Step 1: What's the cost of a subscription box?
When planning to start your own subscription box you must start with the cost! Financial types call this your "Cost Of Goods Sold" or COGS
= Product Cost
+ Fulfillment Cost
Product cost is the cost of all the products in a shipment to your customer.
Remember to include the cost of any shipping or taxes in order to get the products to you or your fulfillment center.
Custom printed boxes add a lot to the branding and unboxing experience.
Custom packaging materials like tissue or custom inserts are key to a great customer experience.
Your total product cost is $13.35
The fulfillment cost includes all costs associated with delivering the shipment to your customer.
If you're using a fulfillment center, estimate at least $1. If you do this in-house, take the hourly rate of employees (or yourself) and multiply it by the time spent doing fulfillment, and then divide it by number of boxes.
Your total fulfillment cost is $6.50
is $19.85 per shipment.
$19.85 ( COGS
) = $13.35 ( Product Cost
) + $6.50 ( Fulfillment Cost
Step 2: Pricing Your Subscription Box
We have another entire calculator dedicated to pricing your subscription box. For simplicity, we are just going to use the general rule of thumb that COGS (Cost of Goods) should be about 55% of your price here.
Or stated another way: Suggested Price = COGS / .55
Your price is per box.
Step 3: Calculating your Gross Profit
Now we have a price we can calculate gross profit.
Gross Profit = Price - ( COGS + Total Fees)
You already know your price ($39.95) and COGS ($19.85) so let's talk about fees.
Based on your price ($39.95) Cratejoy will charge you $0.54 per sale (our fees are 1.25% + $0.10 per transaction). Assuming you are using Stripe you will pay $1.34 per transaction in Credit Card Fees (based on 2.9% + $0.30 per transaction).
Your Gross Profit is $14.21 per shipment.
$14.21 ( Gross Profit
) = $39.95 ( Price
) - ( $19.85 ( COGS
) + $1.89 ( Total Fees
Step 4: Customer Acquisition
Getting customers costs money too. It doesn't matter how you plan on getting your customers, there will always be a cost. It can either be the value of your own time - or the actual costs of advertisements. You track this cost as the Cost Of Customer Acquisition or COCA
Understanding your COCA is one of the most important parts of running a subscription business.
COCA is the actual dollar cost to acquire a single customer for your subscription box.
If you place 10 advertisements and each advertisement costs $1 then you get a single paying customer out of those efforts - your COCA is $10. You spent $10 to get one customer.
COCA for a subscription business can be as low as $2 per sale, or as high as $30. It depends on your market - and your skill!
We suggest that you choose a COCA of at least $8 for estimation purposes.
Step 5: The Fun Part, Profits!
Now that you have a Gross Profit and COCA you can calculate your Net Profit. Net Profit is the actual money-in-the-bank reward that you get for all of your hard work. It represents the money you can choose to take home and spend, or re-invest and grow the business faster.
Net Profit = Gross Profit - COCA
On the first month a customer signs up you make a Net Profit of $6.21.
$6.21 ( Net Profit
) = $14.21 ( Gross Profit
) - $8.00 ( COCA
But remember....this is a subscription!
You only pay the cost of acquisition once. That means that the first month they subscribe is the least profitable month you have with this customer. On subsequent months you make Retained Net Profit, or just Retained Profit.
Retained Profit is one of the secrets behind the success of the subscription business model. You pay to acquire the customer once and profit over and over again.
Retained Profit = Net Profit + COCA
For every additional month a customer stays subscribed you make a Retained Profit of $14.21!
$14.21 ( Retained Profit
) = $6.21 ( Net Profit
) + $8.00 ( COCA
Step 6: Churn
You can only collect Retained Profits if your customers are sticking around for more than a month or two. In subscription businesses this is measured by tracking Churn. Churn is a measure of the percentage of customers who cancel in any given period. Churn is the absolutely critical must-nail-no-matter-what metric for a subscription business.
Churn = Period Churned Customers ÷ Period Total Active Subscribers
We've compared all of the subscriptions on the Cratejoy platform and crunched the numbers. The data shows that the absolute best subscriptions have a churn of 5% or less. Subscriptions that have a churn of 15% or more are typically losing so many customers each month that they can't grow.
We recommend using a churn rate of 8% for estimation purposes.
Your Churn means that 8% of your customers will cancel in any given month. Using your Churn we can estimate the number of months a customer will stay subscribed for on average. We will call this Average Duration or just Duration for short.
Duration = 1 / Churn
Your Duration is 12 months.
12 ( Duration
) = 1 / 8% ( Churn
Or stated another way a subscriber to your subscription will stay subscribed for an average of 12 months.
Step 7: Lifetime Customer Value
Using the duration we can now begin to calculate the "Customer Life Time Value" or CLTV of a subscriber to your business. CLTV is the total profit you will make from a single subscriber over the entire lifetime of their subscription. In other words CLTV is:
CLTV = Net Profit + ( Retained Profit x ( Duration - 1 ) )
CLTV is the amount of money you will actually realize as the result of getting a customer.
You will make a profit of $162.52 (CLTV) for every customer you acquire.
$162.52 ( CLTV
) = $4.37 ( Net Profit
) + [$14.21 ( Retained Profit
) x (12 ( Duration
) - 1)]
Step 8: Your First Month in Business
Now, let's talk about what happens when you have more than one customer (you do want more than one customer, right?) For your first month in business you'll need to acquire your Seed Customers.
Seed Customers are early adopters you acquire by direct sales or pre-launch campaigns.
You really should consider running a pre-launch campaign. Subscription School wrote about it here.
We recommend launching with at least 50 seed customers.
With 50 seed customers, you will earn $310.50 on $1,797.50 of sales in your first month.
The Power of Retained Profit:
Your Second Month in Business
With your churn of 8% you should expect 4 cancellations. So will only have 46 subscribers going into month 2. You have less subscribers, so you should make less profit right? Wrong!
Even after losing 4 subscribers to cancellations and getting no new subscribers, you will still make MORE profit in your second month in business due to retained profit.
In your second month of business your 46 retained subscribers will give you sales of $1,653.70.
Your retained profits will increase to $653.66!
Step 9: Reinvesting for Growth
In order to grow your business you'll need to spend money on customer acquisition at some point. You could invest savings or raise investment, but the majority of merchants choose to grow by reinvesting profits.
Let's assume you will invest 15% of profits back into customer acquisition.
That means in the second month you will add an additional 5 subscribers (with a COCA of $8.00). Those 5 will drive new sales of $215.70. Add the new subscriber revenue and Net Profit to the existing revenue and Retained Profit to get your month two numbers.
At the end of your second month in business you will earn a profit of $690.92 on total sales of $1,869.40.
Step 10: Profit
In your first year in business you will make $14,334.59 of Take-Home Profit on total sales of $48,999.85.