The subscription box business model: Understanding the economics

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Subscription boxes have taken off over the past few years. From food deliveries through clothes and beauty products, subscription boxes allow customers to receive a regular delivery of products – potentially at a discount to the retail price of the products included. This article explores the economics of such subscription boxes – discussing the benefits of subscription boxes to customers, and the ways that subscription services are able to achieve high value.

Value for the consumer of subscription boxes

Passed on savings

One of the key reasons why customers are attracted to subscription services is the possibility of savings. Subscription boxes can offer the possibility of getting an assortment of items each month for substantially less than the cost of purchasing the items separately. By passing some cost savings discussed below to customers, subscription services may thus be able to provide great value to subscribers.

Introduction to new products

Another reason why customers may be attracted to subscription services is that they get introduced to new products that they may otherwise not have tried. Rather than having to research new products to try, you are automatically exposed to new products to try – all curated for people who share a similar interest.

The excitement of monthly deliveries

A final attraction of subscription boxes is the excitement of getting a monthly delivery of new products to try. There is something inherently enjoyable about receiving a delivery, and especially so if it contains exciting products to try. This is partly why subscription boxes can make great gifts – each month the recipient gets delivered a new surprise treat.

Costs saving: How subscription boxes can provide high value

Beyond the value that subscription boxes can bring customers, the business model can have benefits, allowing greater value to be provided. Some of the most successful subscription services are able to combine have value to customers, with cost savings on acquiring the products. While the specific savings will vary depending on the nature of the subscription box, it is important to consider how value is being ‘created’ beyond curating and shipping the products to customers.

Samples to products

While it can be great as a consumer to be exposed to new products, it is also good for the sellers of those products. Being included in a subscription box exposes your product to a large number of potential customers, who may be more included to purchase further items once they have tried it. Since the subscribers of the box are likely to be the most interested in that type of product, the subscription box allows manufactures to target their samples at a particularly relevant audience.

The possibility of driving subsequent sales provides an incentive for manufactures to provide samples (or even full product sizes) either entirely free to the subscription box company, or at a substantial discount relative to the retail price. This setup can be win-win-win: the product manufactures are able to expose their product to a large number of interested consumers, the subscription box firm can acquire the items to be included at a substantial discount, and customers can receive items at a discount from what they would typically pay.

Part of the reason why this approach works is that the items contained in the monthly boxes typically rotates, with little to no direct ability to pick out what you want. If customers could select the specific products that they wanted, this may pull sales away from retail sales (in turn making manufacturers reluctant to offer their products at a discount). Because customers don’t get this choice – they are sent whatever the selection is for that month – most likely to customers who have never used that item before, and were not planning on purchasing it – manufactures are a lot less concerned that samples included in subscription boxes substitute for retail purchases at full price.

Purchasing in bulk

Beyond the attractiveness that ability to expose the products to a large number of customers who may go on to make full-price retail purchases, subscription box companies often ship a large volume of products. The bargaining power for purchasing in large quantities is much greater than it is for customers who make individual purchases, and so subscription box provides have the potential of acquiring the items at a discount to if they were individually purchased.  

Limited overheads with a recurring revenue stream

A final component of the subscription box business model is that the setup lacks a lot of costs of traditional retail stores. In-line with on-line firms, subscription services do not incur expenses of expensive leases or sales staff common with traditional retail.

Difficulties of the subscription box business model

Of course, subscription boxes are not a guaranteed recipe for success. Some limitations of the business model include:

Delivery fees

This can constrain the types of goods that are suited to subscription boxes to smaller, lighter items. While delivery fees may not be substantial for beauty products, for more bulky items such as drinks or some food products, the cost of delivering the product may comprise a substantial proportion of the subscription fee.

Customer acquisition costs

A final cost that can be substantial with subscription boxes is the cost of customer acquisition. It is not uncommon to see promotions or affiliate marketing used as a way of selling subscriptions. The company may make a loss on the first box (or several boxes) that each customer is delivered.

While the intent is that the initial costs of acquiring customers will be outweighed over time – subscription boxes can have a high churn rate. Customers may initially value the novelty of getting a surprise box delivered (or the signup promotion), but this benefit can decline over time. A high customer acquisition cost, coupled with a high churn rate, can quickly eat into expected margins.

High levels of competition

A final consideration with subscription boxes is the high level of competition between different subscription box companies. Entry barriers to subscription services are low, allowing competing services to enter. This can compound the problem of high customer acquisition costs and customer churn: lots of competitors offering very similar services mean result in promotions to attract customers, with customers easily able to cancel their subscription and switch to different company (potentially taking advantage of multiple signup bonuses across firms).

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