How to Start a Subscription Business: A Step-by-Step Guide

To create a stable stream of recurring income, the founder has to consider the demand for the product, integrate an automated billing system, and focus on subscriber retention policies. The subscription model is linked to a consistent income flow; the subscription market is forecast to be $557.7 billion in 2023, with a 16.3% annual growth rate. 

This guide takes you through the steps needed to create a recurring revenue product, focusing on the product, the billing infrastructure, the acquisition strategy, and the retention policies.

In making a recurring order, the customer acknowledges that they will be making frequent orders, or the need for a product will keep on being renewed. Validating a recurring need can influence a company’s investment decisions, potentially redirecting resources away from single-purchase offerings. A clear validation process can inform an understanding of customer perceptions regarding service charges relative to service received. Early observation of account behavior can influence the dropout rate during the initial billing period.

Direct feedback from potential customers about what they want is very essential in making sure that the positioning of the product is well done before starting to write the code.

The discussion on the type of model to use in conveying your product can be taken up using the following structure: 

• Access-based SaaS: This kind of model should be considered if your software provides constant functionality or processes, with the help of hosted data or stored information that the user requires so often as once in a week. 
• Curation model: This kind of approach should be used if the core value of the product is based on the provision of new discoveries, or the selection of specialists, or unique physical items.  
• Replenishment model: In this model, products are typically physical consumables that experience reduction with use or over time.

Before building, ask these self-assessment questions:

1. What is the typical frequency of this situation? 
2. What is the status of a customer’s access to essential resources or functional utility following subscription termination? 
3. Do competing entities currently implement a subscription model for comparable software or services?

• Account for frequency of use: Analyze web analytics, search intent, and user activity data to assess how often potential customers encounter this difficulty.
• Create a pre-sale or waitlist: Create a landing page explaining what the software does and ask for credit card details, or just email addresses, before starting to code. 
• Perform customer interviews: Ask potential users about the way they currently try to solve the problem and then calculate the monthly budget they spend on the alternative ways.

The subscription’s architecture is an important factor to consider when looking at the implications of subscription management for business operations.  This factor influences how revenue grows together with the extension of the product and the account. The method of setting the price affects the Customer Acquisition Cost (CAC), the ability to expand the account, and the gross profit margin. The establishment of clear boundaries may affect the occurrence of confusion and influence the acquisition of revenue from diverse customer segments.

Your pricing model should be consistent with the value that users derive from your application. This strategy is associated with revenue changes, influenced by customer perceptions of value from the application. It is better to create different categories of plans in advance, when there is still time to go all the way with the process of selling to existing users.

• Incorporate a minimum of two pricing tiers: A standard edition offering the basic functions, with a premium edition including additional features or higher-level access, and an enterprise edition as an upgrade option.  
• Justify pricing based on value: Consider pricing strategies that are based on account activity such as the number of contacts, number of monthly active users, or the number of API calls made, rather than the cost of the server.  
• Consider an annual billing option: Offer a discount of up to 20% off the monthly price offered by extending the period of payment to one year.  The data shows that annual subscribers bring in 50-60% more revenue per user than monthly subscribers.

To create a Minimum Viable Product (MVP) for recurring billing, you should consider creating the simplest software possible that provides enough functionality to get the audience to subscribe for a monthly fee. The development of numerous features has the potential to influence project duration and the utilization of engineering personnel and company capital on items awaiting verification.

The first version should be designed to address the problem stated by the audience and include clear onboarding documentation and reliable account management. 

Early access to the product for users may facilitate their familiarity with the experience, which can influence account retention. It is important to keep the main features simple, as this will also reduce the cost of maintaining the product and give time to test the rest of the features.

• Deliver the primary workflow: Develop a software product ensuring that the main function operates as specified and consistently.
• Create a basic onboarding flow: Send welcome messages and clear instructions to guide users to their first activity within 48 hours of registering.  
• Add account management features: Let users modify their profiles, change passwords, and manage their plans in the dashboard.

A billing infrastructure includes components and procedures that enable a SaaS company to execute recurring billing, manage transaction-related aspects, and maintain adherence to regulations during international growth. This step goes beyond the selection of a billing tool: it also includes the identification of the legal entities that will be responsible for collecting taxes, bearing chargeback losses, and handling the recovery of failed payments before they are converted to churn. Delaying this action could involve replacing the current platform with a new one, an operation that would proceed while live subscribers are present and would represent a migration initiative. This decision affects time, cash flow, and the extent of compliance that the founder will perform.

There are two different ways of looking at this problem and the choice depends more on the nature of the position rather than the specific device used in the process.  

• Billing-tool-alone approach: A tool that allows for control over the process of invoicing, setting up recurring payments, and so on. In this case, the SaaS company is the Merchant of Record — meaning it is the one who is responsible for calculating, collecting, and remitting sales tax and VAT in the jurisdictions where it has customers, and also takes care of chargebacks and fraud.  
• Merchant of Record (MoR) approach: An MoR is the one who sells the transaction. In this case, the SaaS company sells to the MoR and the MoR sells to the end customer.  With this kind of structure, the taxes, PCI compliance, fraud handling, and chargebacks are also transferred to the MoR together with the billing and collection functions.

The self-examination applies to decide between them: Does the company have (or is it planned to put into operation) the capability to register for sales tax, calculate it and file it in the countries where it sells – this is a requirement that applies since the first B2C sale in the EU, irrespective of the number of non-EU sellers?  

If the response is affirmative, a billing tool and a distinct tax compliance solution may be sufficient. If the answer is negative, then that gap will either be handled or develop into a compliance factor when the customer base includes international regions.

When you have established the billing and invoicing requirements for your business, do not forget to: 

1. Enable payment gateway functionality: This allows users to select from credit cards, digital wallets, bank transfers, and local payment methods. It is necessary to consider coverage when it is time to put it into practice, but it appears less important than it was at the conceptual stage; for example, offering a customer’s preferred local payment method increases the probability of completing the checkout. This is an area where many do-it-yourself billing systems perform differently when operating outside their home markets.   
2. Set dunning and retry policies: Initial payment attempts do not succeed in over 20% of cases. A retry policy informed by a computer’s assessment of when card functionality may be restored, rather than fixed intervals, processes a greater number of these retries compared to a simple schedule, due to its consideration of daily and hourly patterns.
3. Create card updater and reminder sequences: Expired or reissued cards are a common reason for payment failures, and this is not because the customer wants to cancel. The function of an automated card updater involves adjusting expired card data in advance of subsequent billing cycles, as opposed to managing issues that arise from card declines.

The first 100 subscribers serve as a group to test the retention rates, the efficiency of the onboarding process, and the satisfaction of the users. A company that adopts a deliberate pace in customer acquisition may exhibit a consistent growth pattern, potentially influencing levels of operational pressure and reliance on specific indicators. 

Should retention levels remain consistent after 30 days of account activity, it may indicate a user’s perception of the offered value is not established, which could relate to account termination. Improvements in retention for this initial user cohort could correlate with adjustments in customer acquisition expenditure.

It is necessary to monitor closely the activities performed by the user during the first few days of usage of the product to understand what functions of the product are the most useful.

• Target specific user groups: Reach out to industry professionals, post in relevant forums, and do small targeted advertising campaigns to attract the kind of people who would like to sign up. 
• Track conversion and retention metrics: Count how many website visits are converted into paid subscriptions and also keep an eye on the retention rate of users during the first 30 days of the month.  
• Collect qualitative feedback: Talk to users who have signed up early in the product to understand why they started using it, what features of the software they are using, and most importantly, what is missing in the product.

Operational metrics need to be tracked by any software founder who wants to gain full knowledge of their business assets and resources. This includes the effects of cash flow on business operations and also the effect of business accounts on business expansion.

In contrast to the practice in traditional businesses, subscription businesses focus on the compound growth rate of revenue and the value of the customer lifetime. By monitoring both top-line financial expansion and granular user retention metrics, teams can identify reasons for churn, allocate a budget for acquisition, and enhance the effectiveness of the pricing strategy.

It is important to put in place a real-time analytics tool, whether in-house or off-the-shelf, to ensure that problems are identified and resolved before stepping up the level of the marketing budget.

Primary Financial and Unit Economic Metrics

Retention and Expansion Metrics

• Net Revenue Retention (NRR): Calculates the total recurring revenue retained from existing customers over a specific period, including upgrades (expansion) minus cancellations and downgrades.

• Formula: 

Benchmark Target: Above 100% is mandatory for sustainable growth; top-performing B2B SaaS applications reach 110–130%. An NRR exceeding 100% relates to a business’s revenue growth that occurs without new user acquisition.

• Gross Revenue Retention (GRR): Measures retained revenue strictly from the initial account base, ignoring any expansion or upgrade revenue.

• Formula: 

Benchmark Target: 85–95% for B2B SaaS. GRR cannot exceed 100% and reflects core product stability without relying on upsells.