Starting a subscription business — or any business — without consulting a true industry expert is a huge mistake. Numerous things can go wrong, and if you don’t talk to someone who can guide you around the pitfalls, you’ll create unnecessary challenges for yourself.
For subscription businesses in particular, a few metrics are key. If cost per order (CPO) is higher than your customer lifetime value (LTV), your margins will be slim and your business unprofitable. Even companies that understand the relevance of some of the most important subscription business KPIs — such as churn rate and subscriber growth — sometimes rely on unrealistic projections, underestimating costs or overestimating revenue to their detriment. To build a successful subscription business, you must first understand what you’re getting into.
SUBSCRIBING TO SUCCESS: PITFALLS TO AVOID
If you’re the prospective or current leader of a subscription business, misconceptions can result in negative cash flow. Funding and PR can keep your business afloat for a time, but that lifeline won’t last forever. Take heed to avoid the following missteps:
1. Misunderstanding the Business Model
In the early stages, CPO is low and can be driven by inexpensive, highly targeted digital media such as Google paid search ads and Facebook ads. At the same time, initial sales per subscriber can be high, showing an inflated LTV. This initial low-hanging fruit makes entrepreneurs feel like they’ve struck gold, leading to unrealistic financial projections. In reality, CPO will go up as the business becomes larger, while sales growth can slow down over time as your market saturation increases.
Don’t be fooled by big percentages. Expand, but be realistic about your numbers — and don’t assume your growth will continue at the same pace.
2. Overstocking Inventory
Lofty goals and high expectations for service can quickly lead to keeping too much product on hand. Don’t allow excitement to overtake rational thinking. The necessary product mix will remain unknown for a while, and the small initial audience’s tastes might not match the larger audience’s purchasing habits down the line. It’s much smarter to buy short and apologize for delays with free gifts than it is to sit with unusable inventory.
To avoid this mistake, start with a limited selection or a fixed starter package, and stay away from customization until you have a firm understanding of your market.
3. Overlooking Back-End Processing
Inexperienced subscription business leaders usually hire a third-party logistics provider for distribution, a customer service company to handle support, and a payment processor for credit cards and then try to connect the data through a labor-intensive process. It sounds simple, but it’s not. These companies don’t coordinate with one another, which means you are the middleman for every problem. If a customer cancels, the delay between support, distribution, and payment often results in an unwanted shipment, an unwanted charge, and an upset customer who requires a costly return.
To avoid this mess, find a fully integrated subscription partner — someone who can provide all three services under one roof. This way, information flows in real time, money doesn’t leak, and you always have a complete view of what’s happening with your business.
4. Not Preparing for Growth and Scale
When you first launch, preparing to scale up your business for future success usually takes a back seat to day-to-day operations and testing. Many young businesses factor in free or low-cost goods they receive through network connections, or they think a low CPO is just as easy at a larger scale. It’s easy to ask for 5,000 free products, but it’s much harder to ask for 500,000 when a company is obviously growing and succeeding.
Around the 20,000-subscriber mark is when your technology, people, customer service, and business model will face challenges. It’s not easy, but as your business starts to grow, you’ll need to revisit parts of your subscription business to look for break points.
Don’t be afraid to start a subscription business. With these tips, you can avoid the most common pitfalls and give yourself a leg up on the competition.