Natalia

Since they came into my life a few years ago I have loved subscription boxes. But I wasn't really sure how they worked. Not at least on the business side so I set out to learn more.

How do subscription boxes work? And better yet how is this feasible from a business standpoint?

First I thought about it. And in the context of volume it makes sense. This is how I see it: They buy in volume, and therefore getting discounts. If something normally costs $5, but you buy 1000 for $4 and you sell em for $4.5, you still make a profit.

Depending a bit on the exact nature, but it can be.

Consider the example of a chinese-made toy. Import price is 5$. Both a big retailer (say, walmart?) and a subscription box company buy 10 000 pieces in two containers. Let's even suppose that both have their storage and logistics facilities next to each other in a Harbor city.

Now, the cost to get it to the US are exactly the same, for the sake of the argument we'll say that it costs an extra dollar to get it to the facilities, so each piece cost 6$ until now.

Walmart will have some workers unpack it and put it onto the delivery trucks bringing the toys into the region. This costs maybe another dollar, so they are at 7$. Shipment to the stores costs maybe 50 cents, so we are at 7.50. In the store, someone needs to set them up in the ailes, make space for them, do inventory and cash them, let's say this is another dollar. And finally, the retail space costs as well, we'll asume this is another 50 cents (keep in mind that the product will likely be in the ailes over some if not many weeks until all are sold). They might also want to add in risk that the product doesn't sell, which we'll assume is another dollar.

Walmart's costs so far are 10$, 5 more than the price from the Chinese factory, and that's before taxes and profit. So they might price it at, say, 15$? That's 5$ for taxes and profit.

Compare the subscription company. All they do is to put the toys into subscription boxes, which maybe is another dollar, so their product costs them 7$. They don't need to pay for supermarket space, they don't need as many worker's hours to do the sales, and they don't need delivery drivers since they can use the postal services. We can estimate that the product costs another 50 cents in administration costs, for subscriber services and ads, and postage. They also got minimal risk since they knew from the beginning that they will have about 10 000 subscribers they can deliver the two containers to, which Walmart didn't know.

So the subscription service by not relying on a local distribution network can cut down it's "internal price" to 7.50$, as compared to Walmart's 10$, which is 25% less.

Depending on their business model, they might even simply buy some product already in the states that Walmart couldn't sell, in which case their internal cost is probably even less - Walmart might be tempted to give it to them below their price to free up storage space.

Also, subscription models can take a different approach to profit. Walmart's profit is quite literally the selling price minus the "internal price" - the cost they had to pay for the product from the factory to the supermarket.

The subscription company can, however, say that form your monthly 50$ or so, they will keep 5$ for themselves, 5$ go to logistics and adminsitration, and the rest goes to products. Depending on how it all works out, they might even sell it at a better profit than Walmart.

Keep in mind that I invented the actual numbers, but that's how it would work.

It comes down to volume along with knowing they can sell 100% of what they order.