Testing Budgets in the New Membership Economy: LinkedIn Article

OceanX CEO & Founder, Georg Richter, answers one of the most common questions that we get around what kind of budget it takes to launch and scale a successful subscription program in the New Membership Economy.  This article was originally posted on LinkedIn.

You’d be hard-pressed to find someone who isn’t hooked on at least one physical subscription service (a box subscription) these days. From Harry’s to FabFitFun, subscriptions are undoubtedly hot, and the industry is ripe for continued innovations and evolution.

That said, subscriptions aren’t necessarily a new trend. After all, phone, cable TV, and other utilities have long been subscription-based services. But this tried-and-true business model is undergoing a renaissance across industries. Birchbox, Dollar Shave Club, Stitch Fix, and 3,000 other physical subscription businesses add to what we call ‘The New Membership Economy’. At the same time, brick-and-mortar retail is getting increasingly more competitive, with direct sellers via subscriptions and Amazon accelerating this trend.

Today, the concept of subscriptions is discussed in nearly every company boardroom. Yes, there are limits and not all products should be sold via subscriptions, but many products — from packaged goods to apparel to food — are moving toward subscriptions.

My company, OceanX, is in the business of helping companies set up successful subscriptions. We focus on consumer products that ship to subscribers, as opposed to more digitally focused subscriptions that comprise what has been labeled as the “subscription economy.” Retailers and brands often ask us one key question: How much does it cost to set up and run a successful subscription? A simple question to a complex topic.

The Cost Elements of a Subscription Model

I’ll explain the basics here, but it’s important to set the right expectations. If you’re a single entrepreneur or a small company and have limited expectations regarding size of your direct selling business, a subscription model can be relatively inexpensive to launch and test. There are simple tools and systems to play around with, but you will have considerable challenges to scale your business. However, if you are a well-known brand or retailer, it will cost serious money to successfully test a new vertical and potential media strategy for your business. The investment will be sizable and so will the potential gain.

Just like opening a new retail store location or taking on a new large account, it takes resources — mainly money and people — to successfully launch and test a new subscription sales channel. But doing so successfully can provide your business with recurring revenue and allow you to establish real relationships with customers.

Here are five essential cost elements to consider:

Demand creation: Setting up a website and waiting for the subscribers to roll in won’t work out in your favor. Getting a channel going requires significant investments in marketing and media. Where you market and how you test will be based on your product category, your business metrics, and what you’re comfortable with. It might be best to test with digital vs TV or social media vs influencer marketing. The key is to plan for enough marketing so you can test your CPA (cost per acquisition) and to spend enough time measuring the LTV (Life Time Value) of your members. This way, you can gather insight and apply it to a working subscription financial model to calculate ROI, make adjustments and grow. 20%-30% of anticipated gross sales should go to the demand creation bucket.

Inventory: This is the second biggest expense bucket. Ideally, the merchandise is exclusive (at least partially) and offers subscribers something new and interesting. It needs to be also be something that people will need or want on a recurring basis. You need to understand your cost of goods (at various levels of production). About 20% of sales should generally be spent on inventory in order for margins to work out long-term.

Postage & Fulfillment: In 2017, people expect free shipping, and delivering on that expectation adds significant cost to the P&L. Postage is a factor of weight, speed, and location and must be included from the very start. Fulfillment is a factor of the number and types of products and collateral in the box as well as how you want the unboxing experience to be. It is cheaper to ‘just throw’ products into a brown box (Amazon model) than to create an unboxing experience that promotes your brand, showcases your products and encourages members to share that experience with others.

Subscription platform provider(s): At a minimum you need a payment processor, a subscription shopping cart, a distribution provider and customer service. Ideally, all these services can be purchased in a bundle — not only for cost efficiency, but also for data integrity. Database building and deep reporting as well as precise execution are essential for success. An integrated platform that connects the data (live) lets you make smart decisions, saves money and many headaches.

Dedicated management: Opening a new channel requires leadership and top management support. Effective project management is a key ingredient in a winning formula.

Just like starting any other channel, you need significant resources to launch and scale a successful subscription business in the New Membership Economy.  However, with solid planning and competent partner selection, you can safely establish a truly successful channel. Ignoring the many mom and pop businesses which will never reach scale, I would suggest a minimum budget of several hundred thousand for smaller companies, and larger companies should set aside at least $1 million. It may seem like a lot of money (and it is), but this investment is truly inexpensive compared to starting a retail operation. The beauty of subscriptions is in connecting with your customers over the long haul so make sure you set aside enough capital to give your test a true chance to succeed.

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