When deciding how to price your subscription box, it is crucial to consider how all aspects of your business are affected by the price tag. New business owners sometimes focus too closely on covering costs or obtaining a specific margin.
However, while covering costs is extremely important as a small business owner, your pricing strategy should be a reflection of the value it provides to your subscriber. Below, we’ll explain how to:
- Determine your costs and net margin
- How to manage your box’s perceived quality through your price
- How to differentiate your box and what that means for your price
There are two kinds of margins that will be relevant to your subscription box business.
Gross Margin: Your profit before accounting for non-product expenses ( the expenses that don’t go directly into your box, i.e. your Cratejoy fee). The gross margin only accounts for product costs.
Net Margin: This is your profit after accounting for all expenses involved in running your business. Your Net Margin is the percent of sales that you’ll take home at the end of the day.
When calculating your margin, you can break expenses down into three categories: product costs, fulfillment costs, and operational costs.
Product cost includes all the costs associated with creating your box. That includes the products, the packaging material (i.e. tissue paper), and the box itself.
For the latter two, prices remain pretty consistent (we recommended estimating about $1/box + $1/material).
For products, though, you have a great deal of flexibility with cost and how they affect your margins because purchasing changes from month to month. Your gross margin is ultimately based on what you decide to put in your box, so if one month you spend less on the items, you’ll get a higher margin.
For example, with a $30 box, if you spend $10 on products one month and $7 the next, you’ve immediately impacted gross margins by $3, or about 10%.
However, reducing the number or quality of your items could compromise subscriber product experience and perceived quality. Maintaining and delivering value to your subscribers is critical to prevent churn.
Churn Rate: The percent of members that cancel their subscription within a specific time period.
According to Len Markidan, head of marketing at Groove, “If you stop helping [customers] get value from your product throughout their entire lifecycle, then you risk making that lifecycle much, much shorter.”
The bottom line: Before adding an expensive item to your box, calculate how it will affect your margins and ask yourself if the customer will really value it. At the same time, before you remove a costly item from your box, make sure that you understand how your subscribers will feel, whether it changes the value propositions of your box, and how it impacts your churn rate.
When starting a subscription box business, you must also consider the cost of getting your product to your customer. This includes the cost of the packing, labor and/or fulfillment fees, and the cost of shipping.
We suggest estimating shipping at $7 (this depends highly on the size and weight of your box) and fulfillment costs at roughly $1.25/box.
Outside of product & fulfillment costs, there are many other expenses associated with running a subscription business that impact your margin. There are fixed costs such as marketing, accounting, web services, credit card and processing fees, and, of course, your time! Your net margin should cover all these costs and leave you with some profit afterward.
How to Calculate Your Margin
Revenue – Product Costs (COGS) – Fulfillment Costs – Operational Costs = Profit
Profit / Revenue = Net Margin
So, sticking with our example and recommended numbers:
$30 (revenue) – $10 (COGS) – $8.25 (fulfillment) – $ 2.75 (ops cost) = $9 (profit)
$9 (profit) / $30 (revenue) = 30% (margin)
The goal for any subscription box owner is to deliver items that subscribers value highly, but are still favorable to your margins. While there’s no single magic margin number, we suggest aiming for a 30% net profit margin. In other words, for every $1 you receive as revenue, $0.30 will go to you as profit and the other $0.70 will go towards covering your costs. With 500 subscribers, that will earn you approximately $4,500/month – or $58,500 per year!
Tip: For more on margins and how to calculate your box’s price, use our Pricing Calculator.
Pricing also affects a number of qualitative factors, such as brand value and perceived quality. While these factors can’t really be measured easily and incorporated into preliminary calculations, they are integral to your overall business and marketing strategy.
According to Indian Institute of Management professor Krishna Agrawala, “Prices are used as an indicator of product quality in situations where it is difficult for customers to ascertain the intrinsic physical quality of products.”
For example, it’s hard to put a price on staying at a hotel without knowing how fancy it is, the provided amenities, location, etc. In this case, a higher price often indicates a nicer hotel. On the other hand, for a product like toothpaste, price matters much less because it’s something that’s used on a daily basis. Consumers know that the quality of toothpaste can only vary so much. As a result, there is little impact of price on the perceived quality in this product category.
Subscription boxes are generally closer to the hotel example. Since consumers often don’t exactly know what they’re getting each month and can’t directly assess the particular quality before buying, a higher price can be indicative of higher quality items. This is an instance where a pricing strategy based solely on your cost of goods would be unwise.
With that being said, the caveat with subscription businesses is that it’s an ongoing relationship. If you don’t consistently deliver goods that meet the expectations for pricing, you could risk losing subscribers. According to a study done by University of Chicago researcher Steven Shugan, consumers that use price as a measure of quality encourage companies to raise the level of product quality.
Generally, price ranges for subscription boxes fall into the following 4 ranges:
- Low Cost ($1-15): Mostly sample-product subscriptions or commodities based on conveniences. (e.g. Dollar Shave Club, Birchbox, Graze)
- Medium Cost ($16-25): These boxes contain full-size items. These subscriptions should provide a premium experience. (e.g. Muse Monthly, Vegan Cuts)
- High Cost ($30-50): These are full experiences. These boxes contain products that are perceived as premium, artisan, or uniquely valuable in another way. (e.g. Prospurly, Popsugar’s Must Have, BattlBox)
- Expensive ($50+): These are priced higher than most other boxes and should contain a number of differentiating factors (see below). (e.g. Box of Style, Trunk Club)
The above ranges are not absolute, but do provide a good picture of the overall market and roughly what kind of value you should provide based on your price point. The easiest way to raise your price is by differentiating your box which we’ll dive into below.
No matter the product category, differentiation helps your product stand out.
If your box provides something that a consumer wouldn’t get anywhere else, you can raise your prices accordingly. However, if your box is exactly the same as another on the market, you may have to lower your prices to compete.
OwlCrate, for example, provides its subscribers with autographed copies of their books. This is something that differentiates their box from other book boxes on the market and justifies their price and provides value to their subscribers.
Pricing can also be a major differentiator. Pricing your box slightly lower than the competition could convey to consumers that you offer better value, but it might also lead to lower perceived quality. Where you land on this spectrum is easily seen through your churn rate. If your subscribers stay, you know that at your price point, your subscribers believe that your box brings them the expected amount of value (if not more).
Eyeglasses retailer Warby Parker is another good example of differentiation. There were plenty of online glasses manufacturers before Warby Parker, but their introduction of free home try-ons allowed customers to see exactly how their glasses would look before they bought online. Because the home try-on provided more value to online customers, they were able to charge more than other online retailers while still maintaining their advantage over brick and mortar stores.
Price According to Your Value
If you’re selling in a market in which prestige and perceived quality are exceptionally important, you may want to price your box on par or higher than competitors. If your goal is to provide an economy or value product, you should price your box lower to attract price-sensitive customers.
In all situations, understanding your customer is key. Researching your target market and your competitors can give you insight as to how much value is desired and how you can price your box competitively and effectively. Price is not solely a representation of cost. It is a powerful marketing, brand management, positioning and financial tool that can be leveraged to build and grow your business.
Cratejoy is an all in one subscription commerce platform that includes everything you need to start your own subscription commerce business online. Try it free for 14 days.