As a subscription box owner, evaluating and re-evaluating the price of your product is one of the most important pieces of decision-making you can do to set up your subscription box business for success in 2019 and 2020.
Even though savvy entrepreneurs know every aspect of your business will be affected by the price tag of your subscription box, some may still focus too much on covering costs or getting a specific margin, but ignore the wider pricing strategy.
This can be a mistake because many subscription box owners miss out on determining the real value of the subscription box to the subscriber.
So, then, how do you nail your pricing to attract — and, ultimately, keep — customers while making the maximum profit? Let’s find out.
Subscription Box Pricing: Take 4 (Metrics, That is)
Unfortunately, there’s no magical way to get to the best price without looking at four metrics. These are critical to subscription box owners making the most accurate financial projections.
While tracking data and metrics may seem like something for your CFO or your VA, stick with me. Getting your head around these formulas will give you a practical way to price your box to get the most revenue.
And we all want more revenue, right?
Subscription Box Pricing Metrics for Success
Here are the four metrics that you must take into account when pricing your subscription box:
- Customer Acquisition Cost (CAC) – This is how much it costs to get a single customer.
- Customer Churn Rate – This is the speed at which you lose customers through subscription cancellations. You can calculate your churn rate either on a monthly, quarterly or yearly basis.
- Customer Lifetime Value – This is the total dollar value of all purchases by a customer from the time they sign up to the time they cancel.
- Profit Margin – This is calculated on your whole box and is worked out by dividing your profit by your selling price.
To work out the price of a subscription box that will bring in the most revenue, you need to estimate the values of these metrics.
1. What is Your Customer Acquisition Cost?
To calculate your customer acquisition cost, total your monthly marketing expenses (advertising, PR, etc) and divide by the number of new customers you sign up every month.
So, if your marketing expenses are $3,600 each month and sign up 250 new customers, you’ll have a CAC of $14.40.
2. Next up: Calculating Your Churn Rate
If you’ve already been in business for some time (say a year or more), review the number of customers who subscribed in January 2018.
You must calculate that percentage of customers who still subscribe to your box today. Let’s say 500 people signed up in January 2018 and, within 12 months, 45% of them continued to subscribe. That would mean your churn rate is 55%.
3. Calculating Customer Lifetime Value
From this example, your customer lifetime value (in months) for 2018 is 12 divided by 0.55, or 21.81 months, meaning your average customer in 2018 will remain subscribed for 21.81 months or at least until October 2020.
You can work out your customer lifetime value using this formula:
Customer Lifetime Value = 1 / by average customer churn rate that month.
4. Profit Margin for the Win
Next, work out your profit margin. If it costs $10 for everything to put your subscription box together and you charge $25 every month, your profit margin will be around 60%. If you could bring the cost of the box down to $8 and charge $40, you’ll get a higher profit margin of about 80%.
So, at $40 per month per subscription with a gross margin of 80% (taking into account your additional costs), you’d approximate a customer lifetime value of: [$40 x 0.8] x 21.41 = 697.92.
Working out this figure will help you to understand how much you should pay for customer acquisition and how much you should budget for marketing.
As a rule of thumb, your cost of customer acquisition should be ideally about 25-35% of your customer lifetime value.
Having worked out these metrics, how exactly do you go about working out the pricing for your subscription box.
Here’s the formula again.
[Monthly box cost] x [gross margin] x [customer lifetime (in months)] = [customer lifetime value]
The amount you charge for your subscription box depends on how long your customers remain with you and the profit margins on each box. It’s also recommended that you include your customer acquisition costs to cover your full marketing budget.
Other Things to Keep in Mind
- Fulfillment costs
When starting a new subscription box business, it’s really important to think about the cost of logistics. This includes the cost of the packing, labor and/or fulfillment fees and the cost of shipping.
- Operational costs
There’s normally so much going on when starting a subscription box business, it’s easy to overlook some expenses. But taking your eye off the ball here can have a negative impact on your profit. You need to account for every single operational expense including credit card processing fees, accounting and marketing.
- Perceived quality and brand
There are non-tangible factors you need to think about when pricing your subscription box for maximum profit. Although it’s hard to put a dollar value on these factors, they still make the difference in whether you’ll be able to maximize your revenue and profit.
It’s a well-known fact that the price of something determines its value. Products with higher price tags automatically make most people think they’re better quality.
Say you’re faced with a choice of hotels. One costs $1,000 per night and one costs $100 per night. Which one would you instinctively think will offer more comfort and quality? Definitely, the hotel that costs $1,000 per night.
This is a bonus for subscription boxes, especially if you offer surprise products. Your customers don’t know what will be in the box, so it’s difficult for them to place an actual value on it.
Following this logic, a higher-priced subscription box should indicate better quality products. This pricing psychology can be used in addition to the cost of goods when pricing your subscription box.
When using the higher priced strategy, you need to be sure that you’re giving your subscribers real value. If your products don’t stack up to your high price, there’s a greater chance that your customers will cancel their subscription.
A study by the University of Chicago found that, when consumers use price to measure quality, this has an indirect effect of encouraging business owners to provide better quality products.
So, charging a higher price could be a big motivating factor to give your customers the best products and experiences.
Price Ranges for Subscription Boxes
The following are the four price ranges of subscription boxes:
- Low cost ($1 – $15) – These subscription boxes normally have introductory goods, samples and products that are used often (e.g. Dollar Shave Club and Graze).
- Medium cost ($16 – $25) – You’ll find full-sized items in these boxes that aim to provide a premium experience (e.g. Vegan Cuts, Boxy Charm).
- High Cost ($30 – $50) – These are full experience products of somewhat high value. The products are normally artisan, uniquely sourced or have some other form of distinctive characteristics (e.g. BattlBox and Ivory Clasp).
- Expensive ($50+) – These are at the higher end of subscription boxes and will have various aspects that make them unique and difficult to get elsewhere (e.g. Trunk Club and Hoppi box).
The price ranges above give you a good starting point of how your subscription box products will be perceived based on pricing.
Being Different Pays Off
The more unique your products, the more you can charge.
Differentiation will help you stand out in a crowded market. If you’re offering one-off, exclusive products, you’ll be able to charge a higher price. Differentiation doesn’t only have to do with the product itself. Your point of difference can be how your product is sourced. For example, if you use ethically and locally-sourced ingredients, put this front and centre of your marketing message.
Where your products are exactly like another subscription box product, you may have to compete on price. This can be a slippery slope because you’ll forever be in a price war with your competitors. Although it can be tempting to adopt this strategy to grow your subscription business, it’s best not to engage in this type of ‘race to the bottom’ pricing.
One subscription box that differentiates itself from its competitors is OwlCrate. They offer a subscription box of books. What sets them apart is that they offer autographed copies of books to their subscribers.
Just like any other business, having a full understanding of your customers’ desires and needs are key to getting the most revenue from your subscription business. Do your research and analyze all the data you can find to collect important information about your audience.
Factors you need to determine include:
- Education level.
- Income level.
- Typical disposal income.
- Marriage status.
The more you know about your audience, the better you can set your ideal price point. If your audience is in the higher disposable income bracket, you may be able to charge slightly more for your subscription box. If your research points to your audience being more driven by lower pricing, then you’ll need to adapt your pricing accordingly.
Take Your Time to Price
There’s so much to consider when pricing your subscription box for maximum revenue. You need to study (or project) the hard numbers as well as take into account softer elements, like pricing psychology.
Your main job is to ensure that you’re exceeding your subscribers’ expectations, while making the most profit. Given that the subscription box market continues to grow, you have the advantage of gathering information from your competitors. See where you can better your product or service without negatively affecting your bottom line.
Last But Not Least: Customer Retention Strategy
We spoke about customer churn above. Although there are some measures you can put in place to avoid failed payments, it’s a reality that some of your customers will churn at some point.
Your pricing strategy should include different ways to reduce churn and recover failed card payments that are due.
And, no, we’re not talking about Dunning software.
At Gravy, our track record of helping businesses to recover recurring payments speaks for itself. We’ve helped to recover more than $22 million of failed payments for businesses we serve.
We provide a full-time focus on ensuring that you get the most revenue out of your subscription business and no failed payments slip through the net.
You’ve worked hard to get your subscription box business off the ground. Think about partnering with Gravy from day one to safeguard your hard-earned investment and boost your profits.
Book a free chat to find out how partnering with us can make the difference to your subscription box business just scraping by and being wildly profitable.