How to start a subscription business

Everything you need to know

Subscription businesses have been thriving for years, and a global pandemic hasn’t changed that. Merchants on Recurly saw a 39% increase in subscribers between March 2020 and January 2021.

Subscription businesses have several advantages over companies that only have one-time offerings:

  • More consistent and predictable revenue

  • Less churn

  • Higher subscription retention and loyalty

Perhaps most importantly, many consumers have gotten used to subscriptions and like the benefits of “temporary ownership.” Uber has become a $100 billion company because many people, especially city dwellers, prefer to “rent” their transportation instead of owning a car outright. There are countless examples in other industries including furniture, outdoor gear, and clothing.

If you don’t currently have a subscription business model, shifting even part of your business from one-time sales to subscriptions might seem like a heart transplant. While building a subscription-based business certainly takes a good deal of time and effort (not to mention courage), it’s not impossible—and if you pull it off right, it can completely transform your company and set the stage for a new era of growth.

This article will show you what it takes to add a subscription component to your existing business model. You will learn what to do. And what not to do.

Let’s start by learning from those who have already set up a monthly subscription service.

Storied brands that have adopted a subscription model

Case studies - generic image

If you’re doubting whether your company can start a subscription business, those fears may very well be unfounded. There are several companies that have subscription offerings that might make you think:

How could a company in that industry offer subscription services?

But they do it. And they do it well. Take Speedo, the swimwear and swim-related accessories company. You can’t really sell swimsuits on subscription—and Speedo hasn’t tried to do that. But Speedo knows that it has a trusted brand and most customers don’t have the resources of, say, Michael Phelps to track their swim workouts. 

So, the company launched the Speedo On app. The app lets swimmers log their swims, view content, and connect with other swimmers around the world. It has a free option, or users can unlock premium features for around $8 a month. The direct benefit to Speedo is the subscribers paying $8 a month. A less obvious, but still valuable, benefit is the brand equity that Speedo builds by offering value to all of its app users—free or paid. That brand equity increases the likelihood that customers keep buying Speedo swimwear and accessories for years to come.

Then there’s Peloton. Many people doubted that home-exercise bikes could be sold with a subscription. But Peloton founder John Foley didn’t listen to the naysayers, and his company’s bikes now sell for upwards of $2,000 plus a $39 a month subscription. The subscription buys access to live and on-demand classes.

In an industry where one-off purchases are the norm—raise your hand if there’s been an exercise bike that’s been collecting dust in your or your parents’ basement since the 1990s—Peloton has found a way to maintain an ongoing relationship with its customers. A relationship that is very profitable, by the way. The marginal cost of content is essentially zero, which means that every additional subscriber has an incremental value of $39 a month. And unlike Netflix or Spotify, Peloton doesn’t have to spend billions of dollars for movie and music rights.

For other companies, subscriptions are their bread and butter. But one-time offerings are a cross-sell or up-sell opportunity.

Consider Birchbox. The subscription-based beauty retailer was built on the idea that women can enjoy beauty products without being obsessed with them. In practice, that means providing subscribers with a box of beauty products every month so they don’t have to spend hours figuring out what to buy.

At first, it may seem like having one-time offerings would go against what Birchbox stands for. But that’s not the case. According to Birchbox founder Katia Beauchamp, the company sought to help women “enjoy the process of discovery.” Many subscribers discover new products through the monthly boxes, and then buy the exact products that they want through the site.

Now that you’ve seen what’s possible—and maybe found some inspiration—let’s explore how to set up a monthly subscription service at your company.

Creating a foundation for subscription service success

The aforementioned companies have achieved success with subscription models because they provide a seamless user experience. Whether consumers are purchasing one-off items or subscribing, the purchase and signup process is streamlined. 

While brands like Speedo, Peloton, and Birchbox made it look easy, there’s a lot of work that goes into starting a subscription business. A key part of that is having a billing, payments, and subscription management platform that work for your business. Here’s what to look for:

Tech stack needs to be on point

Developer Tools - no speech bubble

To serve a global customer base through both one-time and subscription offerings, you need to put a solid infrastructure in place. Let’s look at some of the components of a robust tech stack:

Supports a variety of currencies and payment methods

According to American Express, 92% of online customers prefer to buy in their local currency, and over 30% will abandon a purchase if the product is priced only in U.S. dollars. Your solution needs to support the local currencies of most, or all, of your customers; Recurly, for example, supports over 140 currencies.

Besides supporting your customers’ local currencies, you need to offer a variety of payment methods. Many people still prefer to pay by credit card, but that number is shrinking—and many consumers in places like Europe have long gotten used to direct debit payment methods. And digital payments, like Apple Pay, PayPal, and Venmo, are also getting more popular every year; digital wallets are projected to account for more than half of global ecommerce sales by 2023. With all these payment methods, you simply can’t afford to accept only traditional credit cards.

Backing up payment methods with the right set of payment gateways

A payment gateway works like a digital version of a physical point-of-sale (POS) terminal, facilitating the transfer of funds from the customer to the merchant’s bank account. Can you just set up one payment gateway and call it a day?

That wouldn’t be a good idea!

Different gateways are more suitable for certain geographies, industries, and business models. For example, you could route your one-time offerings to one gateway and your subscription fees to another. That would also simplify the financial reconciliation process. Look for a subscription billing platform that supports multiple gateways.

Moreover, you should insist on a billing platform that offers gateway failover. In 2019, for example, 50% of gateways had more than 10 outages. That could cost you a lot of revenue if you do high volume.

Provides invoicing and tax support

Tax Compliance

If you work in your company’s finance department, you may be thinking:

This seems like an awful lot to keep track of.

And it would be—if you had to do it alone.

But a robust billing solution can make invoicing and taxes a breeze.

Recurly, for example, automatically creates invoices for all scenarios, including one-time charges and subscriptions. Your finance and accounting teams get access to accurate and organized data, so they don’t have to hunt for the right information come tax time.

And don’t forget about sales tax. Choose a billing solution that automatically calculates sales tax across the states and countries where you do business.

Includes a robust revenue recovery strategy

Involuntary churn is the last thing a subscription business wants to experience. Acquiring a new customer is anywhere from 5 to 25 times more expensive than retaining an existing one. You can’t afford to lose subscribers due to billing snafus.

A top subscription billing platform like Recurly automatically addresses involuntary churn in two ways: first, by preventing most at-risk payments from failing, and second, by recovering as many of those payments that fall through the cracks as possible. There are four steps involved in this revenue recovery process:

  • Account Updater: automatically updates subscribers’ credit card info every month before their cards are charged

  • Expiration Date Pushing: pushes the expiration date on cards that are set to expire (Recurly-exclusive feature)

  • Dynamic Retries: uses machine learning and over a decade’s worth of transaction data to devise a retry strategy optimized for every merchant

  • Customer Updates: enables you to send customizable, automated dunning emails and monitor their performance

Not all revenue recovery processes are created equal. When considering a billing platform, ask for some hard numbers on involuntary churn. Recurly saves 72% of subscribers who are at risk of involuntary churn.

Pricing and plans need to be flexible

“There’s more than one way to skin a cat” is a saying that has stood the test of time for good reason. It can be applied to a multitude of scenarios—including hybrid billing models. 

Companies have to tailor their pricing and plans in a way that makes sense for both them and their customers. Here’s how to ensure a billing platform gives you flexibility with pricing and plan decisions:

Supports a number of billing models

Quantity-based pricing vs. usage-based billing blog image

A billing model that is perfect for one company could be disastrous for another. 

For example, most electric utility companies charge customers based on how much electricity they use. If the rate is, say, 10 cents per kilowatt hour and the customer uses 500 kilowatt hours in a month, the bill would come out to $50. This is a usage-based billing model.

If a video streaming service, on the other hand, decided to use a usage-based billing model, it probably wouldn’t work out so well. Imagine if Netflix came out and said, “From now on, we’re going to have you pay 30 cents for every hour you stream.” Its customers would be up in arms. A quantity-based pricing model is what Netflix uses in reality. This pricing model gives users a certain amount of a product or service, regardless of how much they end up using.

There are different subtypes within the models. Staying with the Netflix example, the company uses the stairstep subtype within the quantity-based pricing model, charging customers based on how many devices they stream.

It’s best to figure out your current strategy and future possibilities ahead of time and see if your prospective billing platform supports it.

Supports an item catalog

An item catalog lets you manage the items that are available on a particular plan without duplicating controls.

This type of capability can be a godsend for a company that offers highly customizable subscriptions. Let’s say you have a men’s grooming ecommerce company and want to make it easy for customers to add razors, shaving cream, shaving oil, aftershave, etc. to their subscription packages. An item catalog would save you time, make it easy to release new offerings, and help you optimize pricing and packaging.

Recurly’s item catalog lets you build your own catalog of offerings in Recurly or integrate Recurly with another ecommerce platform.

Supports trials, promotions, and gifts

img-2020-10-how-subscriptions-and-gifting-1200x500

Sometimes, your prospects need that final push to start using your product or service. A free trial can give them a risk-free way to use it before making a long-term commitment. But a lot goes into creating a free trial offer. How long is it going to be? Do you want to require payment information up front? Do you want to let them redeem free trial coupons? Ask a prospective billing platform about customizability.

The same goes for promotions. You don’t want to be stuck with the ability to only do a certain percentage discount off your goods. Perhaps you want to set a time limit, offer a different discount depending on purchase size, or something else. Flexibility is the name of the game.

Also, don’t forget about gifting functionality. Subscriptions make some of the best gifts because the receiver will be thinking of the giver all year long instead of just one time. That ultimately increases the chances that your subscription will be gifted to others in the future. 

Billing platform needs to integrate with your systems

A billing platform that doesn’t integrate with your systems is guaranteed to cause anguish and require a lot of (time-consuming) manual workarounds. Custom data fields and the ability to integrate with CRM, accounting, and tax platforms can make the introduction of a billing platform a seamless experience.

Supports custom data fields

Every company wants to get a deeper and more comprehensive understanding of its subscribers and use those insights to improve retention efforts. You can use custom data fields to gain that understanding, creating subscriber segments based on subscriber location, age, gender, or other criteria.

The data could be used to make connections across your organization and reach big-picture realizations. For example, maybe you are retaining subscribers in one demographic at a much lower rate than another. Custom data fields help you get that data, so you can take decisive action.

Integrates with other platforms

One of the most important questions to ask a prospective billing platform is how it integrates with your existing platforms. It’s not enough for it to integrate with your other platforms—it also needs to transmit the data properly.

You don’t want your sales team to waste time manually entering new accounts in both your CRM and billing platform. Or for your finance people to be migrating data from your billing platform to your accounting and tax platforms.

Some of the platforms that Recurly integrates with are:

And here is a longer list of Recurly’s integration partners.

What to avoid when creating a subscription business 

There’s a lot that goes into successfully building a subscription business, but there are several things you want to avoid at all costs. Under Armor founder Kevin Plank hit the nail on the head when he said, “Trust is built in drops and lost in buckets.” A misstep could turn your highly anticipated move to a hybrid model into a nightmare.

Here are some of most common issues to avoid and what you should do instead:

Not having a clear value proposition

Companies adopt a subscription model because it seems like a good way to grow revenue. The thing is, that can’t be the only reason. If you and your peers have never sold subscriptions, you should tread lightly; a hasty move could look like a cash grab and turn off your customers.

For instance, car companies typically make money from one-time offerings—buying and leasing cars. Setting up a subscription service could work well for a car company, but only if it serves a specific market need.

Make sure your go-to-market approach works not just for your company, but also for your buyers.

Waiting too long to launch

It’s too easy to look at all of the success stories and say, “We should wait until everything is nearly perfect to start a subscription business.” It could take years to get anywhere close to perfection, and in that time, your opportunity cost in lost revenue could be immense. 

After you choose to create a monthly subscription business, you should seek to get your infrastructure and strategy into place quickly. Remember, you can always refine your strategy later.

A quick launch can depend on the amount of time it takes your billing platform to get up and running. Some platforms take many months, or even years, to implement. Recurly, however, helps clients reach operational status in just 46 days on average.

Building a solution in-house

img-2020-08-build-vs-buy-blog-1200x500 (1)

It’s tempting to try to save money by building a subscription management and billing platform in-house. But that may not be the best idea. There are a lot of complexities involved in building a recurring billing model; it can take years and several staff to build one that even approaches the top platforms on the market.

What about using spreadsheets, particularly if your company is a startup? You’re still unlikely to come out ahead when you consider the billing and payment options, analytics and insights, automated invoicing, tax compliance, and more that a platform like Recurly can provide to a growing company.

Starting a subscription business 

As the business environment gets more competitive, companies need more ways to deliver value to consumers. In this day and age, adopting a hybrid subscription and one-time offering sales model is one of the best ways to do that.

To reiterate, you want to:

  • Learn from the companies that have laid out the blueprint for how to start a monthly subscription business

  • Use a billing solution that facilitates a smooth transition to a subscription model

  • Avoid the missteps that can torpedo your company

As you’ve seen, there’s a lot to manage with running a subscription business. A patchwork billing solution can introduce unnecessary obstacles to your path to success. A top-notch subscription billing platform like Recurly, on the other hand, can take a load off your shoulders and give you the best chance at subscription success.

Request A Demo Get a Personalized Tour of Recurly

Table of Contents