According to Tim Ray, the founder of Carnivore Club, a subscription box is the most flexible, efficient and easy-to-run business model in ecommerce. He was particularly attracted by its entire ease combined with the benefit of low-risk recurring revenue.
It’s essentially built on the fundamental principle of periodically supplying a consumer with a pre-selected set of items at a fee. Pretty simple and straightforward.
And the best thing about all of this is the fact that customers have not disappointed at all. Currently, 15% of online consumers have signed up to one or more services to periodically acquire products through monthly boxes. This has seen established retailers make more than $2.6 billion in 2016 alone.
Sadly, just like any other business model, it’s not that rosy for all retailers. While the whole industry has recorded exponential growth in recent years, the subscription box business space is also volatile.
According to My Subscription Addiction, about 13% of subscription-based businesses it has been tracking have failed, and many more are experiencing drastic losses.
To avoid this, you need to run your business on a solid strategy that not only focuses on the logistical framework but also payment management. Here are critical pointers on how to do this and consequently position your subscription box business for success.
Understanding Subscription Box Business
The subscription box business falls under the trial & continuity merchant category. These merchants operate under a recurring billing business model, which can present some challenges. For one, customers are signing up to be on a recurring payment plan. This can present opportunities for misunderstanding, where customers do not realize that their card will be charged every month. This is especially true for merchants that offer free or $1 trial options to onboard more customers. In some cases customers may not recognize the recurring charge on their billing statement, leading them to dispute the charge with their issuing bank. In other cases, the customer may simply have buyer’s remorse and opt to dispute the charge rather than canceling through the merchant. In either event, the merchant is at risk for increased chargebacks, which can be an expensive problem.
Despite this drawback, there are many benefits to subscription box businesses. These include:
- Increased customer lifetime value: For merchants that offer a great introductory offer and have a solid marketing plan in place, the subscription box business can be lucrative as it offers long-term revenue from loyal customers. The key is to entice customers to try the product at a discounted rate, allowing them a no-risk option for sampling your service. If the product quality and customer service is solid, these customers will likely stick around for the long-term and potentially share their great find with friends. The end result is increased customer lifetime value.
- Predictable Revenue: One of the biggest draws of the subscription box business model is recurring revenue. Recurring revenue equals predictable revenue, which has benefits that branch out to every aspect of the business. Predictable cash flow makes it easier for startups to thrive and grow the business.
- Opportunities for Upsell/Cross-sell: Customers that sample your products or service at your introductory rate are primed to upgrade. Offering tiered product and pricing options tailored to the different segments of your core base can promote increased upsells. Add-on products and services are also ideal with subscription box businesses, as they offer your customers the opportunity to improve their experience with additional complementary items.
Managing Recurring Payments Requires Solid Infrastructure
These benefits are well worth the investment of setting up a subscription box business; however, they can also be negated if you do not have the proper payments infrastructure in place. Some considerations you need to take into account include;
- Streamlined Recurring Billing Services – Merchants need to be able to simplify the transaction process while still protecting the business. Recurring billing has unique considerations which often requires a specialized billing system that allows the customization of billing schedules, the ability to email receipts, and secure online account access for customers.
- Dashboard & Analytics – It can be beneficial to work with a payment processor that offers an intuitive dashboard that allows you to track and monitor subscriptions and easily identify upsell and cross-sell opportunities.
- Payment Gateway – You’ll need a payment gateway that easily accepts digital payments. Your gateway should easily integrate with your sales system and offer a breadth of payment options to consumers, including the major credit card brands, PayPal, and multi-currency options.
- Fraud Prevention – Since recurring billing can often come with increased chargeback ratios, you’ll want to have a solid fraud prevention strategy in place. This includes a tailored suite of fraud prevention tools for true fraud and chargeback notifications for friendly fraud.
- Auto Updater – Subscription box businesses need to protect their customer relationships and guard against unnecessary churn. Employing an auto updater that automatically updates customers records can save you time and money by easily updating payment account information when it expires or changes due to lost, stolen, or expired cards.
These are just some of the considerations that subscription box business merchants need to address upfront. It can be overwhelming to tackle everything alone, so it’s recommended that merchants work with a trusted payment processing partner that has experience working with subscription box businesses.
These specialized payment processors can partner with you to achieve your business goals and act as an advocate on your behalf. They can also help you manage and streamline omnichannel payments across mobile web, desktop and mobile apps.
The subscription box industry will only grow in popularity, so merchants in the business should find their footing with an experienced payment processor that understands the quirks and nuances of the subscription box business. PayArc specializes in working with subscription box businesses of all types. Reach out today for a customized quote on how we can help you achieve your business goals.