Subscription businesses have been around for a long time, yet only recently has the model gained traction in industries like retail, healthcare and consumer products. Software as a Service (SaaS), for example, has transformed the computer software industry, while subscription services like Netflix, Spotify and Amazon Prime are changing media and entertainment businesses. Companies in a few product-based industries have also shown the potential the subscription model can have. Loot Crate, for example, has created a thriving business delivering subscription-based “nerd boxes.”
These successes, combined with changing consumer preferences, the growth of ecommerce and the continued success in evolving business models across all industries have led to a significant increase in the number of companies offering subscriptions. Research by McKinsey & Company estimates that the subscription ecommerce market has grown at a compound rate of 60% per year since 2014.
Whether you’re a services-business or a product-based business, having a recurring revenue stream as part of your business model, whether that’s at 100% or it’s a hybrid revenue mix, has several advantages:
Cash flow. Subscriptions generate recurring revenue, which results in more consistent cash flow.
Predictability. More consistent demand with less fluctuation in order volume makes forecasting, inventory management and scheduling easier.
Growth potential. Regular contact with subscribers provides an opportunity to upsell or cross-sell additional products or premium services.
Customer retention. Monthly delivery of goods and services creates stronger relationships than one-time purchases, making customers less likely to try alternatives.
Valuation. Potential investors prefer recurring revenue streams to transactional and project-based models, resulting in significantly higher valuations.
In addition to these benefits, moving to subscription pricing can increase the potential market for a product. Spreading the cost of goods or services over 12 months or more allows companies to reach customers who are unable or unwilling to pay a large, upfront fee. That’s already proven out in the SaaS sector where the low upfront costs have become a powerful differentiator against on-premises software with hardware requirements, licenses and maintenance fees.
Subscription Management Challenges
Companies that have traditionally relied on non-recurring revenue streams recognize the value of subscription pricing. And many organizations are turning to subscription offerings as a way to increase revenue and deliver greater value to their customers. Along with the benefits of the subscription business model, however, come important challenges companies must address, including:
- Keeping track of multiple subscription plans, pricing schedules and promotions
- Billing the correct amount for usage-based plans with variable rates
- Managing complex billing scenarios that combine one-time payments with recurring fees
- Making changes to individual subscription plans, such as upgrades, downgrades or holds
- Complying with accounting standards for revenue recognition and deferred revenue reporting
Succeeding with Subscriptions
To address these challenges, organizations should begin by automating subscription and billing management. Many companies rely on spreadsheets and manual process when launching a subscription business, but this approach is both inefficient and risky. Managing data in spreadsheets is a security issue, impacts data quality and real-time visibility. And manual processes are not only time consuming, they also increase the risk of errors and cannot scale as the business grows. Automation streamlines billing process and puts subscription and billing data in one place, improving data quality and helping ensure accurate billing.
Subscription plans that combine flat monthly rates with variables charges or one-time fees can create billing nightmares that immediately impact the customer experience. Billing problems can be one of the most frustrating for customers. An effective billing management solution should support multiple pricing options, including fixed and consumption-based rates, with the ability to customize rate plans for individual subscribers. The system should also make it easy to update a user's account status, billing information or other details. The ability to manage the timing and duration of promotional pricing and trials is also critical. Finally, the solution should be accessible by customer service and accounting personnel, preferably via an ERP system.
Monitoring the right KPIs is another critical success factor. Response rates, lead velocity, subscriber acquisition costs and average revenue per subscriber should be measured. Analyzing trial conversion rates with subscriber return on investment makes it easier to determine whether paid or free trials deliver the best results.
Successful subscription businesses emphasize the importance of delivering a consistent, quality experience with every customer interaction. This is especially important when dealing with customer support issues. Organizations moving from transactional sales models may need to increase customer service headcount and provide additional training for support personnel. While this drives up operating costs in the short-term, minimizing subscriber churn and increasing customer lifetime value more than make up for the added expense.
Finally, for companies with subscribers in multiple countries, it’s also important to price subscription plans in the appropriate currency. While the Euro and U.S. dollar are common base currencies, consumers are better able to determine the value of products and services when priced in the currency they are most familiar with. Communicating with subscribers in their own language is just as important. English may be the most popular second language, but using a customer’s native tongue will make emails and other communications seem more personal.
Simplify Subscription Billing and Management
NetSuite SuiteBilling provides a unified billing management framework that supports transaction, subscription and usage-based pricing, as well as hybrid pricing models. With real-time visibility, detailed reporting and user-friendly analytics, SuiteBilling not only automates billing and subscription management processes, but also helps companies make smarter decisions that improve performance.
To learn how to simplify subscription billing and management, watch this webinar.