What to know before starting a subscription box business
The subscription box business model is increasing in popularity, particularly with the set up and ecommerce platforms more accessible than ever before. Starting a subscription box business or adding a subscription to your current offering is an exciting prospect. To ensure you can avoid the problems we know our clients have experienced in the past with subscription models, I am sharing with you some key issues to be aware of and avoid. After all, who wants to have to deal with unforeseen problems when you could be focusing on growing your subscription customer list and coming up with great new ideas for future boxes?!
Want to make the running of your Subscription Box business smoother? Our legal templates are linked below:
In this article we explore considerations for the successful set up of the subscription box model and if you have a subscription box already, tweak your existing processes to ensure you can focus on creating more unboxing ‘ooh and aah’ moments for your customers.
The subscription box business model
Unlike other consumer products received by mail, subscription box customers sign up for kits, packs or grouped products on a regular schedule. Subscription boxes vary based on the market they target or the intended outcome. We are seeing explosive growth in the areas of beauty, food supplies, shaving products, pet foods, books, wines, toys, and hand-made goods. Although, there are many emerging niches appearing too.
A subscription box, or a package a customer receives in the mail each and every month, are popular right now, with both consumers and retailers. Why? From a subscriber perspective it can be like receiving a surprise every month and if put together well, can provide a positive unboxing experience, on repeat. And from a business perspective, it creates the holy grail of monthly recurring revenue or “MRR”.
As modern consumers seek convenient shopping with brands they trust, subscriptions will continue to grow in popularity to meet the increasing demand. While you may be considering this as a core business, many business owners are showing interest in exploring how they can add a subscription box business model to their product ecosystem, and create an additional revenue stream.
If you can get it right, a subscription really is the holy grail of monthly recurring revenue. Being able to order in bulk because every order requires the same items and the fulfillment requirements are based on the number of subscriptions you have, is easier to plan forward for than a traditional online retail model where inventory for each item needs to be managed, and wastage is a real issue.
Types of subscription box business models
As you know, subscriptions offer online shoppers a convenient, often personalised, and cost-effective way to receive items on a recurring basis. There are different types of subscription box formats. Here are some different approaches:
The Curated Subscription Box: This is the most popular category of the subscription offering. It includes items such as pet accessories, cosmetics, clothing or non-perishable food items. What makes this category unique is that customers do not always know what they are getting, and it will often take them by surprise.
If a curated subscription box is what you might like to provide, to ensure the category keeps surprising customers, it is important to understand consumer preferences and offer products based on individual tastes and preferences. Unlike random surprise gifts, curated subscription boxes position themselves as an authority or expert in the category, promising to deliver hand-selected or vetted products. While curation resembles discovery, the difference is that products in the curated box go through a more critical and thorough examination by experts.
The Replenishments Subscription Box: This category is popular among consumers with recurring orders, for instance, for consumable household goods such as groceries and household supplies. Replenishment boxes can expose consumers to brands they haven't tried before or allow them to try different products from the same brand. It can also be a good way to package in products that you may have excess stock of.
The Digital/Access Subscription: This type of subscription, while not necessarily in box form, gives consumers access to content or premium services. This might be access to an online membership, online digital platform with content and resources. A delivered box may also be part of the subscription but it’s not the core delivery method. Online news sources, online courses and online knowledge centres are other examples of access subscription services for consumers.
The benefits of the subscription box business model
Subscription boxes or subscription models can add predictable sales outcomes to your business. By looking at the active subscribers, you can assess the health of your business instead of relying on projections or estimates, as is the common case in typical retail structures. In time, this model can offer predictable monthly recurring revenue, meaning you can confident know how much to invest in the growth of your business. In addition, subscription business models allow you to plan wholesale orders based on your current subscription, reducing the risk of having out of date stock or stock you cannot move.
Drawbacks of the subscription box business model
While it would be lovely to imagine that subscription box business models are a risk-free way to generate revenue, we want to ensure you’re aware of the problems that arise and what you can do to manage them more easily.
Subscription cancellations
The subscription business model typically operates on a month to month basis. You may be lucky to get a minimum six or twelve month commitment but in the early days, to ensure people will give your subscription box a try, you may not be able to insist on that type of commitment. However, cancellations are inevitable.
Your terms and conditions for cancellation should be clear to customers, with favourable notice periods. Have clear and easy to read clauses in your terms and conditions at the point of purchase that address issues such as cancellations. For instance, if a subscriber is allowed to cancel their order at any time and that happens to fall a day or after two shipment, you will be left bearing the cost of a box that has already been shipped. However, if you ensure your terms and conditions state a minimum notice period of say, 30 days, you won’t have sent the box and you won’t be out of pocket.
Refunds
Under Australian Consumer Law (also known as the ACL), subscriptions are considered purchases just like any other retail business model so you must adhere to the laws as they would apply to any other standard online or in-store purchase.
Your terms and conditions need to clearly set out what your policy is for returns and refunds is. This should touch on issues such as damaged product or what happens, for example, if someone is allergic to an item. There needs to be a disclaimer included to say that you will refund or replace faulty items, rather than leave yourself open to more substantial damages claims. Without these inclusions you run the risk of having to pay out additional costs. An example of this could be a book that is missing half of its pages. You should replace that (and take it up with the manufacturer). Yet, if someone is allergic to an item and there is a clear product list and warning on the product that they use at their own risk and should test first, a disclaimer around use will likely be enough to protect you.
Delivery
Chances are, unless you are offering a digital or access-style subscription, you will use a third party delivery service like Australia Post, Sendle or a private courier company. And when you do that, once the subscription boxes leave your hands you cannot control what happens in the time between the box leaving at your end and when it reaches your subscribers’ hands.
Sometimes, products don’t get to subscribers on time due to challenges faced in the transport systems, such as floods, fire or strikes. This can mean that some products, like refrigerated items, will go bad before being delivered. Other times, items will be left lying in building entrances, hallways or are stolen. To cover such risks, it is helpful to maintain communication with your subscribers to ensure they are aware of their delivery arriving at a certain time.
Apart from looking into whether your third party carrier insures the items, you will need to think about how a customer should report any damage. For example, your terms might detail that they must provide photos within 24 hours of receiving a damaged item, along with information about what you do in terms of refunds and replacements.
For damaged goods with evidence provided within the stipulated time, you may consider replacing the box or specific items rather than having the customer have the inconvenience of spending time and/or money returning the damaged items.
Importantly, you will need your own insurance because postage and delivery can at times be an issue. However, it is important to be realistic about what you put into your subscription box, and the packaging inside, to help minimise the risk of items not being delivered as expected.
Disclaimers
Besides cancellations, customer information security should be a consideration. To deliver a subscription of any kind will require your business to have access to billing, shipping, and other personal information. As such, you must ensure your privacy policy complies with the Privacy Act and the Australian Privacy Principles and addresses that while you will be collecting personal information, despite being the business owner, you do not regulate third party providers like Stripe or Paypal, and therefore cannot be responsible for any issues that result, limiting your liability.
Part of the excitement for many subscription boxes is the surprise element, as consumers do not always know what will be arriving. However, surprises also come with disappointments. For that reason, you need to include disclaimers in your subscription box terms and conditions to manage disappointment from customers, especially for curation boxes. What can be helpful to avoid this is to take steps to learn your consumer tastes and preferences. For instance, as part of the sign up form ask questions about key issues that could arise such as specific allergies. This will go a long way in helping you curate or tweak certain boxes to ensure you don’t lose customers.
How to Avoid Churn
‘Churn rate’ is the term used to track the percentage of subscribers that opt-out of a subscription. Churn is your greatest enemy in the subscription business.
Your core goal is to actively reduce churn and maintain subscriptions for long periods. This will increase the overall lifetime value of each customer. To help maintain subscriptions, attract new customers and keep your churn rate low, here are some of our top recommendations:
Ask for feedback at point of exit
When you do receive cancellations, get curious and seek to understand why customers want to cancel the subscription. It helps you formulate a strategy to avoid similar future churn. You can collect feedback through a simple online survey, via email, or over the phone at the point of cancellation.
Customer service
Responding promptly and positively even when there are complaints is important to help reduce churn. If a customer has had a bad experience or doesn’t like something, how you or your team manage that feedback will go a long way. How issues are managed can impact whether a customer maintains their subscription, or if they do not continue, help you minimise the risk of poor online reviews.
Keep up promotion and building interest
Stay visible and connected, even if you have high subscription numbers. Keeping front-of-mind, creating interest and continually delivering great experiences goes a long way in maintaining subscriptions and generating new business to replace any lost subscriptions. You may also choose to set up partnerships with third-party brands to leverage their appeal and reputation for your subscription box brand.
To help manage these inevitable issues, ensure your terms and conditions are agreed to at the point of purchase. Ensure they comply with Australian Consumer Law (ACL) and take into account the nuances that are specific to a subscription product. Then you can rest easy knowing there are policies in place for you and your team to follow when any of the issues we’ve explored above arise.
We have created a template for subscription box terms and conditions that form clear and transparent rules for you, your customers and your team to follow when issues arise. Alternatively, you may wish to book a time to speak with us if you have specific questions relating to your business.
