Here’s the million-dollar question of the day: Where should you invest your money to grow your subscription?
Business budgeting is not a new challenge, but it’s one that can be simplified by learning from those who have done it before. A subscription-based business model offers more predictable spending and revenue, making the process of budgeting your product and advertising needs easier.
Here are four tips to optimize your business budgeting and have a prolific 2022, courtesy of the SUBTA community.
Tip #1: Understand Your Desired Profit Margins
Before you can set any kind of budget for your business, you need to know what your desired profit margins are for the upcoming year.
Typically, a successful subscription business will have a profit margin of 30%-60%, according to Christopher George, Founder and Chairman of SUBTA.
“Profit margins and what you’re measuring often evolve as your subscription grows. For a box brand, you must evaluate what you’re spending each month on product and advertising alongside your revenue to ensure it’s a profitable business,” says George. “Pretty quickly into the business, you should be looking at the data and estimate your subscription’s CAC, LTV, and churn rates.”
Meeting your desired profit margins rarely happens immediately, George explains. Though setting up a proper prelaunch can result in a quicker return, many boxes aren’t profitable until a few months into the business.
Tip #2: Tailor Your Business Budgeting Based on Your Subscription’s Stage
Your spending budget will vary based on your subscription business’ stage and subscription segment. A startup subscription box might prioritize more organic content in comparison to a 5-year-old subscribe & save. The format in which you set up a budget is a factor, too.
There are four ways to plan your budget as a subscription business:
An annual budget is planning out your business’ projected income and expenses for the entire year. Businesses can use an annual budget as a benchmark to see if they’re meeting their financial goals.
Annual budgeting can sometimes make it easier to forecast assets, liabilities, and equity, according to Investopedia. It doesn’t work for everyone, though. The subscription businesses we spoke to prefer shorter-term budget plans.
A semiannual budgeting cadence means planning out the first half of the year and the second half separately.
Jill Lodato, Founder of Boost My Box and Kids Baking Club, advises her coaching group to budget and plan out their boxes six months in advance — or six separate boxes. The goal is to create a routine of costs associated with the cost of goods, giving you a better idea of your profit margin.
When looking at your cost of goods, “[Be] sure of two things,” she says. “One is that all of the contents in the box are about the same price that it is for all the other months. The second is to make sure the weight of the box is consistent as well.”
For example, “If they want a 50% profit margin, then they need to make sure this is the case for each box that goes out,” says Lodato. “If one month the cost of goods is $30 on a $60 box, then the next month it is $37 on a $60 box, it will throw off a good indicator for a new owner if the business is sustainable.”
Semiannual budgeting is a great way to forecast larger business goals while still maintaining a sense of control on your spendings.
The calendar year is divided into four quarters with three months in each one. Quarterly budgeting is a short-term solution that makes it easier to focus on your business’ overall yearly goals, according to Katie Romant, founder of TinkerTots Boxes.
She launched her box in 2019 and has been implementing a quarterly business budget ever since. Romant and her team look at the upcoming year, settle on desired goals for each month, and prioritize them accordingly.
If you’re struggling with keeping track of your business spendings, a quarterly budget provides a good foundation to forecast realistically and stay on track.
Some subscription box entrepreneurs in the startup and established stages have found success in business budgeting on a monthly basis instead of yearly. Sarah Williams, Founder of The Framed! Monogram Box and Launch Your Box, is one of them.
If you’re setting a budget on a monthly basis, the first thing Williams suggests to look at is your product. Here are a few questions to ask yourself when factoring in products, according to her:
- Does my product budget need to increase?
- If so, can I cut the cost of something else?
- Is it time to raise the price of my product/service?
Williams typically sets a separate budget for every component of her box: Product, packaging, labor, and marketing. Whenever you are increasing the budget for a category in your business, try to identify where you can make up the difference.
Budgeting on a monthly basis also provides easy management of your spendings. If you’re set on establishing a yearly budget, it’s a lot harder to forecast prices so far in advance.
Monthly budgeting will help a business quickly pivot should an unexpected economic situation arise, such as a pandemic. Overall budgeting doesn’t help you with these situations because it’s more challenging to adjust a bigger-picture budget. It’s important to stay consistent with your subscription and set realistic goals for the months ahead.
Tip #3: Use Organic Marketing to Stay Budget-Conscious
Now that you’ve set up your budgeting cadence, provide your subscribers with organic content to drive traffic to your brand and stay budget-conscious.
Lodato considers organic content a form of “sweat equity” that has worked well with her brands. Through engaging photos and videos on social channels, Lodato attracts customers to her subscription box.
She started Kids Baking Club’s YouTube channel while running a preschool prior to the Covid-19 pandemic. Lodato posted baking videos that would teach viewers how to make fun recipes. What started out as a fun hobby soon turned into an acquisition strategy for her box; the channel now has nearly 54,000 subscribers.
Organic content also fosters brand identity when it’s surrounded by personable photos and captions. You can provide customers with a positive subscription experience if they know who they’re buying from. Ultimately, “people want to buy from people,” said Krysta Lewis, CEO of Aisling Organics, in her session at SubSummit 2021. In fact, last year, 64% of consumers felt closer to companies they had direct connections with, according to Zuora, and were more likely to buy from them.
Another organic marketing tactic is opt-ins and pop-ups. Opt-ins refer to customers giving a business permission to contact them about a product. Pop-ups are how those opt-ins appear to a customer. Utilizing opt-ins and pop-ups has been a big part of Williams’ organic social media strategy.
One way that she implements them is through Pinterest. The image-sharing service has almost 455 million monthly active users. Williams’ profile is approaching 4,000 followers and has just over 1 million monthly views on Pinterest. She uploads “Pins” — posts on the platform — of her products that then lead users to her website and generate organic traffic.
If your product is something that people will be using in the future, Pinterest is a great area of opportunity. More than three-quarters of Pinterest users found new products or brands on the platform, according to the company.
Don’t be afraid to branch out into other social platforms as well. TikTok is dubbed to be one of the best ways to increase traffic and brand awareness, according to Lewis. The platform has more than one billion monthly users and opens the doors to a lot of customers.
To be at the forefront of a customer’s experience, you have to meet them where they are at, according to Williams. If that means that you have to invest more time and effort into using Instagram because that’s how your subscribers consume their information, then find a way to be there. Understanding where your target audience is can expose your subscription to new, organic marketing opportunities.
The same thing goes with any other platform. Being as available to your customers as possible, wherever they’re consuming information, will put you ahead of a customer’s experience and design a portal toward conversion.
Tip #4: Budget Your Ads Accordingly
When asked how much she spent on ads this year, Williams laughed and said, “Too much.”
Don’t be discouraged. While organic content is vital to drive customers to your subscription, ads can be effective for acquisition; they just need to be budgeted accordingly.
Kayla McKinley, Head of Marketing at Dry Farm Wines, says that her history with networks such as Facebook and Google has helped her understand their trends and predictable behaviors. So, when Dry Farm Wines is business budgeting, it’s easy to look at past budgets and issue a percentage to those right away.
Williams, too, analyzes the data from previous marketing campaigns to identify next steps.
“Does it make sense to increase the product budget and leave the marketing budget the same when we know we’re not getting the same bang for our buck?” she asked.
Don’t be afraid to experiment with new platforms if your ads aren’t performing well.
“The rest of [our] budget is set aside for testing new channels [such as] podcast ads, direct mail, sponsored content, etcaetera,” says McKinley.
Once you’ve found your winning formula, stick to it. “You have to go with what’s working,” Williams said.
So, when is the time to start budgeting? While it seems like a daunting task, the sooner you plan, the better. When the time finally comes and you sit down in front of your computer, look at the data. Were there any missed opportunities in 2021 that you want to take advantage of in 2022?
Maybe, like Williams, you spent too much on ads and you want to prioritize organic content marketing. Maybe a yearly budget isn’t the right fit for your subscription, and you shift to a quarterly or monthly budget.
You’ll be able to effectively price your product and allocate necessary spendings to invest in the right marketing tools with a solid budget planned out. Make 2022 your best year yet by business budgeting and finding the best opportunities to grow your brand.