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

It's as simple as that .

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 . 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 . 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 .

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 . 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 . 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 .

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 .

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 . 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 . 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 . 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 . 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 . 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 .

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 .

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 .