Pros and Cons Of Starting A Subscription Box Service In 2020 - Fora Financial
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Pros and Cons Of Starting A Subscription Box Service In 2020
March 09, 2020

Pros and Cons Of Starting A Subscription Box Service In 2020

A decade ago, most consumers didn’t know what a subscription box was. There were some early adopters in this market, such as The Sampler, an art-based subscription, which started in 2004. However, the trend really took off when beauty service Birchbox hit the scene in 2011. Now, there are subscription boxes for everything from vegan meals to scuba gear. Birchbox is still going strong, along with its main competitor, Ipsy. Many entrepreneurs are joining in, hoping for a piece of a market that grew 890 percent between 2014 and 2018.

Here, we dive into the pros and cons of starting a subscription box business.

What Are Subscription Boxes?

A subscription box is a package that customers receive by mail on a recurring basis. The products in the box all relate to a specific niche or interest.

The products themselves aren’t the only source of value with these services. There are other reasons that subscription boxes appeal to customers.

Some boxes are focused on the element of surprise, meaning that the customer doesn’t know what they’re getting. Others focus on curation, offering the best versions of products within a specific category. Sometimes savings are the primary goal. Customers receive a selection of goods at a lower price than if they bought each one separately.

With services like Ipsy, subscribers get to try out sample sizes of products before committing. If they decide to buy the full size, there are often brand discounts on the site.

Companies like Dollar Shave Club offer convenience along with curation. Customers receive the same highly-rated products each month, so they don’t have to worry about running out. Many subscription box services offer several of these value propositions at once.

Pros of Subscription Box Services

Monthly subscription box companies enjoy high retention rates and a predictable income stream. User feedback and referrals are easier to obtain than they are with other businesses. These are just some of the reasons that more than 3500 subscription boxes exist in the U.S. alone.

While some of the initial novelty of these services has worn off, the industry is still booming.

More Consistent Feedback From Users

With monthly box subscriptions, you have 12 opportunities each year to seek customer feedback.

It’s also relatively easy to encourage subscribers to respond to feedback requests. Many companies offer to tailor future boxes based on feedback. Customers are motivated to give their opinions when they know that doing so will improve future deliveries.

By making it easy to review every box, you can keep customers’ responses coming. Many companies send out an email after each box is received with a link to answer some quick questions.

This might seem obvious, but the key to benefitting from consistent feedback is to actually use it. If a customer has a negative experience with your product, it gives you a chance to improve. Look for patterns so you can continue to learn and increase your product’s value.

By showing subscribers that you value and implement their feedback, you’ll increase loyalty and retention.

Greater Frequency = Higher Likelihood To Refer To Others

If a customer enjoys their subscription each month, they’re likely to tell friends about it. Your offering will be on their mind much more often than with other business models. Even with quarterly subscriptions, the customer is reminded of how much they enjoy your products four times per year.

Consider offering an incentive for referrals. For example, you could give a customer one month free if they refer someone who starts a subscription.

Referrals don’t require an in-person conversation. Today, consumers post about shopping experiences, whether positive or negative, on social media.

You might provide a referral code to someone who has thousands of followers on Instagram. A single post about your service could lead to dozens of new subscriptions. Just make sure your shipping and packaging materials are as photo-worthy as the products.

Lower Retention, Less Need For Lead Gen

Subscription services don’t require as much time or money for retention efforts as other business models. If a customer remains happy with your boxes, they’re unlikely to leave. This is particularly true with customizable subscriptions. By giving a subscriber control over what they receive, you further motivate them to stay with you.

When customers do cancel, if you’ve encouraged feedback, you’ll know why. You can then apply that information to increase retention going forward.

There are two primary reasons that customers cancel a subscription box. The first is that it’s too expensive. The second is that they’re unhappy with the products. Each of these cancellation reasons is reasonably easy to address.

If price is the issue, you can offer a discount or coupon. You can also consider offering differently priced tiers. If the customer didn’t like their products, gather as much feedback as you can, and make changes accordingly.

Higher retention rates also mean that you can spend less time looking for new leads.

Predictability of Subscription Boxes

It’s fairly easy to predict what your costs and revenue will be with a subscription box company. Although you’ll include different products each month, you can estimate what costs to expect. Shipping and packaging are also consistent, so you know how much to budget for those your box design and other costs. Also, you can calculate how much stock you need based on the number of subscribers.

Once a customer signs up, you know when to expect payment. You can count on a consistent monthly recurring revenue (MRR). While customers may cancel, once your business is up and running, you’ll be able to predict retention rates.

Because of their predictable revenue stream, subscription businesses are attractive to investors. If you end up seeking outside funding, you’ll be able to provide a clear overview of potential profits.

Cons of Subscription Boxes

If you’re thinking about launching a subscription box service, it’s vital to understand the potential downsides. Keep in mind that for each successful box, many others have failed.

The good news is that if you do decide to proceed, you can learn from others’ mistakes. Being aware of the downsides of this model can help you address or avoid them.

High Levels of Competition Across All Niches

A few years ago, the idea of subscription boxes was novel and exciting. There was room in the market for just about any idea someone could imagine. Now, however, many corners of the subscription market are oversaturated.

If you start a beauty box subscription, you won’t just be up against big names like Birchbox, Ipsy, and Sephora. You’ll also be competing with hundreds of smaller offerings. There are already options for more specific niches, such as perfumes or cruelty-free makeup. The potential audience is also smaller for very specific niches.

To stand out from the competition, you’ll need a unique and creative subscription idea. It may be challenging to find such an idea when there are already so many different boxes available. You’ll also need to determine whether your potential product is actually something people want to receive regularly.

Struggling To Maintain Excitement and Novelty

The excitement of receiving new, high quality products in the mail is one of the reasons subscription boxes are so popular. It’s easy to maintain that sense of novelty for the first couple of months. When a customer has been with you for years, though, it’s much harder. Nurturing those long-term relationships is crucial to success for subscription boxes.

Even if a customer isn’t unhappy with their subscription, they may simply get bored. Failing to gather and implement feedback makes this outcome much more likely. Ideally, subscribers will let you know what kinds of items will keep them interested.

There’s a balance between branching out and remembering why people signed up in the first place. If you include new or unique products to keep people hooked, you risk losing loyal subscribers.

Stagnation When Not Tailored To Customer Needs

Customers are more likely to cancel subscriptions that aren’t customized. For business owners, customization requires more time, effort, and money than sending a standard box. It’s more difficult to manage inventory when there are different shipment configurations. You’ll also need to maintain a wider variety of vendor relationships.

If you offer subscription customization, it’s crucial to perform market research and understand the options subscribers want. Also, remember to implement past feedback for future shipments.

Aside from the products themselves, consumers want to be able to personalize their subscriptions. The option to skip a month or two of deliveries can reduce cancellations. However, you’ll need a system in place to keep track of postponed orders and restart shipments on time.

Uncertainty of Income (People Can Cancel!)

Customer churn is a term that refers to the cancellation of subscriptions. Preventing churn is one of the main objectives of any subscription service.

Retaining customers is easier with subscriptions than other businesses, but people can still cancel. Some studies show that one-third of all subscribers cancel within three months. Over half cancel in less than six.

If your profit margin is slim, it can be difficult to recover from a spate of cancellations. Cratejoy, a platform for subscription box companies, recommends a margin of 30 percent. That number may be hard to reach for new businesses.

Still, cost-cutting efforts may backfire. If you include items of lower quality than customers are used to, they’re likely to cancel. Remember, there are several costs involved in this type of business besides the products themselves. You’ll need to account for shipping, packaging, marketing, and more.

Our Final Thoughts On The Subscription Box Model

As with most business models, there are pros and cons to subscription boxes. For many entrepreneurs, the pros outweigh the cons. If you have any creative subscription box ideas, now is a good time to get started. Just make sure you can stand up to the competition, maintain excitement, and tailor your concept to potential customers’ needs.

Are you ready to give subscription services a try, but need help with funding? Contact Fora Financial today for a free quote.



Frequently Asked Questions

How should I choose a niche for my subscription box business?

Start by researching the kinds of boxes that are most successful. Then, consider how you can put a unique spin on these popular niches.

Consider your value proposition, whether it’s convenience, savings, the element of surprise, or curation. Remember that subscribers enjoy customization, and ensure that your idea will be exciting for years to come.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].