How to Thrive on Thin Margins In the Subscription Box Indust…

The subscription box business model is tough to execute, and Blue Apron’s tough sledding after its IPO has emphasized that fact. With revenue and customer losses as well as a share price that’s been cut almost in half since the IPO, the future is looking challenging for the 5-year-old company.

Blue Apron’s CFO Brad Dickerson has said the cost of automating the company’s warehouses required crippling cuts to its marketing budget. He’s warned that the company might never be consistently profitable, and the problem is the same for many subscription box businesses built for growth and maybe not long-term profitability.

High costs associated with customer acquisition combined with high-touch product and operations, especially in categories such as meal delivery, make it difficult to survive on the thin margins of the industry.

Overwhelming obstacles

Subscription boxes that include food delivery will always face obstacles: Some amount of waste during preparation is unavoidable, spoilage creates inventory issues, and the need for rapid delivery and cooling during transportation requires large containers and dry ice. Delivering fresh perishables direct-to-consumer across the country is almost impossible, but the customer demand for it has led to another obstacle: competition.

Companies such as Blue Apron have many competitors — Hello Fresh, Plated and Freshly, to name a few. The market will likely shake out and see a long-term winner, but for now, numerous companies are trying to deliver fresh meals to consumers on already thin margins created partly by the giant of rapid delivery, Amazon.

Related: 5 Essentials for Building a Subscription Business Customers Won’t Quit

Finally, it doesn’t help that subscription box customers aren’t just looking for novelty. They want value, convenience, fast delivery and a superior experience. That combination is a tall order for any channel, but a well-designed and efficiently run subscription business can still be very profitable. Successful examples include specialty variant Barkbox, sampling variant Ipsy, and apparel personalization model Stitch Fix.

Stunning successes

One subscription startup on everyone’s minds these days is Stitch Fix. Using a sophisticated combination of customer input, data and human stylists, the service delivers highly customized purchasing suggestions right to subscribers’ doors. This model is the definition of one-to-one marketing, and while it’s easy to grasp the idea that customized products of any type will lead to more sales over time, pulling it off the way Stitch Fix has is another matter entirely.

Related: How This Startup’s Focus on Personal Touch Helped It Thrive

After its IPO, Stitch Fix experienced a bumpy start to trading before taking off, likely catalyzed by purchases made on Cyber Monday. Seven days later, it had risen 54 percent.

Success must be earned, but companies such as Stitch Fix have demonstrated that the demand for a subscription experience can sustain a thriving business. To be successful despite the industry’s thin margins, subscription companies should focus on a few key areas:

1. Determining demand, variety and volume

Don’t just find out what your customers really want — find out how often they want it. One company that’s done that is EatsieBox, a snack service that delivers personalized foods monthly but specializes in helping people expand their snacking horizons. More than 70 percent of the snacks the company delivers are completely new to their customers, keeping subscribers interested and looking forward to what’s next.

Delivering only the same things on a regular schedule is a great way to get tentative subscribers to cancel, so mix it up with a variety of new products. Your program needs to be about more than just a recurring shipment. Make it fun for subscribers to be members so they look forward to receiving each delivery.

2. Analyzing results

Subscription boxes that have the right product mix, pricing models and acquisition models demand deep analytics and sophisticated business intelligence. It’s a highly technical business, so live data feeds that integrate subscriber demand with data such as inventory and shipping weight, among others, are crucial.

Blue Apron, for example, is working to open new fulfillment centers to prepare for future growth. Once those centers are operational, it’s crucial that the company ensures it has an up-to-date system in place that will allow workers to easily find and update shipping data. You can’t just wing it when it comes to analytics — upgrading legacy systems is required to ensure your software integrates with the tools necessary to run your business. Putting off an upgrade will also generally end up costing more in the long run.

3. Adding it up

Even if a program is attractive and interesting, the numbers have to add up. It doesn’t take much to understand that perishable products — manually packaged in expensive containers — won’t be sustainable if they cost only $10 per shipment. Even with more customers than they can serve, Blue Apron’s pricing is probably too low.

Stitch Fix founder Katrina Lake started by buying clothes for friends of friends on her credit card and keeping track of store return policies. She also had no way of forcing customers to pay for clothing they kept — she essentially started out using the honor system. After a $750,000 investment from a venture capitalist in 2011, the company was able to open warehouses and set up a safer payment system.

4. Running smoothly

Buying goods and putting them into packages seems easy, so operations is often an afterthought when thinking about the profitability of a subscription business. From supply chain to returns to customer care and payment processing, the reality is that, most often, efficiency makes the difference between profit and loss.

According to a Microsoft survey, more than 90 percent of participants reported that they would rather take their business to another company than buy from one they knew used outdated technology. And 80 percent said they would abandon an online purchase if a company’s website wasn’t up to their standards. Regularly update your subscription brand’s website, payment system and other tech to ensure you are delivering the best customer experience possible.

It’s easy to see how entrepreneurs interested in the subscription box industry might be discouraged by the industry’s thin margins. But in reality, all sales-facing channels have thin margins these days. Everyone is competing with Amazon, which has an established footprint and access to cheap capital.

Related: A 5-Step Guide to Competing With Amazon

Subscription box programs need to distinguish themselves using an interesting product assortment, consistent delivery and variety. Companies will then need to ensure they’re operating efficiently and using data to drive business decisions. It might not be a walk in the park, but entrepreneurs who follow the tips outlined here will find themselves on a path to success.