Why is subscription billing so common and what does it entail?
There's no question that you've seen the opportunity to sign up for a subscription if you've done any sort of shopping in the last few years, whether for work or for fun. Everything seems to require a membership, including razors, meal delivery services, software, and a lot more. Let's examine what subscription billing is, why it's so common, different forms of subscriptions and the business model's shortcomings.
How Does Subscription Billing Work?
Subscription billing, often known as monthly, quarterly, or yearly billing, is the practice of charging your consumers a predetermined rate at regular, predetermined intervals. With subscription billing, you may stretch out payments over time rather than all at once, making your products more accessible and appealing to a wider range of potential customers. Additionally, it creates a future stream of recurrent income that enables corporate expansion. Win-win.
Businesses that provide tangible products, content, or services should use subscription billing structures. In addition to the well-known subscription box frenzy, subscriptions can fuel software, streaming media, professional services, IoT-driven services (such as monitoring, and metering), and more for businesses and individuals alike. If set up and handled effectively, subscriptions can be quite profitable. Many companies are eager to switch from unpredictably occurring one-off transactions to a recurring revenue model so that they may generate, recognize, and project revenue in a more constant and reliable manner.
Subscription billing is on the rise
Even if the idea of subscriptions is not new, over the past five years their popularity has increased by more than 100% annually. Why? The solution is rather straightforward.
Businesses make a lot more money when they charge monthly fees as opposed to getting a one-time payment, as explained by Inc. As an illustration, Adobe's stock surged about sixfold in five years and subscriptions now make up 86% of the company's total sales after it switched from boxed software to the subscription-based Creative Cloud (Source: Fortune).
However, subscription models aren't intrinsically superior to traditional ones; rather, their positive effects on the bottom line and client happiness are what make them so popular. Consider software. When a new version of a program was published, Adobe was depending on users to upgrade their previous versions of the software, which led to sporadic and unpredictable income surges. The business has experienced significant growth because of the recurring revenue generated from switching to a subscription model. Additionally, it has given Adobe the freedom to concentrate on incorporating the most cutting-edge improvements as they are created rather than waiting until the following major release, at which point they may already be out of date. This helps businesses stay ahead of trends and are capable of meeting customer demands, as well as keeping the product updated.
Popular Subscription Model Types
There are several approaches you can take if you want to establish a subscription billing model at your firm, based on your objectives and business model.
Fixed Cost
Fixed fee subscriptions provide goods or services for a predetermined cost throughout the course of the agreement. Companies gain high visibility into recurrent revenue by offering fixed-price subscriptions. Monthly boxes (like FabFitFun or Dollar Shave Club), home services (like pest control or cleaning services), and memberships to fitness clubs are a few examples of fixed-fee subscriptions that are widely used.
Hybrid
Customers can add one-time purchases to an invoice using a hybrid approach without permanently altering their subscription. This strategy offers merchants the chance to boost revenue by upselling and cross-selling products while giving customers more flexibility and control. When a consumer buys hardware but must pay a monthly fee for the software to run, update, or add new capabilities, such as home security systems, that is an excellent example of a hybrid business.
Usage-Based
Customers with usage-based subscriptions can only pay for the services they really utilize. This kind of approach gives the customer a high level of transparency and enables the company to change the tiers as necessary to meet demand. Mobile phone plans, municipal utilities, and cloud-based storage services are a few examples of usage-based subscriptions.
User-Based
Like usage-based subscriptions, user-based subscriptions let consumers pay according to the number of users. User-based plans, which are most frequently found in SaaS subscriptions, also enable a high level of transparency and predictable pricing for the consumer.
Challenges of the Subscription Billing Model
Even though subscription billing has more advantages than disadvantages, managing recurring contracts effectively presents the most challenges. To keep track of bill amount, frequency, and length without employing a specialized subscription billing management technology, many businesses use spreadsheets and manual procedures. This might not be a concern for extremely small businesses, but as a company expands, it might present numerous problems and difficulties.
Recognizing Revenue Correctly
It might be challenging to properly allocate the contract value in compliance with ASC 606 and other contemporary revenue recognition rules when dealing with multi-element subscriptions, such as software, hardware, and professional services. Additionally, using your financial management software, it can be beneficial to keep subscription billing schedules apart from subscription income schedules.
Contract Adjustments Management
Adjustments might not be a problem if your company provides goods or services under predetermined conditions—one price, for a predetermined period, at the same frequency for each client. However, if you choose to offer specials, upsells, or down sells, you'll need a reliable procedure to handle these brief modifications without changing the fundamental conditions of the agreement.
Taking Care of Several Contracts
Multiple active subscriptions on one account can be difficult and annoying for both the customer and the business. Maintaining accurate billing information requires more administrative labor for the company, particularly when proration and co-terming are involved. When one contract expires before the other, confusion is also brought about. Receiving separate bills for each service might be stressful and confusing for the customer.
Scaling up as you grow
With subscriptions becoming more and more popular every year, it's critical to think strategically about your billing plan. Will your procedure be able to accommodate the demand in the years to come even if it can currently handle your subscription billing needs? Unless they have plans to automate them, businesses shouldn't dismiss the hidden back-end costs associated with scaling subscription business models.
Customer Retention & Service
It's crucial to keep in mind that if your company offers subscription billing, it must invest time in customer service and retention initiatives. As a company that generates recurring revenue, we are aware of how crucial it is to consistently offer customers value. They will break the contract as soon as they no longer believe your product or service is worthwhile, and subscriptions can make that process simple.
Billing for Subscriptions Management
Conclusion: Implementing a subscription billing model is a terrific method to create a steady and recurring revenue stream while providing value and convenience to your clients. Your firm will prosper when billing is well managed with the right recurring revenue software and client retention is good.
360 Subscription Billing, a Built NetSuite Native SuiteApp that automates recurring and subscription billing processes from beginning to end inside NetSuite, will turbocharge your management of recurring revenue.
Work 365 offers subscription billing best practices to streamline recurring revenue for Microsoft partners and software vendors.
