by Have you ever wondered what does it take to build a subscription box business that has the potential to actually change your life? I have been meaning to write a post about this topic for a while as I think it could help a lot of people.
When I say change your life I don’t necessarily mean create the next Dollar Shave Club, become a multimillionaire and sell your company (Even though a very nice exit is certainly possible under the right circumstances)
I am talking about your subscription box business becoming your main source of income so you can leave your full time job. For most people who get involved in this industry that is the number one goal and reaching that goal will change their lives. (That was certainly my goal when I got started)
They know once they reach this goal they will have more free time to do the things they love. Such as spend time with their family, travel more, have more time for hobby’s or simply have more time to spend working on their business to take it up another level.
Myself and my two business partners were very lucky as we achieved this goal in BusterBox a good few years ago now. It took us just over 12 months for the 3 of us to quit our jobs and go full time in the business and get a proper office / warehouse.
We also achieved all of this with no outside investment (up until this point we are 100% bootstrapped). It certainly wasn’t easy, but it was 100% worth it.
When I think back now I realize that reaching that point was vital for us. It allowed us to focus 100% on the business and take it up another few levels.
I am now going to explain something that is crucial if you want to succeed and build a business that can change your life.
The numbers in your business need to be on your side.
I want to make something very clear here. You cannot outwork poor numbers. You might be the hardest working person in the world, but if the numbers don’t make sense, you will not get far with this business model. Your business needs to have a solid foundation so, it can scale and support growth.
This means there needs to be enough room in the business to pay for marketing, pay for salaries and pay all the other expenses that come with running a business. The only way you will be able to pay all of these things is by having a decent margin and decent metrics. If you have a terrible margin in your business, you will need to get to unbelievable subscriber numbers to support the business and it will be hard to make it viable.
I am very aware your margin can improve as you grow, but don’t make any assumptions around this. Do your research and figure out at what point will you see this improve.
Likewise, you need to have metrics that support growth. That means your churn rate and customer lifetime value are really important.
I have written a lot about metrics in the past so you can take a look at my blog to learn more about them but trust me they are crucial.
I have come up with a test you can do to give you a rough idea if you are on the right path or not.
It’s called the Million dollar test.
We are going to work out what your company would look like if it were doing $1 million a year in sales. If it looks good, congrats you are on the right path. If it doesn’t look great, then you know you have some stuff to work on.
$1 Million Dollars is just over $83,333.33 a month in recurring revenue. We can all agree that is a lot of money,
You probably think when you get to that level everything will be fantastic in your business.
There should be plenty of money left over to pay for everything and you should be able to take a good salary from the company.
If your business is structured properly and you have your numbers right, you are on the path to creating a fantastic business which will change your life.
If your numbers are all over the place though, and you have a poor margin, high churn rate and low CTV you are going to have some issues you need to fix.
Here’s the information you need to work out the Million Dollar Test.
- What’s your Average Revenue Per User? (This will tell you how many subscribers you need to get to $1 Million Per Year in Sales)
- What would your COGS be each month to fulfil all of these boxes?
- What’s your monthly churn rate? (This will tell you how many people you need to replace each month at this level)
- What’s your average CPA? (Multiply this by how many people you need to replace each month to learn how much you need to spend on marketing to stay at this level)
- What’s your CAC compared to CLTV? Are you making a decent profit on each subscriber?
- What would your other running costs be? Warehouse space, insurance, taxes, ETC…..
Using the above information you will be able to work out roughly how much money is leftover from $83,333 per month.
At this level, there should be enough money left to pay yourself a good salary, cover all your costs and hire some help. (When you get to this point it won’t be feasible to be doing everything in the business yourself. You will need help with things such as customer service)
If you have worked this out and there is enough money left to do all of these things Congratulations you are on the right track. Keep doing what you’re doing and push as hard as you can because it’s all going to be worth it in the end.
If you just did this calculation and worked out one of the following things though.
- You’re still losing money at $1 million a year in sales
- You can barely pay yourself even at this level
- You can’t afford to hire any help
- Your churn is so high it’s not viable to get to this point or to replace your customers if you do get there.
You need to stop what you’re doing and address the problem head-on in your business.
There is no point persevering down a path that doesn’t make any sense. You need to identify what the problem is and fix it. It’s really that simple.
Some of these problems can’t be fixed overnight, but once you have a reasonable plan and you’re taking action and can see improvements over time, at least you know you’re fixing what needs to be fixed.
At BusterBox we have run into so many challenges as we scaled that I could write a novel on it. That’s part of business though. Whenever something came up we would think about it logically and eventually come up with a solution.
This is the same for any business and the good news is most problems can be solved once you’re willing to address them. If you bury your head in the sand though that’s when you will end up wasting a lot of time and money.
This post is to help the people who have been running their subscription boxes awhile and want to make sure they are on the right track to take their business to the next level. If you are only getting started don’t worry about this. Just get going with your business and take action. Don’t worry about any of that stuff yet.
If you have any questions about any of this or anything else in your subscription box business, please email me at liammichaelbrennan@live.ie. Thanks and have a great day.
