The Challenges of Operating a Subscription Box




  • by Jesse Richardson March 14, 2016
    March 14, 2016

    Challenges of Running A Subscription Business


    The merits of subscription commerce, naturally, are dead center at the heart of Subscription School. It’s our goal here to explore the strategies, case studies, and realities that surround the industry, specifically with an eye on monthly recurring product offerings, like a subscription box.


    But while we pay homage to the perks and pros of this model, we must also take a moment to sit back and observe the challenges of operating a subscription business. Like any business, subscription businesses do have their drawbacks and pain points.


    From tasks around early planning to challenges that come with scaling, here are some of the biggest things you need to watch out for when launching a subscription box:


    Challenge #1: Pricing Your Subscription Box


    Pricing is in may ways the Achilles heel of subscription boxes. In the pursuit to get everything as low priced and affordable as possible, many business owners don’t take the necessary time to accurately price their product. This can occur for many reasons:



    • Not considering all the costs
    • Comparing one’s idea to a close competitor, and adopting their pricing structure
    • Underestimating specific costs, like product sourcing or shipping
    • Not providing enough ‘wiggle room’ in your budget if you need to spend more occasionally

    How to Overcome the Challenge:


    First, I suggest you take a look at Cratejoy’s subscription box calculator. This calculator simplifies a lot of calculations, but should only be used as a rough tool – you will need to do additional investigation around your costs to get an accurate sense of pricing.


    Next, let’s drill down on these missteps:



    • Not Considering All the Costs: There are a handful of costs that go into a subscription product, and they can be boiled down to a short equation:


    COGS (Costs of Goods Sold) = Product Cost + Fulfillment Cost


    Product costs includes 1) the cost of products, 2) the cost of your box and 3) the cost of tissue paper, packing material, and any other inserts you include in the box. Simple enough.


    Fulfillment cost includes 1) the cost of packing the box and 2) the cost to ship the box.


    But what this leaves you with is gross profit. If you have a box priced at $ 24.99, and your COGS = $ 18.99, you may feel comfortable with a $ 6 margin. But calculations don’t end there: you need to 1) factor in CoCA (Cost of Customer Acquisition) and 2) Operational costs, including hosting, apps, stock photos, customer service platform costs, and any other business related expenses, such as accounting or employees.


    These costs add up, and when you don’t consider them, you can find your margin squeezed to nothing, or even requiring you to invest cash.



    • Pricing with a Competitor in Mind

    This is one of the easiest missteps to avoid in pricing. The fact of the matter is this: you should focus on building your own products before ever worrying about a competitor. A competitor’s pricing can be poorly built, or factor in some competitive advantage you’re not aware of, leaving you with a competitively priced product that’s potentially unsustainable or even inferior in some way.


    The bottom line: forget your competitors.



    • Underestimating Costs

    Using the calculator above, you may feel confident in your assumptions. But when you don’t take the time to proactively confirm your assumptions – by actually investing product costs or shipping costs – you leave yourself exposed to surprise.


    For product sourcing, make a point to reach out to several companies you’re considering for your box. Ask them what kind of pricing they can offer for [X] number of the item you’re interested in. See how easy it is to negotiate with them on price. Even if you don’t have a subscription yet built, you can get an accurate quote from a potential supplier.


    For shipping, make sure you’ve chosen your box size and know your potential average weight (or cubic tier if using cubic shipping for subscription boxes). Shipping is based on zones, or shipping areas based on distances from the origin address. Cratejoy’s shipping calculator is a good tool to understand these concepts, plug in your data, and provide yourself with a validated assumption.



    • Not Providing Enough Wiggle Room

    Similar to the last point is providing yourself room for margin of error. Simply put, it’s wise to build in a buffer zone for costs. If you want to achieve an $ 8 margin on all your boxes, consider pricing it to allow yourself a $ 10 margin. By doing so, you open up the possibility to have higher margin months, but also provide yourself with security, in case one month purchasing, shipping or other expenses arise.


    Challenge #2: Scaling an In-House Fulfillment Operation


    In-house fulfillment is challenge. Scaling it is harder.


    To get a sense of the growth of this operation, check out these two pictures. The first photo shows myself and the other founders of Conscious Box working the packing line for a few hundred boxes.


    Conscious Box In House Fulfillment


    The next photo is 10,000s of subscribers later.


    Conscious Box In House Fulfillment


    To say getting from A to B was a ‘small feat’ would be a huge understatement. It took thousands of hours, lots of effort, and there were many mistakes along the way. But keeping fulfillment running smoothly is possible, and from some points of view, a potentially profit saving and quality-control-improving idea.


    How to Overcome the Challenge:


    First, consider outsourcing. Yes, while you can save money and potentially have better control over the quality of packing, I personally encourage outsourcing fulfillment. The main reason is that it lets you stay focused on growing your business vs. on the pains of running it.


    If outsourcing isn’t in your outlook, there are a few things you can do to help keep this operation running smoothly:



    1. Find the right people. You need a Warehouse Manager, responsible for keeping track of products, their quantity, expiration dates, and any other critical information. You’ll also need Packing Managers, who serve as the heads of the teams of packers. Because most subscription boxes have 5-10 items inside, you’re limited to the number of people who can pack at once, which means you need to create separate ‘lines’ of teams packing boxes. Packing managers help keep them running efficiently.
    2. Dedicate time to preparation. By pre-folding boxes, stocking bins with packing material, and keeping the area clean and free from obstacles, you greatly reduce the chances of hold ups on the line and delays with packing.
    3. Create a monthly calendar. Monthly calendars do a few things for you: 1) they outline ‘drop dead dates’ for when product must arrive, be counted, and be stored, 2) they detail packing days and schedules, and the # of staff persons needed, and 3) they hold you accountable to these dates and requirements, improving your chances of a successful execution.
    4. Keep hands on deck. Having a team of floating packers, who can clean a space, re-stock products or jump into the line themselves, helps keep lines moving efficiently.
    5. Create dedicated work stations. Having specific pre and post-line stations, either for folding boxes or slapping labels on, helps remove some steps from the actual ‘packing’ part of the job. Ideally, your packing line itself will never stop moving, with boxes piling up at the beginning (stock) and end (finished product) of the line.

    Remember: the scale at which a warehouse team is needed usually exists in the 1000s of subscribers, no 100s. However, as you begin to scale and keep fulfillment in-house, make a point to prepare some of the resources you’ll need to keep your team on task and on schedule.


    Challenge #3: Rhythm of a Monthly Schedule of Operations


    One of the biggest challenges I see among new subscription business owners is simply getting in the rhythm of a monthly schedule of operations.


    What exactly is the challenge here?



    • Every month, you need to find and order products.
    • Every month, you need create a packing list, have it printed, and have it delivered.
    • Every month, you need to manage shipping and fulfillment logistics, including ordering materials and organizing labor.
    • Every month, you need to manage re-billing, including determining exact cut off dates/times and segmenting customers into specific, accurate windows.
    • Every month, you need to attend to customer service needs, including replacements, refund, etc.
    • Every month, you need manage marketing your box and service, including social media promotion, email marketing, and any other efforts.

    When you sit back and look at it, it can feel daunting, and that’s the source of the challenge: there’s a ton to do!


    How to Overcome the Challenge:



    1. Create a calendar. Most of these operations don’t need to happen at the same time. Week 1 can be dedicated to finding products. Week 2 can be dedicated to creating a packing list and placing an order. Week 3 can be dedicated to getting operations and materials ready for packing (your packing list should arrive this week!). Week 4 is dedicated to packing/shipping and getting prepared for a peak in customer service attributed to shipping and rebilling. Marketing and customer service needs to happen throughout the month.
    2. Delegate. If you’ve got a business partner, split responsibilities based on your skill set. If you’ve got employees, make expectations, deliverables, and time requirements clear.
    3. Set daily reminders. Make a point to keep yourself on task through the day. Set day specific goals, and create alarms throughout your day for when they should be completed. Adjust go-foward deadlines based on early/late completions.
    4. Execute one task at a time. Trying to create an email campaign, take customer service calls, and browsing products all at the same time is never going to work. Multi-tasking key operations simply is usually wise for a deadline driven business. Try to focus on one task at a time.

    Challenge #4: Maintaining Superb Customer Service


    Subscription businesses live and die on their ability to service subscribers excellently. Unlike the product they’re willing to wait 3-4 weeks for each month, getting helpful and accurate customer support will be something subscribers expect immediately.


    And it’s for good reason: subscribers are committing to an on-going service that rebills on a set interval. In the same way they commit to you, they’ll expect a strong commitment for you.


    What this means is holding yourself to strong customer service standards:



    • Email received notifications: You should alert customers that their email has been received
    • Same day replies: Keep response times under 24 hours during business days
    • Exceptional Self Help: You should have both a comprehensive FAQ page as well as self-service options (for changing address, etc)
    • Social Media Support: Customer service doesn’t stop at your email inbox. You need to have your team members focused on all your social media channels.

    In order to accomplish these things, you should consider using a third-party customer service solution, which will provide extra tools and services to keep response times down. For example, the use of Macros automatically fill in responses emails, while using Filters and Lists sort emails based on topics and keywords.


    Overcoming the Challenges of Operating a Subscription Box


    While some of the planning and logistics around subscription boxes can be provide unique challenges to scaling and operating your business, solutions aren’t far away. If you’re considering operating subscription business, let us know which challenges (those listed here, or your own challenges) you think are most difficult in the comment section. If you currently operate a subscription business, tell us how you’ve managed these challenges, or which ones proved most difficult for you!

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