Starting a subscription business in 2024
Table of contents
What is the Subscription Business Model?
Benefits of Subscriptions
Steps to start a Subscription Business
How does a Subscription ecommerce business work?
Shipping and Fulfillment
Marketing Strategies and Tactics
Challenges of Subscriptions
Subscription business model FAQs
So, you’ve decided to take the plunge into entrepreneurship and start a subscription business. Congratulations! Starting a new business is an exciting, and scary, venture, but Upscribe is here to help you every step of the way. In this guide, we’ll walk through everything you need to know to start a subscription business in 2024. But first, what are subscriptions, what do customers like about them, and how can you make the subscription model work for your new venture?
What is the Subscription Business Model?
Definition and Popularity:
A subscription business involves selling a product or service to customers on a recurring basis. This model has gained immense popularity due to its predictable revenue stream and the ability to build long-term customer relationships. It also helps businesses to better forecast supply needs, typically leads to higher LTV (lifetime value) at a lower CAC (customer acquisition costs), as well as an overall better customer experience due to the fact customers don’t need to remember to make a purchase manually.
There are a variety of types of ecommerce subscription models, but they can be broadly classified into three main categories.
Types of Ecommerce Subscription Models:
- Curation model: Regular delivery of products, typically curated based on a customers personal needs and preferences (e.g., beauty boxes, groceries). Examples of these include Birchbox and HelloFresh.
- Replenishment model: This model automates the purchase of items so that customers receive replacements on a regular basis, typically of commodity items or items that are frequently used, such as razor blades, vitamins, etc. They typically come with some kind of a subscribe and save discount, and are loved by customers because they don’t need to take the time to remember to reorder items they use regularly. Examples of these include Dollar Shave Club & Amazon Subscribe & Save.
- Access Model: The access model allows customers who pay a regular fee to obtain specific perks and bonuses, such as early access to new products, exclusive discounts, or other special benefits. This can also include services where you buy a product once (or receive it for free), and continue to receive service or support of the product with payment of a monthly subscription. Examples of this are Whoop, which gives you a free tracking band, but charges a monthly price for access to their software and tracking.
Benefits of a Subscription Business
There are many benefits of adding a subscription option to your Shopify ecommerce store. The major benefits of doing this include:
Better customer relationships: Rather than a one off purchase, such as if somebody was buying your product on Amazon, subscription businesses are typically DTC, and as such, can have much better customer experiences to their customers, and allow you to actually form a relationship with them. This helps to increase loyalty, customer engagement, and to allow the business to better personalize the products and services to their unique set of customers.
Lower CAC (customer acquisition costs): While it can be extremely costly to acquire a new ecommerce customer (with costs only going up), subscription business models can actually acquire customers at a lower cost than other models due to a typically higher LTV (lifetime value). Rather than paying an arm and a leg to acquire a single customer who may or may not reorder from you, subscription models better help you identify the payback period, based on the average amount of time that most customers stay subscribed.
Better opportunities to upsell or cross-sell: Due to having an ongoing relationship with your customers, this gives you the ability to better cross-sell or upsell your customers. If someone really enjoys your monthly mid-price tier subscription box, they may love the extra products or benefits of upgrading to your premium box.
Better data insights: Customers will be much more willing to share what they love (or dislike) about your subscription experience due to the ongoing relationship you maintain with them. You will also be able to collect data on their overall preferences, buying patterns, marketing demographics, and much more to help you acquire similar customers.
Predictable revenue stream: In many ecommerce businesses, sales can fluctuate widely from month-to-month (or even week to week), which makes planning and forecasting extremely important, and difficult. Subscription models help to take some of the guesswork out of forecasting inventory because the income is much more predictable, allowing you to scale up or scale down appropriately to fit the needs of the business.
Steps to Starting a Subscription Business
It can be overwhelming to think about launching a new arm to your business, especially when it comes to launching a subscription business. As such, we have put together a list of steps to follow with some areas to think about within those areas when launching a subscription business below:
- Identify your niche: Understand what unique product or service you can offer. Look for gaps in the market or emerging trends.
- Take time to research your competitors: Study your competitors to identify what works and potential areas for differentiation.
- Business model canvas: Create a canvas outlining key aspects like value proposition, customer segments, channels, revenue streams, and cost structure.
- Financial planning: Prepare a detailed financial plan, including startup costs, pricing strategy, and revenue projections. Upscribe has a helpful subscription cost calculator to help you decide how much you should charge for your subscription.
- Licensing (if needed). Ensure you comply with all local, state, and federal regulations and obtain the appropriate licenses for the products you plan to sell. You may also need business certificates (also known as DBA’s), or LLC/Corporation formation.
- Pricing: At this point you’ll want to have a solid idea of what competition is out there and how much they’re charging. You want to price your products appropriately so that they cover your costs, but are also reasonable so that customers will choose your business over your competition.
- Consider adopting freemium pricing model, in which you allow customers to use your product or service with basic features for a certain period of time, in the hopes that they will eventually upgrade to a paid tier. Be sure to track your conversion rates from free to paid to ensure the costs are worth it.
Product or Service Development:
- Quality and consistency: Focus on high-quality offerings and ensure consistency in delivery.
- Customization and personalization: Consider offering personalized options to add value.
Building Your Platform:
- Ecommerce platform: Choose or build an ecommerce platform that supports subscription management. Shopify is the most popular ecommerce platform, which includes an app store with apps like Upscribe that let you manage your subscriptions all in one place. They also handle complicates issues like support, billing and payments, and more.
- User experience: Ensure a seamless and user-friendly experience, from browsing to checkout and customer support.
Marketing and Customer Acquisition:
- Brand building: Develop a strong brand identity and value proposition.
- Digital marketing: Leverage social media, email marketing, and content marketing to attract and retain customers.
- Influencer partnerships: Collaborate with influencers to reach a wider audience.
Logistics and Operations:
- Supply chain management: Ensure a reliable supply chain for uninterrupted service.
- Customer service: Offer excellent customer support to retain subscribers.
Legal and Compliance:
- Regulations: Comply with legal requirements specific to your industry and region.
- Privacy and data protection: Ensure customer data is securely handled and privacy regulations are adhered to.
Scaling Your Business:
- Feedback and adaptation: Regularly seek customer feedback and adapt your offerings.
- Expansion strategies: Explore new markets, add product lines, or enhance services.
Track customer churn:
Tracking churn helps you to understand why your customers cancel their subscriptions, and can help provide insights into getting them to stay. Maybe you don’t offer an easy way to “pause” a subscription, such as if the customer is going out of town or doesn’t need your subscription during a holiday. Maybe your prices are high compared to your competitors, and you could offer a lower cost plan that better fits their needs.
How does a subscription ecommerce business work?
A subscription ecommerce business is a relatively straightforward business model. A customer comes to the businesses website, typically from an ad, organic search (SEO), social media, or other method. They’ll browse the products the company sells, and then sign up for an account to begin personalizing their subscription preferences. Depending on the type of subscription, the customer will either choose specific products that they want delivered at a regular interval, or input their preferences to receive a curated box put together for them.
They’ll then go to the checkout page to input billing and shipping information, and be given an estimate on when they can receive their first box. All payments and subscription logistics are typically handled by an ecommerce subscription platform like Upscribe, which integrates directly with your Shopify store.
Once integrated with your Shopify store, Upscribe makes it simple for you to turn any product on your Shopify store into a subscription product. Solutions like Upscribe, help you automate the process of charging a subscription product so you don’t need to do anything once a customer has signed up for a subscription product. Customers will be able to manage their own subscription by pausing, editing or canceling their subscription in only a few short clicks.
Shipping and Fulfillment
Now comes the fun part; fulfilling customer orders and shipping them out to your customers! Shipping and fulfilling orders involves receiving the order from the customer, assembling all of the products they ordered from your warehouse, garage, etc., and sending them to your customers via USPS, UPS, FedEx, etc.
From the time the customer places the order until the time their box arrives at their doorstep, the clock is ticking! That’s why it’s so important to have clear (and frequent) communication with your customers to inform them of where their box is at every step of the way. Be sure to be clear up front on how long it takes from the order being submitted to it being sent out, as well as how long on average the shipping carrier takes to deliver the box to their door. This is even more vital around the holidays, when people are typically expecting to receive their packages by a certain date so they can give them out as gifts to friends and family.
On top of communication with your customers as to the status of their orders, allowing customers to track orders themselves, or potentially alter orders up to a certain point before they are fulfilled and shipped.
Below are some tips and tricks on how to create an outstanding shipping and fulfillment process for your orders.
Optimize packaging: The packaging will be the first impression the customer has of their box. Not only should it be easy to open and visually appealing, but you’ll also want to make sure that it’s well padded to protect the contents inside. You also don’t want to choose packaging that is too large as this can add to shipping costs.
Negotiate shipping rates: Depending on the volume of packages that you send, forming a partnership with a shipping carrier may make sense and can help you get favorable rates depending on how much you send. This is important not only for your bottom line if you offer free shipping, but also important to the customer if they have to pay for shipping; oftentimes customers will get to a checkout page and end up leaving once they see shipping costs that are higher than they’re expecting.
Offer different shipping speeds: Some customers may be fine with standard shipping (on average, roughly 3-5 business days), but some may want their products faster, particularly if they’re a new subscriber or have frequent reorders. Offering different shipping speeds is a great way to ensure customers are getting their products exactly when they want them. Many businesses will offer a free shipping tier, which is the slowest tier (typically ground shipping), while also providing a faster shipping option if a customer desires.
Consider branding your boxes: Branded boxes are a great way to keep your business top of mind for customers. The packaging will be the first thing the customer sees, and a branded box will stand out moreso than the standard cardboard boxes that they probably receive from a multitude of other companies. It’s also a great way to advertise, as others will see the boxes, and occasionally customers will reuse boxes themselves, further spreading your brand around.
Consider outsourcing: Outsourcing your shipping and fulfillment can be a great way for you to save time, energy, and hassle on shipping and fulfillment, leaving you more time to focus on growing your subscription business. Many fulfillment companies can automate receiving orders from a subscription service, and they will handle all of the inventory picking, packing, labeling, and shipping for you. All you have to do is send your inventory to them and send orders as they’re received, and they handle the rest. Most can handle standard packaging or custom boxes, as well! Perhaps best of all, many outsourced companies already have existing relationships with a variety of shipping carriers, and can help to ensure affordable rates for any shipping option.
Add something special to each box: It’s the little things that customers remember that keep them coming back to your business for years. Consider creating a special unboxing experience (which is also a great way to catch the attention of influencers on platforms like TikTok, Instagram, and Youtube. This can be as simple as a hand written thank you card, or contain a special, unexpected gift or other personalized token of appreciation.
Send tracking information and shipping updates: Tracking information is crucial to ensuring a customer is aware of where their box is when it’s out of your hands and in the hands of the shipping carrier. Unfortunately, issues do happen and packages can be lost or delayed, so overcommunicating on this step whenever there is a status update on their box is important. While many customers will track their boxes themselves, it can be helpful to also send them email reminders with updates as to where their box is, especially if it’s delayed.
Marketing strategies and tactics
Growing a subscription box business requires innovative and effective marketing strategies to attract new subscribers and retain existing ones. Here are several strategies tailored to the unique aspects of subscription box marketing:
- SEO & Content Marketing:
- Blog Posts: Blog posts are a great way to rank for a variety of search terms on Google, and are a great way to keep your site relevant with fresh, up to date content. Create valuable content related to your subscription box niche to attract organic traffic. Use SEO best practices to rank higher in search engine results, drawing potential subscribers to your site.
- Video Content: Leverage the power of unboxing videos by encouraging subscribers to share their own experiences on social media. You can also collaborate with influencers to reach a wider audience.
- Interactive Content: Create helpful tools such as quizzes, calculators, and more to allow your audience to better understand the benefits of your subscription offerings. For example, you may want to provide a quiz to help customers determine what type of box is best for them.
- Social Media Marketing:
- Engaging Social Media Presence: Utilize platforms like Instagram, Facebook, and Pinterest to showcase your subscription boxes with high-quality images and engaging posts. Use hashtags, run contests, and engage with followers to build a community around your brand.
- Paid Social Ads: Invest in targeted social media advertising to reach potential customers based on their interests, behaviors, and demographics.
- Email Marketing:
- Newsletter: Build an email list and send regular newsletters with exclusive content, sneak peeks into upcoming boxes, and special offers to keep your audience engaged and informed.
- Segmentation and Personalization: Use email segmentation to send personalized recommendations, renewal reminders, and targeted promotions based on subscriber behavior and preferences.
- Referral Programs:
- Encourage word-of-mouth marketing by offering incentives for subscribers to refer friends. This can include discounts, free boxes, or special gifts for both the referrer and the new subscriber.
- Collaborations and Partnerships:
- Influencer Marketing: Partner with influencers who align with your brand to reach new audiences. Provide them with a subscription box to review and share with their followers.
- Brand Partnerships: Collaborate with complementary brands to co-create special edition boxes or offer cross-promotional deals to each other’s audiences.
- Customer Retention Strategies:
- Personalization: Offer personalized box options where subscribers can choose their preferences, increasing satisfaction and loyalty.
- Customer Service Excellence: Provide outstanding customer service, including easy cancellation and pause options, to improve overall satisfaction and reduce churn.
- Community Building:
- Create an online community around your subscription box, such as a Facebook group or forum, where subscribers can discuss products, share experiences, and provide feedback.
- Loyalty Programs:
- Implement a loyalty program that rewards long-term subscribers with perks, discounts, or exclusive items to encourage continued subscription.
- Utilizing Data and Analytics:
- Analyze customer data to understand preferences and trends, which can inform future box curation, marketing strategies, and personalized offers.
- Seasonal and Limited-Edition Boxes:
- Capitalize on holidays and seasons to offer special edition boxes, creating urgency and tapping into the consumer’s desire for exclusive products.
- Offer a Trial Period or Sample Boxes:
- Consider offering a discounted trial period or a smaller sample box. This lowers the barrier for new subscribers to try your service with less commitment, potentially converting them into regular subscribers.
- Optimize Your Website for Conversion:
- Ensure that your website is user-friendly, mobile-responsive, and optimized for conversions. Include clear calls-to-action (CTAs), compelling copy, and streamline the subscription process.
- PR and Media Coverage:
- Reach out to media outlets and bloggers for features or reviews of your subscription box. Getting covered in a popular publication can significantly boost your visibility and credibility.
Challenges of subscriptions
As you think about starting and growing a subscription business, it is important to keep a few items in mind in order for your business to thrive. Keep these challenges in mind as you grow your business:
Customer Retention: Focus on customer satisfaction and regular engagement to minimize churn. Be sure to consistently ask for regular feedback to get ahead of issues customers may have that cause churn, such as payment failures, miscommunications, product satisfaction, etc.
Market Saturation: Differentiate your offerings and create a unique value proposition. It has never been easier than today to start a subscription ecommerce business, meaning that the competition can be extremely high for certain products and services.
Cash Flow Management: Keep a close eye on finances and adjust your strategies accordingly.
Customer acquisition: It can be costly to acquire new customers, especially for those who may already have too many subscriptions and are hesitant to add another monthly fee.
Subscription fatigue: Customers may eventually become tired or overwhelmed by receiving products regularly, which can lead to cancellations. They may also be juggling numerous subscriptions at one time and may look for costs to cut, especially if hit with a layoff or job loss.
Shipping and Fulfillment challenges: Depending on how many products you sell, fulfilling orders can be challenging for subscription boxes due to the customizable approach many businesses take. If you sell perishable goods, that adds an extra layer of complexity as you’ll want to ensure the customer receives their order well before the expiration date.
Subscription business model FAQs
- Can a subscription model work for any type of business?
- Yes, a subscription model can fit for most, if not all types of businesses. There are some industries it works better for (such as software, ecommerce, media, consulting services, etc. but any business out there could adapt from selling one-off sales to offering those same products/services via subscription, or offering incentives to switch to the recurring subscription in the form of discounts, additional benefits, etc.)
- What are some examples of successful subscription businesses?
- Dollar Shave Club: Dollar Shave Club is a great example of a subscription business selling personal care products that people routinely need to resupply. They make it extremely easy to reorder on regular cadences so you’re never left without what you need.
- HelloFresh: HelloFresh is one of the first meal delivery services, and also one of the most successful. Many other competitors have came and gone, but HelloFresh has stuck around with the simple, easy to use interface, great introductory offers, and delicious meal recipes.
- Amazon Prime: Amazon Prime first launched almost 20 years ago, and has been a hit amongst Amazon customers ever since. Best known for their two day shipping, Amazon continuously offers new perks and benefits to prime members like music and video, exclusive perks and savings, access to prime day deals, and much more.
- Microsoft 365: Microsoft 365 is perhaps one of the best examples of a company that pivoted from selling software on a one-off basis (their extremely popular Microsoft Office, which includes Word, Excel, Powerpoint, and Outlook) and bundling them all together for an annual fee starting around $70. While this annual fee is less than the cost of the software package they used to sell, the recurring revenue more than makes up for it.
- Barkbox: People love giving gifts to their fur babies, and barkbox discovered a niche to sell monthly dog treats and toys to owners on a recurring basis. They allow you to customize your box for your dogs specific needs, such as allergy safe treats to different types of toys the dog enjoys. They offer various lengths for their plans, from annual to monthly, with discounts provided for a longer subscription term.
- Netflix: One of the oldest and best known online subscription services, Netflix famously got their start mailing DVDs to customers doors and letting them keep them as long as they wanted (killing the late fee for good). They then pivoted into streaming video and became a global media empire with their own original series and the highest subscriber count of any major streaming service.
- Costco: Started back in the 1980’s with a novel idea; people would be willing to pay an annual fee in exchange for buying discounted (sometimes heavily discounted) goods in bulk. Costco was able to keep prices low by providing exclusive access to their members, and buying their products in bulk which allowed them to negotiate major discounts.
- What technology platforms should I use for my subscription business?
- Upscribe. Upscribe makes it easy to manage your subscriptions, payments, reorders, and much more all in one easy to use interface within the Shopify platform. Any Shopify merchant is eligible to use Upscribe; Request a demo of our platform today.
- Shopify: Shopify is the largest ecommerce platform out there, allowing entrepreneurs and established businesses alike to start selling products online. They offer a robust app store with hundreds of thousands of apps, with everything from email and sms software to subscription management software like Upscribe.
- Woocommerce: Woocommerce is an open-source ecommerce platform built for WordPress, the world’s most popular CMS. Woocommerce allows you to build websites with prebuilt themes, include shopping cart functionality, customized product pages, built in SEO, and sell subscriptions.
- Bigcommerce: Bigcommerce bills themselves as an enterprise ecommerce platform, enabling both B2B and B2C functionality and multi-storeform and localization functionality. They also have a sizable list of partners and integrations to allow businesses to customize how they manage their businesses.
- Klaviyo: Klaviyo is an email and sms automation platform which integrates with all of the major ecommerce platforms like Shopify, Bigcommerce, and more. They can manage one off email and sms campaigns as well as transactional and recurring emails such as order confirmations, shipping updates, satisfaction surveys, and much more.
- What metrics should I track for my subscription business?
- CAC: CAC stands for customer acquisition costs, and helps you to understand how much money you spent, on average, to acquire a single customer. Oftentimes, this cost will be higher than the cost of a month’s subscription.
- LTV: LTV stands for lifetime value, and is a measure of, on average, how long a customer stays subscribed and buying from your business, multiplied by how much they spend with your business. Ideally, this should be higher than your CAC.
- CAC:LTV ratio: This is a ratio that measures how much you’re spending to acquire a customer, in relation to how much the customers are paying you throughout their entire lifecycle. A 2:1 or 3:1 ratio is ideal for most businesses, although some newer businesses may be happy with a 1:1 ratio as they are in growth mode. A 5:1 ratio or higher typically means that you aren’t spending enough and could potentially be growing faster and more aggressively.
- Retention rate: This is a measure of how many customers stay subscribed after a predefined period of time. For example, if you care about annual retention of monthly subscribers, you’d look at how many customers subscribed 12 months ago are still subscribed today, divided by the total number of customers who subscribed 12 months ago. You’ll want to look at this both from a customer retention metric (focused on the total # of customers) as well as a dollar retention metric (focused on the total # of dollars, as in many cases, not all customers pay the same amount).
- Churn: Similar to retention rate, churn is a measure of how many customers cancel your subscription. Churn is useful to provide insights into reasons customers decide not to renew, such as pricing, customer service, and much more.
- Growth rate: Growth rate is the number of customers you add each month (or lose each month). If you have 100 customers to start the period, and you add 10 new customers, and lose 5 customers, your growth rate is 5% (110 – 5 – 100) / 100).
- Conversion rate: This is a measure of the customers who take an action on your website that you determine is valuable. This is most often a sale or subscription, but could also be signing up to receive emails or requesting pricing. Conversion rate is calculated by determining the number of conversions divided by your total number of visitors during a specific period of time (monthly, quarterly, annually, etc.).
- Can a subscription model work for any type of business?
Starting a subscription business in 2024 requires a well-thought-out plan, a deep understanding of your market, and a commitment to providing exceptional value to your customers. By focusing on quality, customer experience, and continuous innovation, you can build a successful and sustainable subscription business.
Remember, the key to success in this model is not just acquiring customers but retaining them over time through consistent quality and excellent service. Customer retention is where Upscribe excels. Looking to learn more? Request a demo to learn more about our subscription management and retention platform.