When my roommate and I returned home one day from work, there was a box sitting on our doorstep. With great excitement, we picked up the package, only to find out that while it was addressed to our apartment, it was sent to a name that neither of us recognized. Like anybody would, we immediately got on Facebook and sent a message to the guy the package was actually addressed to, and he let us know he would come over and pick it up.
It was a full week before he arrived to claim his package and throughout the entire week, we spent entirely too much time guessing what we would have seen if we just decided to pull off the tape and take a peek.
Until this experience, I didn’t really understand the subscription box craze. I knew services such as Birchbox, Bulu Box and Loot Crate were blowing up, but never really understood the appeal of giving my money away for a mystery package. But, after just one week of being mesmerized by the box on our doorstep, I was convinced there was money to be made if I could replicate that excitement.
Listen to Peter and Jonathan discuss subscription services with Levi King, founder and CEO of Creditera on the fifth episode of The Bcast, Bplan’s official podcast (at 21:30):
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Running a subscription service has unique benefits and challenges. Of course, these types of businesses experience the same highs and lows as any e-commerce business, but unique aspects are presented as well. Before we review some of these benefits and challenges, I do want to make it clear that I highly recommend brainstorming an entry niche into the subscription industry, since there are currently hundreds, if not thousands of these businesses out there. However, many are run poorly and will fade, and additionally, there are certainly untapped niches that have potential for penetration.
The Benefits of Running a Subscription Service:
1. Predictable revenue
The “of-the-month” business model has been around forever. There have been wine, cigar, and coffee clubs like this for decades. The model is simple; you are billed on a recurring basis and receive your products at the same time every month. Most companies try to spend money obtaining customers, and then run campaigns to get customers back. The great thing with subscription services is that once a customer signs up, that revenue can be projected for months. It’s much easier to determine what revenue ranges will be on a month-to-month basis when you know what percent of your customer base will stay on board.
For more on this topic, read How to Forecast Sales for Your Monthly Subscription Service
2. Develop customer relationships
Business owners will always tell you that the best way to learn about your business is to talk to your customers. With subscription e-commerce, customers remain customers for months at a time. As a result, relationships are formed, and businesses have the opportunity to really get to know and understand their customer base. Determining what vendors are valued by your customers and what vendors may need to be re-evaluated is much easier when you are receiving monthly feedback on your inventory selection.
Additionally, customers are much more likely to become fans of your business if they are receiving products every single month. Think about it this way—when you go online and search for makeup and make a one-time purchase, most of the time you probably don’t even remember what website the purchase was made on. On the other hand, if you sign up for one of the many subscription boxes that sends out monthly beauty supplies, you will be excited every single month when that box arrives on your doorstep, and probably be inclined to ‘Like’ their Facebook and follow them on Twitter. You have become a fan of the name on the outside of the box.
3. Good publicity for vendors
The basis of many of the surprise boxes on the market now is providing customers with samples of products from up-and-coming vendors. For example, a beauty box may be filled with a bunch of samples of makeup from various designers. As a result, the vendors love working with subscription boxes, because it creates brand awareness and serves as a marketing platform. Vendors want their products in your box, resulting in healthier margins.
Of course, just like any other industry, there are unique struggles that come along with running a subscription service.
The Challenges of Running a Subscription Business:
1. Consumers are afraid of contracts
How much do you hate it when you sign up for a free trial, the trial period expires, and then you get charged a big chunk of money for something you initially wanted for free? Many people stay away from any sort of business that runs off charging customers’ credit cards monthly. Customers become afraid that if they don’t like the products they’ve signed up for, they’ll forget to cancel and waste money on stuff they don’t want. This also can cause for a hefty volume of customer service inquiries, dealing with people that want refunds because they forgot to cancel their subscription, or didn’t like the surprise box.
However, many subscription services overcome the fear of contracts by allowing customers to sign up for a set number of months and pay upfront, so there are no unwanted credit card charges.
2. Maintaining value is key
Losing subscribers is arguably the biggest challenge for a subscription service. Subscription services must focus on maintaining the value of their box, or else customers will start fading out. It’s important to continue to impress customers and “wow” them into staying signed up for another month—because customers will easily get bored of a subscription service if the gifts become repetitive.
3. Competition is popping up fast
As this industry starts to gain popularity, many companies are using the opportunity to develop tools assisting subscription e-commerce businesses. As a result, there are tools available to start your own business in this field very quickly. This, of course, means low barrier to entry, and potential for over-saturation in your market.
From experience starting and running a subscription business, I’m personally satisfied with the business model we selected. Unique challenges exist in every business model, and cannot discourage you from entering if you really believe in your plan. The third challenge listed above (tools easily available to start your own business) should ultimately be interpreted as an opportunity to take that leap and give subscription e-commerce a shot. So take some time and evaluate what niches haven’t been penetrated by this business model, and start creating your business plan.