The subscription box economy continues to be booming even through these trying times. Also, the barriers to entry to business have never been lower. What you are seeing more and more is visionaries with subscription box concepts that can be self-started. But how do you start a successful subscription box company? There are marketplaces out there like Cratejoy and software to help optimize your subscription business like Subbly or Recurly. I have been lucky enough over the past couple of years to build a subscription company from scratch with my partner. We have enjoyed success scaling the business in 2020. Due to a lot of extensive research we got a fair bit of things right out of the gate. However, we didn’t hit on all cylinders. In hopes of helping other subscription box founders, I decided to start a three-part series of blogs in helping provide direction on how to start a successful subscription box. We will focus on three phases: 1) Pre-Launch, 2) Launch, and 3) Refinement & Expansion. This first piece will focus on the Pre-Launch activities.
Research the Market Thoroughly
Whether you already have a rough idea of the subscription box you want to start or are looking for inspiration, the first step to success is research. Let’s start with the individual that has an established idea. Here are some things you need to consider:
- What is the competition, if any?
- Is your idea unique enough to appeal to consumers?
- You can have a niche idea and still have a successful box. However, you can get down to a granularity level that is too niche. Example: Starting a subscription box for pet clothing vs. starting a subscription box that focused on bow ties for dogs.
- Who is your target market?
- Gender
- Age
- Income Level
- Geographical Location
- Shopping Persona of your target customer
- How will you sell?
- Direct to Consumer
- Wholesale
- Distribution
- Where will you sell?
- Brick N’ Mortar
- Online Only
- Subscription Market Platform such as Cratejoy
- Amazon Strategy
You will find there is an abundance of data available to help you fine-tune your existing idea. There is also an abundance of decision points that are needed. By going through the initial research there are a variety of options available:
- Proof of concept – By researching your competition, target market, and marketplace you may find affirmation of your idea
- Pivots – You may find your idea was close but the data and market tell you to pivot a bit to be more broadly appealing
- Deal Breakers – Due to regulation, legality, or another issue you may find that your idea is just not as desirable as once thought.
- Lack of Interest – This can be either from you burning out early in the research phase or you finding out from your market research that there just isn’t enough demand for your idea to move forward.
Now, let’s say you don’t have an idea in your head. You are just interested in the recurring revenue model that comes with the subscription industry. There is still a lot of research to be done to help you find your idea! A good place to start is looking at what types of boxes and industries are popular. Obviously, there are your beauty boxes like Birchbox and Ipsy, pet boxes like Bark Box and Pooch Perks, apparel boxes such as Stitch Fix and Trunk Club. Unless you have deep pockets or a team of investors it is going to be hard to get to this level. However, it doesn’t mean you can’t take these ideas to one level of granularity lower and carve out your own niche. What would that look like?
- Instead of Birchbox what about a box focused on lipstick or nail polish only?
- Rather than Bark Box how about a box that focused on treats only vs a Bark box which focuses on treats and toys
- Instead of Trunk Club how about Jeans Club? Denim for days.
You get the idea. Take a mass-level success box, research why it works and the demographics, and then slice it down a bit to become more niche. You can always grow your idea and expand it later once your business gets traction. Maybe Jeans Club becomes Chino Club. Another way to help generate ideas is to go to a subscription box marketplace, such as Cratejoy. Here you can search by keywords, most popular boxes, hottest new trendy boxes, etc. There are many ways to slice and dice to find what you are looking for.
Once you find a brand that you are interested in go to their listing and read the customer reviews, look at past boxes to understand what would be required in product procurement, and look for offsite reviews of the brand on a company like TrustPilot. If you are extremely intrigued with a brand buy a one-month box that doesn’t renew. There is nothing like getting a subscription box in the mail. All the pictures and descriptions in the world can’t replace that feeling of receiving and opening a sub box. Every box is different and exciting, experience it first hand. Be willing to invest some money in market research. It will pay off in spades long-term.
Finally, a way to look for inspiration is to look at subscription reviews aggregator sites like Hello Subscription and My Subscription Addiction. Here you can find unbiased reviews (as long as not paid partnerships), popular categories, and sneak peeks into what others are putting into their most current boxes. By navigating this site you can identify an idea or two that can then be researched further with the steps listed above.
Pre-Launch Phase
Okay, you identified your idea, your target market, and your ideal selling channel(s). The next thing you want to do is put up a pre-launch page on your website – essentially a ‘coming soon!’ page. This will help with starting to get your business name and idea out in the market. Be sure to have an email sign-up section to allow for valuable collection during your preparation to launch. Communicate with these individuals that signed up throughout your pre-launch phase. People love to get behind-the-scenes access so sharing content and progress reports are valuable at this stage. You can make some of your most loyal future customers by building a rapport with this group of individuals in the beginning phases. People love connections!
In the pre-launch phase there are several things you need to solidify:
- Product Offering
- Will you have one box for all your customers, or do you plan on having variations of your boxes that could be different by type of product or by size (amount of goods one will receive)? There are many subscription boxes that have variations so don’t rule it out.
- Expected Launch Date
- This can totally change as you get closer but aim to not be too overly aggressive here on your timeline. Inevitably, there are going to be delays along the way. Under-promise, over-deliver.
- Cost of Goods Sold (COGS)
- Assuming your box is physical products vs. a service there are a host of costs you need to account for and firm up. Some companies don’t report all of the below categories in COGS, but we think it makes sense to as these are fixed costs tied to selling your product offering:
- Product COGs – The foundation of subscription boxes is buying items wholesale. Often, these items are 50% discounted turnkey pricing. Depending on your niche you may be able to find deeper discounts as certain industries are priced differently. The bigger you get the more leverage you will have on cost negotiations and payment terms.
- Packaging – Are you going to ship your product in a cardboard mailer or in a polybag? Is your packaging going to be branded or plain? Are you going to use recycled tissue paper or shredded cardboard for your dunnage? Build test boxes and see what works best for your need. Just be sure to capture all the costs as they add up.
- Shipping – Look, shipping is an exceedingly growing cost center. Do you plan on offering free shipping? If so, you need to have that baked into your MSRP. A rule of thumb we like to follow on the subscription box side of things is to break out the shipping charges instead of baking it into your product. Your customers will be adding up the value of the contents of their box. If you bake in $5-10 of shipping costs you are starting from a valuation hole in the customer’s eyes.
- Marketing Materials – A lot of subscription boxes include marketing materials such as an illustrative card describing the contents of what is in the box you just purchased. Others send coupon flyers or cards. It is suggested to provide something as subscription boxes are monthly first impressions with your customers. You can absolutely provide value aside from just physical products.
- Marketplace Fees – Where are you going to sell your product? If online, some of the marketplaces have flat monthly fees while others want a % of your sales. By now you should have researched the marketplace that was best suited for your needs. Make sure you know the fees associated with it.
- Card Processing Fees – Depending on the industry you can expect 2-5% in card processing fees. Most of this is passed on from the processing company to you. Make sure you understand the difference between flat pricing and interchange-plus pricing.
- Other Fixed Monthly Costs – Website Hosting (Bluehost, A2 Hosting, GoDaddy, Email Marketing Software (Mailchimp, Sendinblue, MailerLite), Accounting System (Quickbooks, Sage, Wave), and any recurring costs that may be specific to your business needs.
- Setting your Selling Price
- By now you should have captured most, if not all, of your operating costs. It makes no sense to start guessing at what your selling price(s) will be until you have a good understanding of your cost.
- You want to start playing with a profit margin calculation so you can understand potential profit $ and margin %.
- Profit Margin Calculation
- Amount charged to customer – COGS / Amount charged to the customer
- Say you have $30 in COGs and charge $50 to the customer
- $50 – $30 / $30 = 40% profit margin ($20 in profit margin)
- If you can’t make your margins work to your desired level (again, different by industry) you need to find a way to raise your selling price (still needs to be a market competitive) or lower your overall COGs (source differently). Those are the only options.
- Importance of Promotions
- In this stage, it is a good idea to factor in any potential one-time or ongoing promotions you may run.
- 20% off your first order for signing up for our mailing list OR
- 30% off the entire cart on Black Friday
- Buy six months of boxes and get the seventh month free
- On the promotions, it is okay to breakeven or even go negative if you are looking at it as customer acquisition costs. We just think it is a good idea to look at worst-case margin scenarios when trying to land on your pricing. You can certainly change your pricing in the future, but it is good to come out of the gate with your box priced where you think it should be for the next 12-24 months.
- In this stage, it is a good idea to factor in any potential one-time or ongoing promotions you may run.
- Market Competitiveness
- We touched on this a little bit, but it is very important that you are market competitive with your pricing. Your end customers will research and look for competitors and will figure out who will provide them the best value. A lot of the subscription customers in the world are value and discovery buyers. If you come out with a box that is $15 more expensive than your competitor, the product offering differentiators better be significant.
- Less than $50 per month is the desired price point. This will bring in the widest audience possible. There are certain boxes where this is not achievable and that is fine if industry-specific reasons cause that box to be higher cost.
- Business Registration
- Set-up a Federal Tax ID, aka an EIN (Employer Identification Number)
- Set-up a Merchant Certificate in the state you are incorporated
- Research if you think a Trademark will be necessary
- Create an Operating Agreement for all shareholders
- Customer Interaction
- You should continuously by trying to build buzz for your new box. With both the customers that have signed up on your email capture pre-launch and for potential new customers.
- Create your social accounts and stay active. Facebook and Instagram at a minimum. Twitter, LinkedIn, and Pinterest if it makes sense.
- Put out compelling content. Sneak peeks of products that will be in the first box. behind-the-scenes of building your company and early sign-up exclusives are wonderful customer propositions.
- Assuming your box is physical products vs. a service there are a host of costs you need to account for and firm up. Some companies don’t report all of the below categories in COGS, but we think it makes sense to as these are fixed costs tied to selling your product offering:
There you have it! Starting a subscription box is a lot of work. However, it can be incredibly rewarding and you can be your own boss. Hopefully, you can find a few helpful pieces of advice in the above that you can apply to your subscription business.
Stay tuned for our next part of this blog series: The Launch Phase.
We love talking to potential customers. Reach out to us below if you have any subscription box questions.
