Subscription Box Answers

Mastering Your Subscription Box Break-Even Point (Your path to profits)

• Liam Brennan

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Ever wished you knew the secret to cracking the code of a successful subscription box business? Your wish is granted! Join me, your host Liam Brennan, as we dissect the numbers behind a successful subscription box business, from understanding your break-even point to crucial metrics like customer acquisition cost, monthly churn rate, and more! In this lively discussion, we navigate the sea of fixed and variable costs, gross margin, monthly recurring revenue, average revenue per account, and customer lifetime value.

It's one thing to understand your business financially, but how about strategically? The second half of our discussion steers you towards the strategic map of your subscription box venture. We delve into how a well-crafted business plan can turn your business goals into reality and the benefits of being part of an online community. Learn how to calculate your break-even point and use it as a powerful tool for your business. This episode is power-packed with valuable insights, actionable tips, and a deeper understanding of the subscription box industry. Listen in and take the first step to turbocharge your subscription box business today!


If you have a question you want answered on the show, make sure you head over to www.SubscriptionBoxResources.com. Join The Free Facebook group and post it there.  

Speaker 1:

Welcome to Subscription Box Answers with your host, liam Brennan. You're no rubbish, no crap. Straight to the point podcast with real, actionable tips, real strategies and insights from the industry which will help you start and grow your own successful subscription box business. You ask the question, you ask the questions, liam gives the answers. It's as simple as that.

Speaker 2:

Hello and welcome back to a brand new episode of Subscription Box Answers. Hope you're having a really good day. On today's episode, we're talking about making money in your subscription box business because, at the end of the day, that's a massive part of business. You have to be able to make money, and one of the big reasons why you probably took all the risk and put all the effort and time into setting up your subscription box business was to produce a better life for yourself and your family, and that outcome will come from your ability to make money. It's really, really important. A lot of people who are listening to this podcast may be rung in their subscription box for a while and you may now be wondering when you're actually going to start making money. Or, on the other hand, you might be a brand new subscription box owner and you're now trying to forecast when you're going to be able to actually leave your job and start earning a full-time income from your business. Well, the answer to both of those questions is actually the exact same thing. You will start seeing a profit when you pass the break-even point in your business.

Speaker 2:

In Busterbox, myself and the two other co-founders became completely obsessed with our break-even point from really really early on. Literally, we used to spend days, weeks with different numbers and stuff on the whiteboard in our office calculating so many different scenarios of how many people we needed, what the cat needed to be all this kind of stuff, because it's really really important and we wanted to know exactly how many subscribers that we actually needed and what our monthly revenue had to be so we had a healthy business where we could get paid, pay our staff and have enough money to keep growing. This is really important and every single subscription box business should spend time working this out, because only then will you know what the goal is and you'll be able to calculate the amount of time and money it will take to reach the goal. And if you don't know what the goal is, then you can literally spend years going around in circles and not doing any of the actions which are required to actually reach the goal. And the goal is really important because the goal is when you're going to be able to actually start paying yourself properly and having a sustainable business which can provide you and your family with a great life. So it's really important that you actually reach the goal, but, like I said, you have to identify what the goal is, because only then you can take the correct steps forward.

Speaker 2:

So what is the definition of a break-even point in a business? Let me read it out. The break-even point determines the amount of sales needed to achieve a net income of zero. It shows the point when a company's revenue equals total fixed costs, post-variable costs, and its fixed costs equal the contribution margin. What I read out is pulled directly from Google and it's 100% correct. Once you surpass the break-even point, you will start earning profit in your business and it will allow you then to start creating the life that you want.

Speaker 2:

So what is the quickest way to work out your break-even point? The first thing you need to work out is what is your gross margin. This is how much money is left over after paying all of your variable expenses, eg, how much money do you make on each box sold after you fill it, package it and ship it out to the customer? And you need to include everything here, everything that you pay to ship the box out. So cardboard fulfillment costs, payment processing fees, product costs, insert costs, whatever you have to pay to ship out a box.

Speaker 2:

The next thing that you need to write down is a list of all of the fixed costs in your business. Your fixed costs are things which are essential to running your business and you know they won't change much as you scale up. Here's an example of some of them your software, your insurance, your warehouse rent, your loan repayments, your annual staff salaries. Go through all of your bank statements very carefully and make sure you have everything listed. Obviously, things can change a bit as you scale up, but you should make a list of all of this stuff. Okay, there is some stuff that won't change much. This is also a great opportunity to get rid of things which aren't 100% needed. Look, we all do it in business. I do it all the time you end up signing up for some subscriptions that you forget about. You're paying for things that you don't particularly need, but this is a good opportunity to see them on your bank statement and just get rid of them. Okay.

Speaker 2:

Now, after you do this, you want to add up the exact amount you spend on your fixed costs each month and write it down. After you do that, you need to work out what your variable costs are and you need to see roughly what you're spending on them each month. Here's an example of some variable costs. Credit card fees have salaries paid by the hour. Once you've done that, then add up your fixed and variable costs and see exactly how much they cost per month. Now you may think that's it, but because we're running a subscription box business, we have some other stuff we have to account for. The next bit of information is vital, and this is where a lot of subscription boxes struggle, so they never go profitable.

Speaker 2:

There are some key metrics that you have to understand and monitor to truly understand what your break even point is, and those metrics are the following your customer acquisition cost, your monthly journey rate, your monthly recurring revenue, your average revenue per account and your customer lifetime value. Let's start with the CPA, the customer acquisition cost. The easiest way to work this out is to calculate your total marketing budget for the entire month and divide it by how many new customers you get signed up. Say, your marketing budget was five grand for the month and you signed up 400 new customers. That means your CPA is 1250.

Speaker 2:

Monthly churn this is one of the most important metrics for any subscription business in general, because if you have a high churn rate, you need to spend more on marketing to replace your current customers every month and to keep growing. For some subscription businesses with a high churn rate, this is completely unsustainable as they get bigger. This is one of the main reasons why you hear about some of the bigger boxes getting into financial trouble and not being able to turn a profit despite millions in revenue. You need some dedicated software to work this out accurately, but for the purpose of this exercise, say you have 3000 subscribers and you lose 300 each month. That means your monthly churn rate is 10%. Monthly recurring revenue this is the amount of monthly revenue your company generates. For example, you have 3000 subscribers paying you $30 per month. This means your monthly recurring revenue is 90 grand per month.

Speaker 2:

Average Revenue Per Account or Average Revenue Per User? It's the same thing and this is how you measure on average how much revenue each customer brings in for you. This is especially handy if you offer multiple subscriptions with different price and tiers. Average Revenue Per Account allows for the analysis of a company's revenue generation and growth at the per unit level, which can help you identify which products are high or low revenue generators. Once you understand what your average revenue per account is, you'll be able to work out how much profit you make from each subscription. The quickest way to work this out will be the following calculation Average Revenue Per Account equals M or R divided by total number of customers.

Speaker 2:

Customer lifetime value. This is a really important metric because it tells you how profitable your company will be in the long term. This metric lets you know how much each customer is worth to you over the duration of their stay and how much you can spend on acquiring a new customer. You should always be striving to improve this. You need a dedicated software to analyze this in real time, but here's a really quick way to work it out. Say each customer pays you 30 per month and your monthly turn is 10%. This means you're keeping people for 10 months on average. So 30 multiplied by 10 equals 300. So, on average, each customer brings you in 300 in revenue over the lifetime of their subscription. This isn't profit, though. This is only revenue. So you now need to work out what your growth's profit is. Say you make $10 profit on each box on average. Well, 10 months multiplied by 10 equals 100. You make $100 profit on each customer.

Speaker 2:

Now let's do a case study and bring it all together. Let's come up with a fake subscription box and see what their breakeven point actually is. Let's say, this subscription box is called basketball box and it's a monthly delivery of basketball goodies straight to your door. Fixed costs, including annual salaries and everything mentioned above. This comes up to 12 grand per month. Variable costs. These are currently costing this fictional company about two grand per month, but they're liable to raise a bit once the company grows. Metrics Basketball box is $30 per month. That's their average revenue per user, and they make $10 growth's profit on each box. Their monthly insurance is 10%, so this means, like the example from earlier, they make $100 growth's profit throughout the lifetime of their subscription.

Speaker 2:

It costs them $12.50 to get a new customer signed up, not including marketing spend. They need to be making 14 grand profit per month to keep the lights on, and this works out at 1400 active subscribers. If they don't spend any money on marketing, though, the business will collapse, so that really isn't the option. They need to be replacing their customers at a bare minimum each month. So at 1400 subscribers with 10% churn, they need to replace 140 customers each month. This means they need to find 140 new customers every single month. We worked out their CPA is 1250, so multiply that by 140 and you get 1750 spent on marketing per month. This means in total, they now need roughly 15,750 in gross profit each month to break even. This equals 1575 active subscribers.

Speaker 2:

This is a very rough example and it can get a lot more complicated. The numbers were made up out of tin air and if you do this calculation again and increase the churn by 5% and the CPA by $5, it's going to make a massive difference to the break even point. I also kept it simple and never mentioned anything about future growth. The dream for all subscription box companies is to hit the break even point and then be able to fund future growth themselves through their revenue. I also never mentioned anything about taxes or how other costs can come into the picture or a number of other factors, including cash flow.

Speaker 2:

But I hope this podcast has given you a very good idea about how important the break even point is and how you can actually work it out in your subscription box business. Think about it like this right Break even point is the point when things start looking really positive in your business. Once you reach that break even point and then surpass it, you have a very good business. That is actually also a very valuable asset that you can also sell for a lot of money, hopefully in the future, if you choose to do that. But the key with these businesses, like any business, is surpass the break even point Now. Reach it first ASAP and then surpass it, and when you know what your break even point is, then you can start reverse engineering your goals to hit it as quickly as possible and for the most cost effective price. I hope that makes sense.

Speaker 2:

If you enjoyed this, a lot of it was pulled directly from my new book, the subscription box blueprint how to start and grow a widely successful online business. If you're in the subscription box industry, I highly recommend grabbing a copy of that book because you're going to learn something from it. It doesn't matter if you're only starting or you've been running a while. You will learn something from this book. You can grab it now over at Amazon. Hope you found this podcast helpful. As always, we'll be back next week at the exact same time and, as always, if you have a question that you want answered on the show, make sure you head over to the free Facebook group subscriptionboxresourcescom, join it and post your question there. I'll chat to you next week. Have a great day.