Pricing the New Subscription Box
Green Crate sells curated snack boxes online. Its best-selling one-off box retails at £24, with variable costs of £11 (product £8, packaging £2, delivery £1). Last year it sold 18,000 boxes, covering £180,000 of fixed costs and returning a modest profit. The founder wants to launch a monthly subscription at £19 per box to build recurring revenue. Market research suggests 4,000 existing customers would subscribe, but 60% of those say they would otherwise have bought the £24 box anyway. Acquiring new subscribers costs an estimated £15 each in advertising, and subscribers can cancel at any time. The founder argues the lower price is fine because 'volume will make up for it'.
1. Calculate the contribution per box for the one-off and subscription products, and assess whether the subscription price is viable.
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Contribution per unit = price − variable cost.
- One-off box: £24 − £11 = £13 contribution (54% margin).
- Subscription box: £19 − £11 = £8 contribution (42% margin).
Volume test. The founder assumes volume compensates, but contribution per box falls by £5 (38%). To earn the same total contribution from subscriptions alone, volume must rise by 13/8 ≈ 1.63× - roughly 62% more boxes. There is no evidence demand would grow that much.
Cannibalisation. Of 4,000 subscribers, 60% (2,400) would have bought the £24 box anyway. On those customers the firm loses £5 each = £12,000 per year of contribution it already had.
Acquisition cost. £15 to acquire a subscriber exceeds the £8 monthly contribution - the first two months of subscription merely repay acquisition. If churn is high, many subscribers never become profitable.
Judgement: At £19 the subscription is marginal at best. A price closer to £22, or a higher-margin box mix, would protect contribution. The answer should show that 'volume will make up for it' requires quantified proof, and here the numbers do not support it.
2. Recommend how Green Crate should structure the subscription launch, justifying your choices with the figures.
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Recommendations:
- Raise the subscription price to at least £21–£22, lifting contribution to £10–£11, or differentiate the box so the £24 price is defensible.
- Target genuinely new customers first. Acquisition costs £15, so payback needs a contribution above that over the expected subscription life. At £8 contribution, a subscriber must stay more than two months just to break even on acquisition; at £11 it is under two months.
- Protect existing £24 buyers by offering the subscription as an upgrade (e.g. exclusive items) rather than a discount on the same box, reducing the £12,000 cannibalisation loss.
- Set a churn target. With monthly cancellation, model expected lifetime value: LTV ≈ contribution × average months retained. If average retention is six months, LTV at £8 is £48 against £15 acquisition - thin; at £11 it is £66 - healthier.
Judgement: The launch is sensible in principle (recurring revenue, predictable cash), but the £19 price and undifferentiated box undermine it. A strong answer ties each recommendation to a specific number and acknowledges uncertainty in churn and conversion estimates.