

If you have an already existing business, it is important to understand whether a subscription plan would lead to more growth or will eat up your profit share. Plan wisely!

Success in any field is never a piece of cake but a great plan and consistency can always sail your boat.