According to a Havard Business School article, there are well over 2,000 subscription businesses in the USA. Data by Statistica also shows that in 2020, the average American had 12 subscriptions and spent $133 more monthly on subscriptions than they realised.
The high number of subscription businesses operating in America suggests this is a booming industry. But is it really? Are these subscription businesses profitable? Can similar businesses be profitable in a market like Kenya?
Today, we will investigate the profit potential of subscription-based businesses and why some fail.
Recurring revenue businesses can be very profitable, but there will be quite a few that will fail. Certainly, there is a lot more to a subscription business than recurring revenue.
Many factors must align to achieve profitability, but essentially, your revenue must outstrip your costs by a healthy margin.
The formula for success (read, profitability) is buying low, selling high, and keeping your costs low. That means filling your subscription boxes with stuff you source for very low prices and then selling them at high margins.
So even though costs can be high when running a subscription business, being profitable isn’t the biggest challenge. You can be profitable with just 50 subscribers. The challenge is making enough profit to thrive and grow the business.
To achieve BarkBox-level growth, you must continually grow your revenue, which entails keeping your customers while adding new ones. Yet that is also the ultimate challenge with the subscription business model.
According to research by Ganter, only 20% of subscription companies will successfully increase customer retention. But never mind increasing your retention rates, just retaining customers can be a struggle.
If you sell directly to consumers or run a brick-and-mortar or e-commerce store with many regular customers, you can implement the subscription revenue model in your business. That would make your revenue much more predictable, making it easy to make decisions and raise capital.
So why, then, do some subscription businesses fail?
It is commonly believed that a customer account cannot be profitable until they have stayed for three or more months. So, the key to profitability is not attracting customers but keeping them long enough.
The key to customer retention for a subscription business is to hook customers to a habit that your subscription service enforces. You must establish what prompts customers to use a product or service and find a way to satisfy that need.
While the convenience of getting the products you like and need delivered to your door helps to attract customers, it becomes less effective with increasing competition.
You must provide something competitors can’t easily replicate. You have to build a community and a strong brand that customers emotionally attach to. This fosters loyalty and communication that allows subscribers to share their thoughts on what you can do to improve the customer experience.
People sign up for subscription boxes for the convenience and value they offer. They get products they need for their hobbies and daily life when they need them and without any effort.
So a subscription creates the same problem it’s supposed to fix if it makes it hard or time-consuming to use it. That takes away the convenience and the reason to keep the subscription. You can’t be profitable if subscribers aren’t renewing beyond their first month.
If it becomes too hard to find items to customise a box because there are too many not-too-dissimilar options, another box service that curates products based on a person’s tastes will steal your subscribers.
So, while it may seem like offering multiple box options to choose from or an option to customize their boxes may seem helpful to customers, it can make it difficult for them to choose what to buy. A curated box or fewer box options may be a better strategy.
Curated subscription boxes leverage the power of surprise to keep subscribers engaged and signed up for longer. Subscribers sign up to receive something new and unexpected every month.
If you can’t maintain the novelty or deliver enough value to make subscribing to your boxes an economically savvy decision, people will switch to new, trending subscription boxes.
Your business tanks if too many subscribers cancel before you have recovered the money you spent acquiring them.
It is a fair assumption that if you deliver more value than the subscriber expects, they will be hooked and will not find a reason to cancel their subscription. But there are two issues with that.
Since it costs money to source the products you include in your boxes, a box with many items will cost you more. You will have to price the box higher to achieve the recommended 30% profit margin, which might scare potential subscribers away.
Charge less, and you will not recover your costs, meaning you will not turn a profit.
The second issue with stuffing your boxes with too many items is your subscribers may not be able to use or consume them all before the next box arrives.
Not only does this cause waste, but your subscribers can conclude that they are spending too much on stuff they can’t use. As a result, they may cancel their subscription.
They won’t necessarily be overspending; it’s you who will be oversupplying, sacrificing higher profits for a strategy that’s, in fact, backfiring.
Your customers could pay the same amount for a box with fewer items without feeling like they are overpaying simply because it’s just about enough for their needs. Add the convenience factor, and the customer will stick with their subscription.
The key to long-term profitability with a subscription box is customer retention. You have to lower your churn rate while continually adding new subscribers.
If you have to replace subscribers with new ones every month, your customer acquisition costs will eat into your margins and make it hard to turn a profit.
So, it stands to reason that while keeping your costs down is central to your success, too many subscription businesses fail because of poor product/market fit, which makes it hard to retain customers. You must ensure that your products are good enough and that your target customers actually need them.
The best subscription box companies invest considerable time and resources into the experience factor. To get customers hooked, you have to turn the experience of unboxing and using the products into something to look forward to. You can do this with great copywriting and clever use of social media.
Customer retention is all about a great product that customers feel they must have, delivering enough value so they can justify the expense economically, and creating great customer relationships through regular communication that keeps subscribers engaged with the brand and reminds them of the value they are getting.
Besides establishing the profit potential of your subscription business idea by sourcing products for your boxes, you have to decide how you will collect customer payments. You won’t have a subscription box business without solving that part of the equation.
The Intasend subscription software helps you create and tailor payment plans to your business needs. The software allows you to integrate the Intasend payment gateway into your website so you can collect customer payments online daily, weekly, monthly, or whatever schedule fits your business needs.
Sign up today with Intasend and integrate the subscription software with your website to automate your billing and collect recurring payments from your customers.