October 11, 2020
The subscription box economy is catching up fast.
According to McKinsey, the market for subscription box service is as big as $15 billion. The level of consumer awareness is still low - only 15% of online consumers have signed up for a subscription box.
Which goes on to prove that the subscription box economy is just getting started.
Smart and effectively run subscription box businesses will not only succeed but thrive in this new economy.
That being said, subscription box businesses are susceptible to failure. And if you want to raise your odds of success, preparing a subscription box business plan needs to be on top of your priority list.
But let me clarify first.
You don’t want to waste a ton of time writing a traditional business plan. Especially if you are just getting started.
You need to create a lean business plan instead. Here is why having a lean business plan is better than having no plan.
When you have just started out, there are lots of unknowns. The lean business plan helps reduce the number of unknowns. Moreover, the lean business plan that allows you to clarify your direction. It essentially allows you to put all ducks in the row.
Here are three reasons why you need to write a lean business plan:
The biggest failures in any business can be traced down to the planning table.
So before you start your subscription box business or write a plan you want to ensure three things:
Also, it makes a lot of sense to validate your idea with a few real customers. You can learn more about pivoting and testing your subscription box idea in this article.
At this point, you also need to make the most important decision about your business - “ What type of subscription box business model will you choose?
The three most common types of subscription box business model are:
Let me give you a quick overview of each of these business models.
Discovery subscription model allows the subscriber to discover and try new products in a particular category. For instance, BirchBox allows its customers to discover new beauty products from the comfort of their home. So BirchBox doesn’t create its own products but source them from popular brands and package them into a monthly box.
Providing access to premium services in exchange for a membership fee. Amazon Prime and Netflix are prime examples of this type of business model.
The convenience-based business model is all about sending products that are frequently used by your customers at regular intervals so they don’t have to shop for them again and again. Lots of promising subscription box startups are coming up in this category. We have seen entrepreneurs sending everything from paper towels and toilet paper to razors and diapers.
A fourth kind of subscription box category is quickly evolving in the market. The reason why I call it “Hybrid” is because the actual profitability comes from sources other than the subscription box.
Many subscription box startups are using subscription boxes as a front-end product and generate revenue from the up-sell of high-value products in the back-end. BirchBox is prime example of this strategy.
Another example is that of SnackNation. It offers consumer insights and runs product samples for brands such as Hershey. A major chunk of their revenue comes from those brands.
The case of Vitamin box Bulu is worth mentioning here. They make private-label subscription boxes for the major brand including Crayola.
This brings to the most important question you need to ask yourself before writing the business plan.
The single most important question you need to ask yourself at this point in time is - “Is my subscription box business idea viable?”
And over these years I have seen that the best indicators to determine the viability of a subscription service is that there are existing players in it.
And even if you are confident about your idea you want to do a test-launch and validate it with real customer data. This will significantly reduce your risk and help you write a realistic business plan.
That being said, let us dive into the outline of your subscription box business plan.
Let’s talk about each section of your subscription box business plan in a little more detail.
Always write your executive summary in the end. However, it might be a good idea to understand how to write one right at the start.
Here is an executive summary for a hypothetical vegan subscription box called “I Love Vegan”:
The “I Love Vegan” subscription box is aimed at serving the one million-plus affluent vegan consumers by sending them a box containing unique, handpicked vegan products each month. The goal is to achieve 5,000 loyal subscribers earning a Monthly Recurring Revenue of $100k by December 2023.”
There are several things happening in that executive summary.
To summarize, your executive summary must include the following:
Here is a simple template you can use to create an executive summary for your subscription box business plan:
[Your subscription box idea] subscription box is aimed at serving the [market size] [target market definition] by sending them [your solution and what’s so special about it] every month. The goal is to achieve [number of subscribers] subscribers earning a Monthly Recurring Revenue of [the target monthly revenue number] by [month and year].”
While creating your executive summary, always keep these three things in your mind:
When you start you need to leave the executive summary blank and actually focus on writing the Problem and Solution first.
The success of your subscription box business hinges on the problem you are solving for a specific group of people (your target market).
You could have the greatest subscription box in the world but if it doesn't solve a specific problem, nobody will buy it. Or you could have a simple subscription box but it solves a big problem the market has and it works like gangbusters.
I am not discouraging you from innovating but remember - going to the market with an entirely new idea is akin to charting to unexplored waters like Vasco De Gama. You will never know where your adventure will end - it could be in the middle of the ocean or a beautiful new country.
When you are the first one to introduce an idea, you will take all the arrows and face all the uncertainties involved. But if you enter a market that has already embraced an idea you can add that little something and raise your chances of success. It is far less risky.
Most founders of successful subscription box businesses discovered problems they had. And they built a subscription box service to solve it. This is a powerful way to discover your subscription box idea.
That’s the reason why we are seeing newer niche categories in subscription boxes such as toilet paper, toothbrushes, and vitamins.
Notice the kind of challenges you see around in your daily life. You’ll probably find a million dollar idea sitting in your wardrobe, kitchen or the bathroom.
Let’s look at a few examples of popular subscription boxes and the problem each one of them solves.
Problem: There was no way for women to experience the fun of discovering new products at home the way they would at a department store beauty counter.
Solution: Helping women discover and try new beauty products from the comfort of their homes.
Problem: Pants don’t fit well. American pants are too boxy, and European pants are too tight.
Solution: The Bonobos chinos are something in between and they fit well.
Problem: Going to the grocery store, meal planning, and cooking are time-consuming for Vegans.
Solution: Green Chef is a subscription box offering vegan meal kits that don’t come up short on taste or originality.
Can you see how simple and clear the problems are?
So here is the deal.
If you can clearly define the problem in one simple sentence and people in your target market can easily relate to it - you’ve found an idea worth pursuing.
Pricing can make or break your subscription box business.
The pricing also depends on whether your subscription box is a must have or nice to have.
Your pricing also depends on your business model and any revenue you plan to generate from back-end sales. For almost a decade BirchBox priced it’s box at $10/month. And it struggled to be profitable. Until recently when it raised the price of its box to $15.
You can use your subscription box as a front-end subscriber getting data gathering tools. And earn revenue in the backend through one-off purchases of higher value items and advertising. This kind of business model works well if you are sending multi-brand products into the box each month.
Take Ipsy for instance. It is yet another beauty subscription box that earns revenue from subscriptions as well as from brands whose products are featured in their monthly boxes. Plus they earn advertising revenue generated by Ipsy influencers.
Pricing Your Box for Front-End Profit
In case you are generating profit directly from the subscription box, here is how you can price your box:
When I speak to the subscription box business entrepreneurs and ask them about their market, the definition of the target market is too broad and generic. They usually talk about things such as - vegan market, bike owners, or American male in the age group of 25 to 35 years.
The problem with such a broad and generic definition is that there are big players out there who will eat them for lunch. The subscription box service business plan must be geared towards a niche market with extremely specific problems.
In the previous section, we discussed the problem your market has and how your subscription box will solve that problem. The devil is in the details. You want to go deeper into finding out the smaller details about your market. You might eventually discover that you could target a specific niche within a much larger market.
Take for instance SmartVine.
SmartVine is an organic vegan wine created for women who want to lose weight without losing their wine. The prime prospect for the wine are women who are health conscious, either going to the gym or consulting a nutritionist or both.
Did you notice the specificity of the audience?
We are not talking about all women who love wine. We are talking specifically about women who want to lose weight without losing their wine.
The more specific you get in defining your market, the stronger your positioning becomes.
You also want to make a list of all of the key attributes and create an ideal customer profile. Your ideal customer profile should include things such as:
Remember, when you go after your market, your customers are going to invariably consider buying from the competition. And if you have done your homework, you’ll be able to create a better value proposition and stand out.
That’s the reason why you need to study your competition.
You need study the competition with a finely toothed comb. Make a list of at least top three competitors with their offers and price points. You want to play prospects and get their subscription box delivered to your doorsteps. And gather as much data as possible such as:
You can create a side by side comparison of your competitors and where you stand in the big picture.
When your prospects are considering subscribing to your box, they’ll compare it with another box in your market. Hence, you want to clearly differentiate and demonstrate how you are superior to the competitors.
You could do this in two ways:
Once you have nailed your product and positioning, you need to figure out ways you will attract them. Which brings us to the marketing and sales plan.
Business is a numbers game.
And the ultimate win in any business happens when the cost to get a customer is significantly less than the money a customer will pay you for as long as they stay with you.
The goal of your marketing and sales plan is two-fold:
Your marketing channels are going to change and evolve based on the stage of your business. In the early stage of business when your goal is to get traction you’ll rely on organic marketing and direct sales. You’ll be using organic sources such as - social media groups, Influencers, YouTube videos, word-of-mouth, and articles to gain early adopters for your subscription box.
Once your idea is successful and people love your subscription box, you want to switch gear and start investing in advertising.
The paid channels could include:
Regardless of the media channel you use, you need to accurately measure and document your marketing costs because it will have a big implication on your cash flow.
For each media channel, you want to measure the cost of customer acquisition:
Cost of Customer Acquisition is nothing but the money you invest in acquiring a single customer for a particular media or campaign.
Cost of Customer Acquisition (CAC) = Ad Spend / Number of Paid Subscribers Joined
If you are getting customers through an organic channel, you might want to include the costs of the content writer, designer, and any software tools you are using.
For your ad campaign, you also need to factor the cost of the marketer who manages your ads.
The key here is to run a test campaign and benchmark the numbers. You need to generate first-party data in order to come up with these numbers. Do not rely on third-party data or your assumptions.
The Money is in the Math
Let’s take a look at a hypothetical example of a kids' subscription box that delivers storybooks every month.
The subscription box is priced at $25 per month. And the average lifetime value of this subscription box is estimated to be 12 months. In other words, on average a subscriber will cancel the subscription in the month 12.
Let us multiple 12 months with the monthly subscription to come up with the customer lifetime value.
Which means a single customer will pay $300 in his lifetime.
Let’s say the business owner decides to acquire subscribers using Facebook ads.
It costs $15 to generate a lead (or get a sign up). And out of every 100 people who sign-up, only 10% keep their subscription.
In other words, the business owner paid $1,500 to generate 10 subscribers. That brings our cost of customer acquisition to:
CAC = $1500/10 = $150 per subscriber.
These 10 subscribers will continue their subscription for 12 months. Hence, they will pay $300 each (based on the customer lifetime value we estimated above).
That means, for every $150 invested on Facebook, the business will generate $300. In other words, for every dollar invested in Facebook ads, the business earns $2.
Which is 2x ROI.
You get the idea.
Ultimately, you want to measure ROI for every campaign and every media channel you use. Some campaigns might generate 1.5x ROI while others may generate a negative ROI.
Here is the bottomline. You keep marketing campaigns that generate positive ROI and continue work to optimize them.
And that’s just a partial picture of your subscription box business.
There is a lot of action happening in the back-end.
So let us dive into your operations and get those things ironed out.
Operation is the backbone of your business. And when it comes to operations, efficiency is the name of the game.
Your operations include things like procurement, packaging, delivery, return, and customer service. You also want to have a structure in place to take care of accounting, legal, and taxation.
A critical aspect of your subscription box business will be to keep up a constant supply of products in sync with the demand for your subscription box. This involves building relationships with suppliers, negotiating rates, and ensuring quality products/raw materials available on time.
Also, you want to consider building a relationship with a printer who will print all kinds of stuff used inside your subscription box.
The first thing you need to determine is whether you will be packaging and shipping inhouse or you’ll outsource the activity to a fulfilment service such as ShipStation or PirateShip. Outsourcing these activities will often mean higher cost but great efficiency.
On the other hand, when you do these things in the house, it could be one more thing on your plate but it will save your costs and help you stay in better control of the overall customer experience.
Will you offer phone support or email support or live chat?
Most people find it extremely convenient to talk to someone straight away over phone support but that also means increasing your operational cost. On the contrary, if you offer email support, you could manage the support requests on your own or have someone in your family share the responsibility.
The decision to choose an ecommerce platform is vital. Because the choices you make at this point will impact your outcomes and the problems you will face.
Bonobos' story is worth mentioning here.
Bonobos earned considerable popularity in a short span of one year. Soon they launched the 60% off Christmas campaign. The word spread like wildfire and their website saw 4 times more visitors than they originally anticipated.
Their server crashed and they received thousands of support requests in a short span of one week. Ultimately it took the founder and his ninja support team a week of downtime and many sleepless nights to respond to support complaints.
The key to choosing an e-commerce platform is reliability.
I have seen entrepreneurs dabble between open sources website solutions such as Wordpress Woocommerce and fully hosted solutions such as 39Shops. While using WordPress based solutions can cost you less in the short term. But it can get very expensive in the long run because you need to hire and pay developers for the upkeep of your website.
And if a Bonobos like situation happens, you’ll have a tough time resolving customer complaints. On top of it, you will pay for the design and development of a website that can cost an arm and length.
In hosted solutions, the scalability is built-in. You never worry about server overloads or software upgrades. Plus, the modern platforms such as 39Shops offer excellent templates to get started. This can significantly save time and cost in launching your subscription powered e-commerce website.
You will also need to take into consideration software and technology costs such as having a computer to process orders, a barcode scanner, printer, a bookkeeping software, and marketing tools to manage your social media channels.
Businesses are successful because of their teams. The good news is that technology can ease things to a great extent. You’ll still need humans to respond to customer questions, process orders, handle delivery/returns, and manage various aspects of marketing.
Here is are the kind of people you’ll need in your team:
Finally, you need to put together your operational costs on a piece of paper. Remember, every small and big decision you make will have an impact on the operational cost.
When you are just starting out, one person could handle multiple roles but as your business grows, you need to expand your team and divide responsibilities.
At the end of the day, you want to ensure that you are clear about the operational game plan beforehand.
Which brings us back to the numbers game - your financials.
The best way to get a clear financial picture of your business is to create an 18 to 36-month cash flow statement.
The cash flow statement is a way for you to understand the inflow and outflow of money. It tracks how much cash you have, how much is coming and going, and when. It will also help you determine when your business will break even.
Your Cash Flow Statement needs to have following rows for the duration you choose (18 to 36 months):
Estimated subscriber growth rate - Depending on your business goals and your ability to service customers without compromising, you’ll need to make an educated guess about your subscriber growth rate. If you grow too fast, you’ll find it hard to ramp up your entire team quickly. If you are too slow, the competition might eat you for lunch.
So you need to maintain a steady and realistic growth rate based on the realities of your management and financial resources.
Monthly recurring revenue (MRR) - When you multiply the average selling price of your subscription box with the subscriber growth rate, you’ll be able to come up with the monthly recurring revenue.
Churn rate - Churn rate is the percentage of subscribers canceling their subscription each month. For most businesses, the churn rate is anywhere between 6 to 8 percent. But it really depends on the type of subscription box you are offering. Ideally, your churn rate should be less than five percent of your monthly recurring revenue. For example, Netflix has a customer churn rate of 1.9%.
Based on your cash flow projections, you can decide on your funding strategy. Will you be funding business on your own and you’ll have a bank or a private investor put in the money? If you are looking at a third party source, you will need to create a balance sheet.
In case you plan to attract third-party funding you will also need help from your CPA to create a balance sheet. The balance sheet gives the potential investor a snapshot of the financial health of your business.
When you start your business with the end in mind, you’ll go much further quickly. It’s akin to having a map for reaching a destination. When you don’t have a map, you keep guessing and end up in the wrong direction. Reaching the same destination might take two or three times more time than it would take with a map.
Now that you have a map of your business in the form of this business plan, you need to identify key milestones for your business. Ideally, you could create a 12-month plan that includes four key milestones. For example,
Having your quarterly goals organized in this fashion will take the stress out and kick in a fresh lease of energy every single day to hit those numbers.
These milestones are not inscribed in rock. Instead, they are like guideposts. So you know where you are with respect to when you started.
"If you don't know where you're going, any road will take you there"
That’s a paraphrase from an exchange between Cheshire Cat and Alice in the book Alice’s Adventure in Wonderland. That quote captures the essence of creating a business plan. The business plan gives you a definite destination and a clear roadmap to get there.
That being said - a subscription box business is all about delivering experience at scale.
Remember, your subscribers will have the excitement of receiving your subscription box once a month but for the next 29 days they are thinking “Do I really need this?.” And delivering a superior experience is when the magic happens.
You may not produce the products you’ll send to the subscribers. You may not innovate the products but you will be the gatekeeper for delivering an exceptional experience to your subscribers. Ultimately, that experience keeps up the excitement of receiving the box every month and not canceling it.
And for your subscription box to be successful, you need to go beyond transactional relationships and build deeper a bond with your subscribers. So they feel connected and part of a community.
Before we end, I want to talk about a quote from IBM founder Tom Watson, Sr.
He said - “To be great, a company needs a religion.”
Good advice for a subscription box business too.
Have questions about your subscription box business plan?
Just drop a reply in the comment box below and I’ll be happy to answer.
Everything we've learned (and are still learning) about growing a subscription box business.
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