161: The Costs of Starting a Subscription Box

Are you excited thinking about starting a subscription box? Wanna know what costs are involved? Let's talk about the 5 main categories today so you can confidently price your box and be profitable in month 1. Come join me on this episode.

Welcome to the Launch Your Box podcast with weekly tips, tricks, and strategies to start, launch, and grow your subscription box. Now here's your host, Sarah Williams.

Welcome back to the Launch Your Box podcast. Today we're talking about costs, the cost of starting a subscription box. Yes, there are costs involved with any product-based business. We have costs, and it's important to understand that as you go into building up this business. Is this a profitable business? Absolutely. It's profitable, and you can be profitable in month one. If you really understand the costs, when you understand all the costs that involves, it helps you price your box, it helps you market your box, it helps you stay in budget, and that's how we can be profitable. So we're going to talk about all those costs. I've got 5 categories of costs, but we're going to go through each of those 5 categories, and I'm going to give you some examples and scenarios as we talk through them. But I want you to be aware of those costs because we don't want to just assume there's only this cost, and then we price our box, and then we're in our first month of fulfillment and we're like, oh my gosh, this is more than I expected and I didn't charge enough and now I'm not profitable. So we just need to know all of this upfront so we can make the best decisions for our business, okay? So let's start with category number 1. It's the most obvious, it's our product costs. So the product cost is just that, it's the cost of our products. Now I lump in shipping to me, with my product costs. So if something, when something's shipped to me, I take the shipping cost, divide it by units, and now my unit cost is all of that. So let me just give you an example so that you can understand this. So say I buy something, say I buy 100 slippers. Maybe they're gonna go into a pajama box or something. I buy 100 slippers, they cost me $5, and it costs me say $100 to have them, them shipped to me. Okay, now I'm just using easy numbers because I— so I can do easy math on the podcast. So now I've got 100 slippers at $5 a pair, and I've paid $100 in shipping. I'm going to divide that $100 by 100. I'm going to get $1, and now the cost of those slippers becomes $6 instead of $5. Okay, so that $6 is the cost of that product because I'm taking the product cost and the shipping cost that it took to ship to me, and that is now what I paid to have that product. Okay, and there's a difference when we talk product cost, and there's a significant difference. And in the beginning, we will tend to buy wholesale a lot, and I've got an episode on the podcast here of the differences between wholesale and manufacturing. But when we buy wholesale, we have a little bit higher cost to those that product. Say I was going to buy those slippers wholesale, I might pay $7 or $8 a pair for those slippers, which now become $8 or $9 when I add that dollar shipping, right? But if I buy them directly from the manufacturer, I'm skipping the wholesaler, which means I'm skipping an entire markup. So if I buy them from the wholesaler, I'm getting them maybe at $4 or $5, where the wholesaler tends to mark those up almost double. Okay, so if the manufacturer is selling them for $4, the wholesaler is probably going to sell them for $8. And then if I buy them for $8, I might sell them for $16 or $20. Okay, do you see how the markup goes? But I buy them from the wholesaler at $4, which means that I can have double the markup. I can sell them still at $16 or $20 and have a higher profit margin because I bought them directly from the manufacturer instead of the wholesaler. So our product costs are one of our main expenses, and it's the highest expense in building our subscription box business. But that's the products that we're purchasing. And if you understand how wholesale and retail and then the manufacturing goes, you can— if you go to the manufacturer, you're able to get a better price. Okay, now sometimes when we start, a lot of times, and I started this way too, I had to buy from the wholesaler. I had 50 subscriptions. Manufacturer's not going to sell me 50 of something, so I had to buy from wholesalers until I got to a couple hundred subscribers, and that was okay. But what happened when I started to get hundreds of subscribers is that now I could purchase from manufacturers because I need hundreds of items instead of 50 of items, and I could also start to negotiate prices with wholesalers if I was still using wholesalers. I can negotiate prices with manufacturing people, I can negotiate. Once you start to build up your subscription, this is what I call your buying power. The higher your subscription level is, the better your buying power is, because now they look at the volume that I'm buying and not just that one individual product. So they want to make money on the back end. And if I'm going to buy, say, 1,000 of these slippers instead of 100 of these slippers, I now can get these slippers at $3 instead of $5, and that allows me to have more profit in my business. So just know that your product costs upfront are going to be a little bit higher, which is going to reduce your profit margin in the beginning. But as you grow, as you scale, your profit margin is going to grow because your product costs are going to be negotiable. All right, so the very first thing you need to consider is your product costs. That's the highest expense in your subscription box. Okay, a lot of people price their subscription box solely based on the product costs, and that's where we get in trouble. We need to consider these other categories before we set our pricing. Okay, so let's talk about the cost in category number 2, packaging. It's one of the first things that you want to do when you think about starting your subscription box is making that custom beautiful box that you're gonna love and your subscribers are gonna love. But we have to be realistic with our packaging costs, especially when we're starting in the beginning, because again, you can be profitable in month 1 and you can be profitable with 20 subscribers and 50 subscribers, but we can't spend all of our profit into packaging. Like, it's not worth it. We're here to build a long, sustainable business. Okay, so we have various options when it comes to packaging. In the beginning, I used very basic packaging. It was craft boxes. I bought a rubber stamp online and I stamped my logo on all of those craft style boxes. They were cheap. I had my logo on it. It was fine. It was fine. It wasn't what I envisioned for my subscription box long term, but it helped me stay in budget and be profitable. And I had a goal. I said once I hit 100 subscribers, I'm going to order a custom box. And I did that. And so then I ordered the custom box and then packaging costs lower as you buy more. So the more volume I had, the more months of boxes I could buy at a time, the lower that cost was for me. So I want you to think about the cost of a basic craft style box versus a custom box. And even what if it's not a box? Like I have a subscription. It's my t-shirt club that comes in a poly mailer, and that poly mailer is $0.35. Custom printed, branded, beautiful color poly mailer cost me $0.35. That box, a couple bucks. So instantly the profit margin and the cost of that is significant difference. And so if you have the opportunity to maybe not put it in a box, Think about that as an option. It will reduce your packaging costs a lot. The other things that I see people do when we're cutting costs, like we're doing a basic plain box and not a custom box, we tend to overdo the inside of it to make it better. Might be colored tissue paper. We might add stickers. We've got insert costs. We might add filler. But all of that material that we're using to dress up the box is part of our packaging cost. So do you need filler? Yes or no? And that's something you should really think about from the start of your subscription box. Do you have products in your box that need to be protected and need to have filler? If you do, then you need to use it. If you don't use it, just get a box that your products fill, and then you won't need filler because that's extra weight and that's extra cost in packaging. Think about The inserts that you make, is there— can you do a smaller size? Can you bulk print them? Think about all those things. The tape, the stickers, the tissue, the everything you put on and in that box as far as packing material is part of your packaging cost. So don't overdo it. And sometimes what I see is that people will so overdo a basic box and they could have actually spent less money by doing a custom box. Like, I can see somebody take a craft box, use printed tape, have stickers all over it, colored tissue paper inside, when the expense of all of that, when they add that up, they could have had a beautiful custom box that didn't need any of that. So once you consider the packaging costs, we don't have to have everything custom right out the gate. I don't need you to unless you can afford it. I had a basic box for months, and you know what? I grew every single month in subscriptions. So don't think that's what you need to be legit and grow. Number 3, we have fulfillment costs. So we've got our products, we've got our packaging, now we have to fulfill our boxes. This is— comes in the form of 2 different ways. So you've got someone that's packing the subscription And a lot of times that's me, like that's us, like not any, not these days, but in the beginning that was me. I was there packing every box. My kids were little, they were like 6 and 8 packing boxes with me. And that's what I did. I was my own labor. Okay. And then there's the shipping cost of what it costs to actually ship the box across the country or wherever you're shipping to it. So I want you to think about your labor costs. For this. And, and it's hard to calculate, especially if you have employees. And I want you to calculate it even if you are the packer that's doing all the work. Your work is going to have to be replaced at some point by someone else. And I'm sure that's going to be offset, because when you get to the point where you're going to have to hire someone to do the packing, you're probably getting a better deal on products because you're buying higher. You're probably getting a better deal on packaging because you're buying in bulk. Okay, so those are going to be offset a little bit, but I want you to be realistic with the cost. What does it cost to fulfill a box? If you look at, say, a third-party fulfillment center, there are what, there are what you call third-party fulfillment centers. I have a podcast episode that I did with Ryan from LessGistics that you can listen to if you're interested in learning about them. But basically, they pack and ship your boxes for you. So you can send them your cute boxes, you send them all your products, they will fulfill and pack everything. And when you do that, on average, you spend about $2 to $3 per box to have it fulfilled, which is great. So if you want to think about your fulfillment costs, put $2 in there, because what we're doing is we're trying to price this right. We want to make sure that we know the costs involved. When you think about having your own warehouse, having your own fulfillment space, you have to think about— for me, I have my own warehouse, I have rent, I have utilities, I have tables and equipment, I have shipping labels, I have tape guns, and I have the ladies that work for me, their labor costs. So when I think about all of those costs involved in having my own space and my own fulfillment, It would totally be worth it for me to send it to a fulfillment center. I can't do that because every box is customized. So that's my own fault. But think about the cost of fulfilling. What would it take for you to fulfill your boxes? If you launch today and you got 100 subscribers, do you have the space to fulfill those where you're at? And a lot of times we work from home in the beginning and we work until we bust the seams of where we're trying to work from home. I think about Lo, I'll just never forget this picture, but Lo has a subscription box called Passion and Growth, and she just had a small apartment and there was a picture of her fulfilling 800 subscription boxes in her one-bedroom apartment. And there was just product and boxes everywhere, but she made it work. It worked for her. Now she has a warehouse space and she does that from her space. But we do what works for us, and that is to have the lowest amount of cost until we can afford more and we can absorb those costs. So think about the fulfillment costs when we think about shipping is expensive. So if you are absorbing the shipping cost in your price, make sure you've added enough buffer in there to cover that cost. For me, I add it to the cost of my subscription so that I don't have to absorb that. But shipping can be very costly, and it's random too, depending on where you live. If you live on the East Coast and you're shipping a lot of subscriptions to the West Coast, that's going to cost you a lot of money and vice versa. I'm fortunate to, to really live in central United States, living in Texas, but there are some states that cost me quite a bit more money to ship to than others, and I find that interesting. So just understand the cost of fulfilling those subscription box. In the beginning, you might consider it free labor because you're doing it or your kids are helping or you've got your best friend there helping you, but you will need to add those costs in later. And hopefully those fulfillment costs are offset with the reduced price of products and packaging as you grow and scale. Okay, number 4 on our list is our tech costs, and these are really out-of-the-box upfront costs that we are going to have to pay for as we're starting our business. Now, we really have, really these things that we need to set up are tech in the beginning. There's really 4 things that you need to get going, and that's your website, your payment processor, your shipping software, and your email CRM. Now, your website, if you are able to build your own website, there's, you could use a platform like Shopify or Subly to really build your own website if you wanna dig in and save some costs there. If you're like me and you're tech challenged and you're like, I don't want to do that, you're going to have to hire someone. And that can range anywhere from $1,000 to $5,000 depending on where you're at, like what kind of website you want, what kind of— how many hours it's going to take to build the site. When I first started my business, I got really lucky because I needed a website built and I met with this guy that was trying to build his website business. And so I got like entry-level $500 website build for me when I started my business, but it's a lot more expensive. That was 2013, so it's a lot more expensive these days to build a website. So that's a considerable cost unless you're willing to dig in and learn it yourself, and you can do that. Platforms like Shopify and Subli, they are so great for kind of a novice tech person. If you can set the clock on your digital— on your alarm clock, you can use the 3 remotes to your smart TV, you could probably build a website. Okay, so there's a lot of tutorials out there. Those platforms supply a lot of information because they want you to use their platform, so they're going to give you a lot of step-by-step to building your website. And we have a lot of information in our membership on getting going and getting started on those platforms. And that's going to save you thousands of dollars if you can open your mind up to learning. And it's also going to give you a lot of confidence in building your business because you're going to learn the back end of your business. So I encourage you to set your own website up and save some money. And if you're sitting here terrified of the thought of that, then you need to come up with the money and have someone do it for you. Because sometimes we may never get our business off the ground if we have to set up our own website. So if you're in that boat, go ahead and pay for that and just know that's a part of starting a business. Now you're going to need a payment processor, and that's not going to cost you anything upfront. They're going to take a percentage of your payments. It's usually 2 to 3% from a payment processor. If you're starting small, you can use the shipping software that's built into your website. But once you start to grow, if you have multiple sites or multiple platforms, you're going to need a shipping software, which can start at $10 a month. And then we definitely need an email CRM. I use Klaviyo, and you can sign up for a free account there, and as you grow, then you'll have a monthly charge. But we've got to really consider these tech costs. And what I don't want you to do is go sign up for a free Wix website or some website that you can get for really low dollar amount and try to piece it together because we need to build a website that will grow with us. And if you're sitting here building a subscription box business and you want it to pay you well and give you an income and give you the freedoms that you want in life, we need to start off right. We need to start off with a robust website, and that comes in the form of Shopify, WordPress, or Subly. and those are what I recommend for a subscription box business because they have the ability to grow with you. So consider those costs as you start to build out your subscription box business. So we've got 4 now. We've talked product cost, wholesale versus manufacturing. We've talked packaging costs, basic, custom, poly mailers, tissue paper, stickers, all those expenses. We've talked about fulfillment costs. It might be free. I call it free $49. When I do the work, it's free $49. Free right now because I'm going to do the work, but what is that going to cost me in the future? And if you don't understand what that is or you don't have any data to go off of, just put $2 to $3 in that column per box when you're thinking about pricing. What is the tech cost for me to start up? Am I going to pay someone to build a website for me? Am I going to pay the $39 a month to start a Shopify and really dig in and spend my evenings and weekends learning how to build my Shopify site and do it myself and save thousands of dollars? Absolutely. And I'm going to encourage you to do that. I want you to do that. It's going to teach you a lot about your business. And the fifth cost— and I get some flack about this one sometimes because I'm going to tell you why— the fifth cost is advertising costs. We can't just start a business It's not like Field of Dreams, if you build it, they will come. If I build my website, people will find me. No, that's not how this works. I wish it worked. I wish it were that easy. I wish you could just put a website up on the World Wide Web and people started shopping with you. That's not how it works. You've got to have advertising costs built in your budget for your business, and you have to do it right away because we have to start audience building. That's social media, that's building, sending traffic to our website. Like, we've got to start building a following, building an email list, and building some traffic. And that comes with advertising. Can you build a business without running ads? Sure, it's going to be slow. You can build organic traffic, and I built my business solely on organic traffic for years, but I also had a retail front and I had people coming in and out of my store all the time. But if you're trying to build an online business, we need paid ads. We want organic traffic, absolutely, but we also want paid ads. So we have to have an advertising budget because there are costs to acquire a new subscriber. That's called our customer acquisition cost, and we have to be able to manage our expectation of what it's going to cost to advertise our business. So we can't we don't really have a legit business unless we have an advertising budget. And if you're sitting here listening right now and you're like, man, I have never done any advertising, I got a cool business, I'm excited for you, I'm excited for you, but I know you're leaving a lot of money on the table by not advertising your business the same way I was. My growth stopped. Your organic traffic can only It can only go so far, and there are a lot of people in our community that have built incredible business organically, but there are also people that without the ads would not have been visible. We need— if we're building a subscription box business and we think it's amazing, like all of us think our subscription box are amazing and they are, but if nobody knows about it, if nobody sees it then we're not going to sell anything. So it's part of building a business. We need product, we need packaging, we need to be able to ship and fulfill, we got to have tech going on with our website, and we need at some point to start advertising. So those are the costs. And really, when you think about those costs, you can build an incredible subscription box business if you understand what's involved in the cost. And that way you don't get a little too excited and spend too much money on your products because you know you've got packaging. You don't get crazy and buy the most expensive packaging that you can find because it looks cute. Maybe you spend the time to dig in and learn how to build your website so that you can save that money for advertising to build your audience and build your business. I don't— you don't have to start big and grand, and I actually don't want you to because I want you to be profitable. On month 1. Start simple, scale gradually, and you can manage these costs really effectively. I hope that helps you understand what's involved in starting a subscription box as far as the costs go, but it's totally doable. You just have to manage your expectation and know what's involved as you're going in. If you understand these 5 costs and you plan and you price and you work through them, you're going to have a great business. You're going to be profitable and successful long term. And that's what this is. It's about a long-term goal of building a business that can sustain you, provide you with a good income, and give you the freedoms of working for yourself and not for somebody else. That's what it's about. That's what being an entrepreneur is about. But you have to spend money to make money, and it's very true here. And if you understand what's involved, you're going to be super successful at this. Make sure you subscribe to the Launch Your Box podcast. I'd love for you to take a minute to rate and review it. Let me know which episode is your favorite so far. Don't forget to join me next week right here.