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The rise of the subscription box business - and how to create recurring reliable income

You may think that you don't know what a subscription box business is. But actually we all do and it's a brilliantly simple and sustainable business model.

If you wear contact lenses and you order a repeat prescription every three months, that is a subscription box business.

If you subscribe to a premium wine or chocolate delivery service, that is a subscription box business.

And if you subscribe to a service that delivers a mix of full and sample health and beauty products each month, that is a subscription box business.

The beauty of this business model falls into two parts, depending on the type of service you are offering:

  1. You take all the effort away from the consumer by offering regular deliveries of things they always want.
  2. You generate excitement in the consumer by making them wonder what they will receive, like they are giving themselves a surprise gift every single month.

More and more subscription box companies are springing up globally, in every niche imaginable. Take for example Lootcrate, which offers its subscribers $40 of geek gaming gear for the subscription price of $29.95, which includes shipping.

The company team up with collectable and gaming companies to put together a package of exclusive gifts each month. Through their website, they generate excitement with a countdown to the next box, as well as displaying what has been in previous box is delivered.

The goal of all of these subscription box businesses is to package up products at a price that delivers a consistent monthly margin.

Whatever your business model, you need to build in time and money freedom goals. The ability to do this through consistent monthly income is what makes the subscription box business such a potentially great option and why I'm discussing it in detail with you right now.

Why the subscription box business model can be so profitable

The business model is basically a recurring subscription set-up. This gives a fixed cash flow each month, allowing the company to confidently invest in the products they are going to package up.

On top of that, because they have a base of subscribers who are interested in a certain niche, companies will be willing to cut costs or offer free samples in order to get that package in front of highly relevant consumers faces.

Although you would think the opposite, start-up costs are also potentially low. With just a small packing space you can run an entire subscription box business. This is because there are dedicated services out there which allow you to run your new business so smoothly that space can be kept to a minimum.

For example, cratejoy.com is a specialist subscription e-commerce platform that allows you to instantly collect recurring payments. This can be integrated with shipstation.com, a specialist subscription shipping service. When you bolt on a payment processor and companies to produce a flow of boxing and inserts, you are basically good to go.

Now obviously that is a little simplistic, but it is the basis of a highly profitable business model. The key to success in the subscription box business is to firstly produce boxes of content that people feel give them great value, and secondly to maintain a good profit margin.

How much profit would I make per subscription box?

Well, the truth is there is no easy answer to this, however let's discuss a simple working formula so that you can get some ideas. To do this, you will need to establish three key things:

  • Your cost per acquisition
  • Customer churn rate
  • Profit margin

Let's say you spend $1000 gaining 100 new customers. This gives you a cost per acquisition of $10.

Your customer churn rate will be to look at a years worth of business and see how many of those customers from one year ago still remain. So lets say 100 people signed up one year ago and 50 are still customers, your churn rate is going to be 50%.

Finally, the profit margin is obviously your subscription rate minus your costs. Say you charge $20 for your box, and it costs you $10 to produce it and ship it, then your gross profits is $10 per box.

Once you can attract and keep customers for months on end, you can see how that almost guaranteed profit margin can give you the space to develop better margins over time.

Now obviously this is simplistic, but by putting figures in and playing around you can start to see how flexible this business model is and how profitable it can be if you get the blend right.

Negotiating the contents for your subscription box business

The chances are that there already is a subscription box service in the niche you are thinking about.

This makes a great starting point for your research.

Firstly, look at the subscription box services there already are and determine if you can offer better value. If not, can you offer a different angle, free example luxury or volume?

Once you spot your gap, a true niche within a niche, you need to research the potential cost to produce a box that will offer greater value than the subscription price. This will mean talking to suppliers in your chosen niche.

But don't worry too much about approaching suppliers to negotiate. You have to remember that most companies are desperate to get their products in front of people, so they will often be keen to offer you a good discount on a bulk purchase, and even to offer free products, or coupons.

Obviously your initial negotiations will not generate the best margins, but this would just be in the beginning. As your subscription service grows you will be able to demand more from contributing suppliers, increasing your margins per box as your buying and negotiating power grows.

It is therefore key that you don't think that as a start-up you have no negotiating power with shipping companies. Start by collecting quotes from all the companies you can find and then re-approach them based on those quotes to try negotiate them down.

Always bundle in postage costs

The second key consideration will be shipping. You need to try and bundle shipping into your total subscription box cost because it will more attractive to potential subscribers.

There are two main reasons why it is crucial that you achieve this while still keeping the box price attractive:

1.People like to know they are paying a single price that will not change month to month. Fixed cost outgoings are far more reassuring to people.

 2. Most of us are very suspicious of shipping costs, not realising how high they can sometimes be. By making the cost an additional one you will increase people's suspicion that you are maximising your profits through charging inflated postage.

So it is vital that you find a way to build shipping in while still maintaining a reasonable total monthly subscriptions cost, as it will build trust while remaining at an appealing price point.

CRUCIAL: Build a brand for your subscription box company

The truth is that a lot of the appeal of this type of business model is in the branding you use to attract customers.

The name you choose for your company will be crucial. It needs to be catchy, representative and memorable. This will make it highly shareable and help it to spread online and through word-of-mouth.

Another linked important step is to present your box as memorably as possible. This means creating a beautifully designed visual concept on your website that follows through to the box packaging.

Although the initial creation cost will be high, getting this right will produce instant brand loyalty and add value perception to the product you supply.

This is a vital point. When those boxes drop through people's doors they need to be impressed. They need to feel they are holding something of real value in their hands that makes them not even consider the subscription they are paying. The excitement of a present each month, delivered

beautifully, will keep them subscribed for the long term.

Get the name and branding right and appeal directly to the right audience and you could be on the way to making big money through this business model. You can learn more about how you can create a strong brand by understanding exactly why people buy.

Marketing a strong brand is the key to reaching critical mass

Creating a strong brand will allow you to appeal directly to your target audience, making it easier to market your business.

Your marketing needs to allow them to connect with you easily, through understanding what you are offering and what you stand for. It should be instantly obvious what they are going to get out of the deal.

It's vital that your branding and company character are so consistent that wherever and however you market your business, people will instantly recognise it and be attracted to it.

In terms of marketing, most subscription box businesses tends to build a popular following through social media. Although other types of marketing are important, as is search engine optimisation, reaching critical mass through social media marketing is generally the key to this type of business being successful.

The way to achieve marketing critical mass is to create a really strong brand. This will give you the best chance of attracting a dedicated group of early adopters. With these backing up your social media marketing, you will instantly get more marketing reach.

This strong wave of personal recommendation marketing, you can more easily convince people to jump on the bandwagon.

So I would suggest that it is vital when you are setting up your business to consider your box and its contents as a brand, which needs to be backed by a fully developed social media marketing campaign.

This means you will need to prepare your social media venues months in advance and it also means you will have to work hard on initial promotions and attractions, giving your early adopters something attractive to spread.

Grassroots and word-of-mouth are incredibly powerful when it comes to this type of business model.

Either way, people are buying into a culture is much as they are buying products and tapping successfully into this ethos can help with your success.

What are your ideas for a subscription box business?

I'm pretty sure that a lot of you reading this piece are already forming lots of great ideas in your minds.

The subscription box business model is unlimited in its potential and even in already crowded marketplaces, such as health and beauty, another angle is always possible. It's all about the brand and providing a bundle each month this is exciting enough for people to continue to subscribe to.

If you already have a subscription box business I would love to hear how it's going in the comments.

Whatever type of business you already have, or are eager to start, one thing that could prove invaluable to you is being backed by professional expertise at key development points.

My Automated Business System is a dedicated, tailored and individually developed solution to build you a business from the ground up.

In terms of developing a subscription box business, my Automated Business System can handle the development of your online infrastructure and your core marketing, allowing you to focus on developing great packages to deliver.

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