How-to guide
The ultimate guide to launching a subscription offering
Subscription businesses have surged in popularity, becoming a beacon for sustainable revenue and the epitome of customer loyalty. The global subscription ecommerce market is expected to reach $904.2 billion by 2026. The echoes are clear: The future is subscriptions.
But with great reward often comes great complexity. Subscriptions are no exception; they transform traditional business models, challenge operational norms, and redefine customer relationships. However, subscriptions' complexities should not deter you–they're a maze of opportunities waiting to be decoded. That's where this guide comes into play. Recurly, propelling over 2,000 leading consumer brands through launches and expansions of subscription programs, serves as your compass.
This guide distills everything we've learned into actionable insights and tactical wisdom to start a subscription business. Here, you'll uncover the why's and hows, tap into the strategic thinking behind successful subscription business models, and learn the infrastructure needs that support a thriving subscription service.
How and where to begin with a subscription business model
Starting a subscription business can offer a steadfast stream of revenue and deepen customer relationships. However, convincing stakeholders in a company who aren’t familiar with the subscription landscape can be as tricky as navigating murky waters. This section is tailored to help you add a subscription offering seamlessly by getting internal stakeholder alignment.
Identify stakeholders
The first step in your internal pitch is identifying key stakeholders who influence strategic decisions in your company. They are likely to have several concerns that need to be addressed to gain their full support. Understanding and preemptively addressing these concerns is vital for a successful pitch. Typically, these include:
C-level executives: This group–especially the CEO, CFO, and COO–is critical for top-level approval. Their support can allocate the necessary resources and influence the organization's direction.
Common concerns: The initial cost and operational changes required for this shift and how they impact the company's current revenue and profitability models.
Product managers: They are essential for understanding the feasibility of offering a product or service as a subscription.
Common concerns: The product's readiness for a subscription model and its impact on product development cycles.
Finance analysts: Their insights will project the financial impact and validate the sustainability of the model.
Common concerns: The predictability of revenue streams, cash flow impact, and the overall financial health of the company during the transition.
IT/Technical team: Any subscription model requires proper technical support, their expertise is necessary to understand the integration with existing systems.
Common concerns: Technical feasibility, necessary system upgrades, or integrations required to support the subscription model efficiently.
Once you've pinpointed the stakeholders, your goal is to engage them by highlighting the potential value a subscription model can add to the business while considering the challenges it may pose.
How to pitch the opportunity internally
When pitching internally, it's imperative to tailor your message for each stakeholder group:
C-level executives: Focus on strategic long-term benefits such as predictable revenue streams, enhanced customer lifetime value, and the ability to leverage customer data for business insights.
Product managers and sales department: Discuss the potential for a more stable demand forecast and opportunities for upselling and cross-selling.
Finance analysts: Provide data-driven projections that show how recurring revenue could improve financial stability.
IT/Technical team: Discuss the technology stack, data handling capabilities, compliance with industry standards, and the flexibility to adapt to future technological advancements or business needs.
How to build a business case
Building a business case for starting a subscription business requires thorough research, strategic communication, and an adaptive approach to stakeholder management. By mapping out the benefits, addressing potential hurdles, and showcasing a well-thought-out implementation plan, you'll build a stronger case for why a subscription model is an attractive avenue for growth and stability.
Market analysis: Demonstrate a clear understanding of the target market for the subscription offering and present data on market size, growth, and competitive landscape.
Value proposition: Define what makes the subscription unique and attractive to customers, and how it aligns with or enhances the company's existing products or services.
Financial projections: Outline detailed revenue models, including subscription pricing tiers, projected acquisition and retention rates, and break-even analysis to reassure stakeholders of the financial prospects.
Scalability and logistics: Discuss how the subscription model can scale over time and identify what changes or investments are needed in terms of logistics, supply chain management, and support systems.
Risk assessment: Highlight potential risks and challenges and their mitigation strategies to present a balanced and realistic view of the subscription implementation.
Implementation plan: Propose a clear action plan that outlines phases, timelines, and milestones for introducing the subscription offering.
Remember, transitioning to a subscription business model isn't just about selling a product; it's about selling an ongoing relationship. Selling this vision internally is your stepping-stone to achieving alignment and ignition of your subscription aspirations. Learn how Disciple Media made the decision to move to subscriptions.
Define & launch your subscription business model
1. Define your subscription program
Your subscription offering must not only attract customers but keep them engaged month after month. Begin by pinpointing what makes your service uniquely appealing and how it stands out in the crowded subscription space.
Identify your value proposition: List the benefits subscribers can expect, then clarify how your subscription solves specific problems for your customers or enhances their lives. Determine pricing tiers that offer clear value at each level.
Segment your market: The first step to building a customer base for a subscription business is identifying your target customer demographics. Tailor your subscription model to meet the specific needs and preferences of your audience segments.
Conduct a competitive analysis: Assess the subscription landscape within your niche. Adapt successful strategies and differentiate your offering from competitors.
2. Develop the Minimum Viable Product (MVP)
The MVP is the simplest version of your subscription offering that is ready to go to market. It should be comprehensive enough to satisfy early adopters while allowing room for refinement based on customer feedback.
Core features for launch: Focus on the fundamental features that will deliver on your program's promise. Prioritize functionality that supports seamless sign-up, billing, and customer service for your subscription business.
Customer feedback loop: Implement systems to collect, analyze, and respond to subscriber feedback. Use these insights to iterate and enhance your offering.
Alpha/Beta testing: Start with a small group of users to test your MVP in real-world conditions. Use their experience to refine your product before a full-scale launch.
3. Launch in stages
An incremental approach allows you to manage risk, gather valuable data, and make improvements.
Stage 1 - Soft launch your MVP: Release your MVP to a limited audience. Monitor the performance and tweak the offering as needed.
Stage 2 - Scale up and refine: Gradually open the subscription to a wider audience as you fine-tune the service. Enhance marketing efforts based on early results and feedback.
Stage 3 - Collaborate and invest: Collaborate with platforms like Recurly, which specializes in subscription management for high-growth businesses. Invest in tools that offer billing flexibility, subscription analytics, and customizable customer experiences. Strengthen support and service for an increasing subscriber base.
Define metrics and goals
Running a subscription enterprise is more than just keeping track of basic metrics like monthly recurring revenue (MRR) and churn rates. Understanding nuanced metrics and setting smart goals can give you a strategic advantage in a competitive arena.
However, having a strong grasp of industry benchmarks, trends, and subscriber preferences ensures foundational knowledge of the state of the subscription economy. Take a look at Recurly’s industry benchmarks from our State of Subscriptions report and subscriber preferences from our What consumers want report.
Advanced metrics
Customer lifetime value (LTV): Define and calculate your LTV to predict the total value a customer contributes to your business over their entire relationship. Use predictive analytics based on customer behavior patterns to optimize LTV, or learn how to use cohorts and line graphs to predict LTV.
Customer acquisition cost (CAC): Strive for detailed CAC measurements that factor in marketing, sales expenses, and overhead distributed across new customers. Monitor CAC in relation to LTV for ratio analysis and budget allocation.
Lead-to-customer conversion rate: Go beyond tracking raw conversions; analyze the conversion rate, focusing on qualified lead segments. Test and improve sales funnels to boost this rate.
Upsell and cross-sell rates: Track the effectiveness of upsell and cross-sell strategies by segment and over time. Refine sales tactics to increase these rates within your existing customer base.
Revenue churn and expansion MRR: Separate revenue churn from customer churn to understand top-line impacts. Look at Expansion MRR for insights into growth within your current customer base, not just new acquisitions.
Learn about fundamental subscription metrics
Goals for growth
Optimize LTV to CAC ratio: Aim for an LTV-to-CAC ratio that demonstrates a healthy return on investment in customer acquisition and retention. The benchmark ratio is 1:3.
Grow MRR consistently: Set targets for net new MRR, including expansion MRR, and monitor progress against goals.
Improve customer retention rates: Establish robust systems for identifying at-risk subscribers and proactive measures for retention.
Expand market penetration and segment reach: Use market analysis to identify new segments or verticals for expansion.
By mastering these advanced metrics and setting ambitious, yet attainable, goals, you can significantly boost your chances of long-term success.
How to shift to a subscription model mindset
The transition from an acquisition-centric business model to a retention-focused one is crucial for the success of a subscription business. By focusing on nurturing and maintaining customer relationships, your business can enjoy a more sustainable and predictable revenue stream.
Ensure employee alignment and incentives. Ensure that your employees' goals and incentives are aligned with retention metrics.
Shift to retention KPIs. Move beyond basic acquisition metrics like sign-up rates, and start tracking retention metrics such as churn rate, retention rate, and LTV. Use analytics platforms specializing in subscription models to monitor these metrics closely.
Conduct a customer engagement analysis. Monitor engagement levels and usage patterns to predict and reduce churn. Implement customer feedback loops to gather insights on product usage and satisfaction.
Forecast your financials. Regularly forecast and analyze recurring revenue, lifetime value, and churn to understand financial health. Utilize financial modeling tools tailored for subscription businesses to gain a clear view of cash flow.
Invest in your teams, product or service, and technology. From customer support to product development, these resources can help you retain and scale.
Customer support and success teams can proactively address customer concerns and focus on fostering long-term relationships.
Systems and technology platforms are needed to support subscription management, billing, and customer relationship management.
Product development can evolve products or services based on consistent customer feedback and usage data.
Key considerations for subscription pricing and packaging
Starting a new subscription business comes with a myriad of challenges, but perhaps one of the most critical—and often daunting—is determining the right pricing and packaging model. The decisions you make here can powerfully impact your business’s revenue, brand positioning, customer satisfaction, and overall success.
Understand your costs: Before setting prices, understand the full scope of your costs. This includes production costs, operating expenses, marketing, and perhaps shipping. You’ll need to ensure your price covers these costs and still provides a healthy margin.
Analyze the market: Research competitor pricing to identify market expectations. Understand your position in the market—is your offering a premium or budget option? Adjust your pricing strategies for your subscription business accordingly.
Know your customer and value proposition: Develop customer personas to grasp what drives value for your customers. Consider conducting surveys or focus group interviews to gather insights into their willingness to pay and preferred subscription options. How do your products or services stand out, and how can the pricing reflect that value?
Flexibility and scalability: Design pricing that is flexible and can scale with customer usage or over time. Consider tiered pricing models that cater to different customer segments or usage levels.
Trial offers and promotions: Trials and promotions can attract new customers and encourage them to commit. Decide on the length and terms of trial periods, taking care not to devalue the core offering.
Learn more about how to optimize and implement subscription pricing and packaging.
How to map the subscriber experience
Mapping the subscriber journey and experience is crucial for understanding and optimizing each interaction point between the customer and your business. It's essential to consider what motivates a customer at each stage, the potential barriers they might face, and how your subscription offering can address these effectively.
Awareness stage: Do customers learn about your subscription through online search, social media, or word of mouth? Ensure your marketing efforts are tailored to meet your target audience where they are most active.
Consideration stage: At this point, potential subscribers are evaluating your offering against others. Highlight your unique value proposition and make information easily accessible to aid in their decision-making.
Acquisition stage: This stage is where the purchasing decision is made. Streamline the sign-up process, clearly communicate pricing and subscription terms, and reassure subscribers with excellent customer support.
Onboarding stage: Properly welcoming new subscribers can set the tone for their entire experience. Provide clear guidance on how to get the most out of the subscription and establish open lines of communication.
Retention stage: Focus on keeping your subscribers engaged and satisfied. Regularly offer valuable content, updates, or features and actively seek feedback
Loyalty and advocacy stage: Recognize and reward subscriber loyalty through referral programs, exclusive offers, or personalized experiences to foster a strong, supportive subscriber community.
Throughout the subscriber experience, ensure the subscription delivers consistent, high-quality value and establish mechanisms for subscribers to easily provide feedback. Personalized content, recommendations, and support can significantly enhance satisfaction and loyalty.
What you need in your tech stack
How to start the build or buy conversation
What is buy vs. build? When launching a subscription offering, the technology platforms selected to manage the subscription lifecycle and recurring billing becomes pivotal. Businesses must evaluate whether to develop an in-house solution or leverage third-party subscription management platforms. This decision hinges on several factors including cost, control, customization, and speed to market. Building a proprietary system offers complete control and customization but requires significant investment in development and maintenance. Conversely, third-party platforms provide a quicker route to market and are continually updated with new features and compliance standards, though they may lack some degree of customization.
For scalability, businesses should prioritize flexibility and efficiency within their chosen technology. This means selecting platforms that can seamlessly handle an increasing volume of subscribers and transactions without compromising performance. The system should also integrate easily with other business tools, such as CRM and analytics, to provide a holistic view of the subscriber experience and business health.
Compliance and security are non-negotiable, with stringent regulations governing data protection and financial transactions. Businesses must ensure their chosen solution complies with relevant laws, such as GDPR for data protection and PCI DSS for payment security. Failure to do so can result in hefty fines and damage to brand reputation.
Globally, businesses must consider local tax laws, currency support, and language localization to ensure a seamless subscriber experience across different regions. Proper handling of these elements not only aids in legal compliance but also enhances subscriber satisfaction by providing a localized and user-friendly service.
When selecting technology for a subscription offering, businesses should carry out a comprehensive assessment of their needs, weighing the trade-offs between in-house development and outsourcing, while considering factors like scalability, compliance, security, and global reach to align with their long-term growth strategies. Continue the build versus buy conversation in our subscription software checklist.
Tech stack must-haves
Establishing a comprehensive tech stack is crucial for operational efficiency and customer satisfaction. Essentials include:
Billing and subscription management solutions: Employ robust platforms designed for subscription management, facilitating flexible billing cycles and personalized subscription plans.
Fraud detection systems: Implement advanced fraud detection and prevention mechanisms that utilize AI and machine learning to identify and mitigate fraudulent activities in real time.
Tax compliance software: Use global tax compliance tools capable of managing varying tax regulations across different geographies, simplifying tax calculation, collection, and remittance.
Marketing automation tools: Leverage marketing automation software to execute targeted campaigns, manage leads, and personalize customer journeys that drive engagement and retention.
Analytics and reporting tools: Integrate comprehensive analytics solutions to track key subscription metrics, customer behavior, and financial performance, enabling data-driven decision-making.
Customer relationship management (CRM) systems: Utilize CRM platforms to manage customer data, monitor interactions, and personalize customer experiences based on their subscription history and preferences.
Enterprise resource planning (ERP) software: Include ERP systems to integrate financials, supply chain, operations, reporting, manufacturing, and human resource activities, ensuring a seamless operation across departments.
Incorporating these components into the tech stack empowers subscription businesses to effectively manage subscriptions, enhance customer experiences, optimize operations, and comply with legal requirements, positioning them for success in a competitive market.
Learn how your tech stack is the key to scaling your business.
Analytics and dashboards
Businesses should prioritize the development of several key analytical dashboards that provide insights across various facets of the operation. Essential dashboards include:
Subscription metrics dashboard: Tracks crucial metrics such as monthly recurring revenue (MRR), annual recurring revenue (ARR), churn rate, customer lifetime value (CLV), and average revenue per user (ARPU). This dashboard offers a high-level overview of the financial health and growth trajectory of the subscription business.
Customer acquisition dashboard: Focuses on the efficiency and effectiveness of acquisition channels, detailing metrics like cost per acquisition (CPA), conversion rate, lead source performance, and marketing ROI. This allows businesses to optimize marketing spend and focus efforts on the most productive channels.
Customer behavior dashboard: Provides insights into how subscribers use the service, including engagement metrics, feature utilization, and activity levels. Understanding customer behavior is crucial for improving product offerings and identifying opportunities for upselling or cross-selling.
Retention and churn analysis dashboard: Analyzes churn reasons, duration until churn, retention strategies effectiveness, and segments at higher risk of leaving. This dashboard is vital for implementing proactive measures to retain customers and reduce involuntary churn.
Payment and revenue recovery dashboard: Monitors payment success rates, failed transaction reasons, recovery efforts outcomes, and trends in involuntary churn due to billing issues. This helps in refining payment processes and reducing revenue leakage.
By integrating these dashboards into their analytics framework, subscription businesses can gain a comprehensive understanding of their operations, customer base, and financial performance to enable data-driven decision-making.
Revenue recognition considerations
Revenue recognition is a critical financial principle for subscription businesses, as it directly impacts financial reporting and compliance. It dictates how and when revenue from subscriptions is officially recorded in the financial statements, ensuring accuracy in earnings reports and alignment with both accounting standards and tax regulations. Fundamentally, every subscription business must understand the "revenue recognition principle," which states that revenue is recognized when it is earned and realizable, regardless of when cash is received. This principle requires businesses to:
Identify the contract: Any valuable contract that includes obligations and enforceable rights counts.
Identify the performance obligation: The distinct performance obligations and the products or services you promise to provide.
Determine the transaction price: Calculate the contract's transaction price and predict the total amount you’re entitled to receive.
Allocate the transaction price to the performance obligations: Distinguish the selling price for each product or service and the revenue allocated to each.
Recognize revenue as the performance obligation(s) is/are satisfied: Recognize months of revenue as you serve your customers.
Learn more about revenue recognition for subscription businesses and see some examples here.
The importance of pricing flexibility
Pricing flexibility plays a crucial role for businesses contemplating the launch of a subscription offering, as it directly impacts customer acquisition and retention. It allows businesses to swiftly adapt to market changes, competitor pricing strategies, and evolving customer preferences, ensuring that the subscription remains attractive and competitive.
The most vital aspects to consider include understanding customer price sensitivity, cost structure, and the perceived value of the subscription. Companies need to strike a balance where the price reflects the value provided while also covering costs and ensuring profitability. Additionally, offering multiple pricing tiers and options can cater to a broader audience, allowing customers to choose the level of service that best suits their needs and budget. Implementing promotional pricing or discounts for longer commitment periods can also incentivize sign-ups and boost subscriber loyalty. Ultimately, pricing flexibility is not just about setting the right price but about creating a pricing strategy that is dynamic, reflects value, and aligns with business and customer objectives.
Learn more about how to deliver pricing flexibility through your product and tech stack.
How to think about your payment strategy
Subscription business models require a multi-gateway payment strategy to ensure uninterrupted service delivery, optimize customer satisfaction, and scale locally and globally. This approach mitigates risks associated with payment processing failures, which can result from gateway outages, declined transactions, or compliance issues. By diversifying payment processing options, businesses can reroute transactions through alternative gateways when necessary, enhancing the likelihood of successful payment authorization. This redundancy is crucial for maintaining consistent revenue streams in a subscription model, where regular, recurring payments are foundational to the business's financial health.
Recurring vs. one-time payments
Handling recurring payments differs significantly from processing one-time payments due to the automated nature of the transactions and the ongoing relationship with the customer. Recurring payments require a system that can securely store payment information and automatically charge customers at agreed intervals without requiring active input for each transaction. This necessitates robust security measures to protect sensitive data and ensure compliance with regulations such as PCI DSS.
Furthermore, subscription-based models must adeptly manage updates to payment details, handle expiring cards, and efficiently resolve declined transactions to prevent service interruptions. In contrast, one-time payments typically involve a straightforward, single interaction, without the need for long-term data storage or automated follow-ups.
Involuntary churn
Involuntary churn, resulting from failed payment transactions, poses a significant challenge for subscription businesses, impacting revenue and eroding the customer base. To mitigate involuntary churn, companies must adopt proactive and sophisticated payment retry logic. This strategy involves intelligent systems that can identify failed payments and automatically attempt to retry charges at optimal times, or when success is most likely.
Additionally, leveraging communication channels to notify customers about payment failures and providing them with easy ways to update their payment information is essential. Transparency and simplicity in these communications can significantly reduce friction, encouraging customers to take swift action to resolve payment issues. Ultimately, tackling involuntary churn requires a blend of advanced technology, strategic communication, and an understanding of customer behavior to ensure the seamless continuation of subscription services.
Learn more about Recurly’s churn management solutions.
Measuring success
Measuring the success of a new subscription offering launch involves evaluating various quantitative and qualitative metrics to understand the impact and reception of the service:
Key performance indicators (KPIs) such as the number of new sign-ups, the conversion rate from free trials to paid subscriptions, and the average revenue per user (ARPU) provide immediate data on financial viability and customer interest.
Engagement metrics, including usage frequency, feature adoption, and user retention rates, offer insights into how subscribers are interacting with the service and its perceived value.
Feedback gathered through surveys, customer support interactions, and social media can reveal subscribers' satisfaction levels and areas for improvement.
Comparing the outcomes of A/B testing scenarios before and after the launch can highlight the effectiveness of different strategies.
Analyzing these metrics collectively allows businesses to gauge the success of the launch and identify strategies for sustained growth and optimization.
A/B testing
A/B testing can focus on various elements to pinpoint what resonates most with your target audience. These tests can include:
Pricing models: Experiment with different pricing tiers or structures, such as monthly versus annual subscriptions, to see which is more attractive to potential subscribers.
Subscription plans: Offer different levels of service or plans with varied features to determine which combination is most popular among new users.
Free trial lengths: Compare different lengths of free trials, if offered, to find the optimal time frame that leads to the highest conversion rate from trial to paid subscription.
Onboarding processes: Test different onboarding experiences to figure out which approach best helps new subscribers understand and get value from your service.
Marketing messages and channels: Vary the messaging, imagery, and channels used in your marketing campaigns to identify what drives the highest engagement and conversion rates.
Implementing A/B testing across these areas can provide valuable insights into customer preferences and behavior, guiding strategic decisions to refine and improve the subscription offering.
What’s next?
When you think you may be ready, expanding a subscription offering globally requires careful consideration of several key factors:
Understanding and adhering to local regulations and compliance standards is critical and can vary significantly from region to region, including data protection laws, payment processing regulations, and tax obligations.
Take into account cultural nuances and consumer behavior differences to tailor your subscription model and marketing strategies effectively for new markets. Localization extends beyond translation; it involves adapting content, payment options, and customer support to align with local preferences and expectations.
You need financial stability, a validated business model, and scalable operational capabilities. It’s important to have solidified your presence in your existing market(s) to achieve sustainable revenue growth, a loyal customer base, and the capacity to provide high-quality support services without compromising the customer experience. A strong indication of readiness is also the ability to invest in market research and localized marketing efforts without straining existing resources.
Through extensive market research, identify potential audience segments in new markets that align with your value proposition but consider local competitors, cultural differences, and unique value offerings that can distinguish your subscription service. This may include developing new features, content, or partnerships relevant to each specific market.
Launching a new subscription offering requires a deep understanding of your market and audience, along with the flexibility to adapt based on data insights. From initial research and building your business case to global expansion, each step is vital in creating a strong, customer-focused business. This guide provides the knowledge and strategies to overcome challenges and achieve long-term success in the subscription industry, but that’s just the beginning. Chat with us to learn more about cultivating a thriving subscription business with an expert partner like Recurly, or get this guide as a checklist to share with your team.
