What is a Subscription Based Business?

Subscription Business

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What is a subscription based business?
What are the benefits of a subscription business?
Can subscription boxes be profitable businesses?
What profit margins can I expect with subscription boxes?

What is a subscription based business?

The subscription business model is one where companies acquire customers that pay for a service or product on a recurring basis; typically monthly or bi-monthly.  The concept is that the customers’ lives are made easier because they will receive a product they need without having to go shopping.  The customers’ credit cards get charged on a recurring basis as well, so it is essentially a set-it and forget-it shopping experience for the customer.

What are the benefits of a subscription business?

While there are many benefits of running a subscription based business, the main benefit that has caused the sudden boom in the niche is that companies can pay a higher cost for customer acquisition, because customers are paying customers for months, rather than a one time buy.  Essentially, companies in the subscription box space are specialists in customer retention, rather than customer acquisition.

Can subscription boxes be profitable businesses?

Just like any business, it is key to deliver value to your customers, but especially so in the subscription box market.  Retaining customers is key to success, so it is important to continuously deliver value.  Regardless, it is still possible to run a profitable subscription based business.  The key is finding a model that allows you to buy at either wholesale prices, or even less than wholesale by offering samples every month and using your service as an advertising model for vendors.

What profit margins can I expect from a subscription based business?

There are various approaches that a company can take towards their inventory.  As I mentioned above, some subscription boxes send various samples to their customers monthly, so cost of inventory is extremely low.  If you are selling whole products though, wholesale pricing typically allows you to pay about 50% of MSRP for items.  So once you include the cost of the box and other overhead costs, you can expect a 30-40% profit margin, depending on your specific model.

Photo courtesy of Opensource.com on Flickr


 

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