John F. Kennedy once said, “Change is the law of life and those who look only to the past or present are certain to miss the future.” The same holds true for any business, if it wants to thrive.
Often business owners know they need to scale their business, but they don’t realize that scaling their business opens other challenges.
What’s driving the subscription business model
Prior to the subscription model, if a customer bought something outright, a business only had to be nice to the customer before the sale. The world has had enough of that. Customers want a better customer experience, and the subscription model guarantees this as they can cancel their subscription if they don’t receive the support they expect. But beyond a great customer experience, they want:
- Personalized delivery
- Instant access
- Continued value added—it needs to get better over time
Why industries are switching to the subscription billing model
Subscription billing was made popular by SaaS (Software as a Service) companies, but the model is exploding across all industries, including music, video, books, marketing services, automobiles, legal services, business consulting, telematics, publishing, and food delivery. Businesses in virtually every industry have moved to this model.
Beyond the pressure from customers to leverage subscriptions to ensure a better experience, companies themselves are drawn to subscriptions to leverage the business advantages of subscriptions. With this transition, they are seeing:
- Predictable revenue—no more feast and famine every quarter.
- Flexible monetization models—the ability to match your pricing model to the value you deliver.
- Less sales friction. For example, $50/month for a single subscription is easier to close than $600/year, just as $5,000/month is easier to close with a business customer than $60,000 a year.
Value monetization is the primary driving force of every business. How to extract money for the value delivered is an age-old challenge, but subscription billing addresses this issue and provides endless opportunities, all with a few clicks. If marketing and sales can envision it, it can be billed using a modern subscription billing platform.
Customers perceive value in:
- Content
- Product quality
- Usage
- Time to market
- Cost certainty, and
- Flexibility are all of value to your customers.
The key is finding the right mix and having the flexibility to create a subscription to match the value you deliver.
The challenges of scaling a recurring billing business
As a business starts to scale their subscription model, they realize that managing subscriptions are much different than selling a one-time product. They need to manage dozens of additional pieces of customer data, including:
- Billing period
- Contract term
- Renewal date
- Uplift on renewal
- Usage
- Pricing tier
- Serial number
- Location
- Software version
- Sales channel
- Sales rep
- Payment method (credit card numbers, expiry date)
- Automatic migration on contract renewal
Factors that disrupt effective scaling in a recurring billing business
In addition to managing more subscription-related data, the subscription billing model creates 4 issues that need to be managed:
1. Revenue Recovery. If you bill monthly, you need to collect monthly.
While subscription billing lowers the barriers to making sales, it creates the need to collect monthly, creating the challenge of revenue recovery. We see revenue recovery costing companies between 1% to 4%. When properly managed, this loss in revenue can be virtually eliminated.
First, you need to be both proactive and reactive. Proactive actions include notifications, such as:
- Your next invoice will be issued on xxxx.
- Your payment information on file is outdated.
- Your payment has been processed – thank you.
Reactive actions include notifications including:
- Your payment has failed – please click here to update it.
- Your payment is past due. To be assured continued service, a payment is required. If we do not receive payment, your service will terminate on xxxx.
However, you need to remember that if you immediately shut off the subscriber because of nonpayment, they aren’t likely to run home and update their credit card information. Instead, they are likely to say, “Oh, did I really need that subscription?”
- Being reactive also includes retrying the customer’s credit card, typically on day 2, 4, 8, 12, 16, 20 and 30.
Second, you need to provide your customers with the tools to manage their subscriptions. This includes easy to read invoices and a self-service portal to allow them to update their payment methods, upgrade, downgrade, add users, remove users, etc. These tools need to be accessible 24 hours a day without the need to speak to anyone.
2. Revenue Leakage. Billing flexibility creates complexity for your accounting team.
At a high level, revenue leakage is simple human error. We estimate that this makes up 0.25% to 1% of the top line. It happens when transactions aren’t billed correctly, which is prone to happen given the flexibility that subscriptions allow.
To properly manage subscriptions, there can be a lot of holes to plug. To do this, your accounting department needs to have a system to find these potential leaks, which can come from:
- Managing free trials
- Reduced billing for x months
- A discounted 1st year with a large up lift in year 2, or
- Any other scheme that your marketing and/or sales team dreams up to align your billing to the customer’s perceived value or budget.
As the billing options change and increase, it is going to be nearly impossible for your accounting team.
3. Superior Customer Experience (CX). Subscriptions are more complex, but your CX should not be.
There is a lot of overlap in addressing revenue recovery and providing a superior customer experience. Customers want to be able to immediately subscribe to your service, so you need to plan for online sign-up pages and credit card capture (be mindful of the security and PCI requirements when capturing credit card information).
Customers also expect self-service, via an online portal with the ability to access it at any time. Within this portal, they need to be able to read and download easy-to-decipher invoices, update payment methods, upgrade, downgrade, add users, remove users, etc.
Further, providing a good customer experience needs to be done consistently throughout the customer lifecycle.
This can be as simple as sending out an email prior to an annual billing to notify them that you will be billing them on a particular date. Without advanced notification, a customer can be caught off guard with an unexpected charge, causing frustration and burning up time trying to resolve the question with your client support staff.
Another example of delivering superior customer service is by notifying a customer that their credit card is about to expire. This gives the customer the opportunity to update their credit card information before a failed billing attempt.
4. User Experience (UX). Subscription billing can create additional work for your accounting team.
This actually takes place on the business side. If your accounting department is shouldering the responsibility of managing subscriptions in house, they will need to make sure that:
- Customer emails will be configured and will go out automatically.
- Credit cards that fail will automatically be retried.
- Cancellation notifications will be sent automatically.
- Free trails will start billing when scheduled.
- Subscriptions will migrate and uplift as programmed.
Subscription billing creates advantages for your customers as well as your marketing and sales teams, however managing the complexity not only takes a tremendous amount of time, but also opens up the potential for costly human error.
How can your accounting users manage the complexities of subscription billing unless there is a system to do it for them?
Subscription management platforms offer a practical solution.
A subscription management platform manages the complexity and arms your accounting team with the tools it needs to bill, collect, manage, and analyze your subscription business. Once the software is properly configured and set up, your accounting team will have very little to do. With a robust recurring billing platform in place, for example, the average customer will receive 30 to 50 communications annually without any human intervention on the part of your accounting team.
Advanced subscription software automation tools allow a business to customize all customer communications such as failed payments, expired credit cards, or past due invoices.
Leading subscription management platforms also provide self-service portals so your customers can update payment methods, view invoices, or buy more services.
Additionally, reporting dashboards on these platforms can provide immediate insights into key subscription metrics. With the ability to track churn and acquisition rates businesses can optimize service offerings for maximum subscription revenue growth.
Revenue leakage, revenue recovery, customer experiences and user experiences all pose significant challenges as a business is trying to scale. However, all these complications can be mitigated when a business engages a proven subscription management and billing platform to automate its processes.
Quick FAQs about Scaling a Subscription-based Business
Q: What are the top 4 challenges to effectively scaling a subscription-based business?
The four primary challenges in scaling a subscription-based business include revenue recovery, customer experience management, revenue leakage through human error, and managing the complexity of subscription billing.
Q: What is the significance of the subscription model in modern businesses?
The subscription model is favored by businesses for its predictable revenue, flexibility in monetization models, and reduced sales friction. It caters to customers’ expectations of personalized delivery, instant access, and continual value addition.
Q: How does the subscription model affect customer value perception?
Customers perceive value in content, product quality, usage, time to market, cost certainty, and flexibility. The subscription model allows businesses to provide these value points consistently over time.
Q: What additional customer data does a business need to manage when scaling their subscription model?
Businesses need to manage additional data such as billing period, contract term, renewal date, uplift on renewal, usage, pricing tier, serial number, location, software version, sales channel, sales rep, and payment method.
Q: What is revenue recovery in the context of a subscription business?
Revenue recovery refers to the challenge of collecting recurring payments, which can cost companies between 1% to 4% of their revenue. This can be managed through proactive notifications and reactive measures like retrying the customer’s credit card.
Q: What are some ways a business can provide superior customer experience in subscription-based services?
Businesses can enhance the customer experience by providing self-service portals for easy invoice access and subscription management, sending advance notifications about billing dates, and alerting customers about expiring credit cards.
Q: How does a subscription management platform help in managing the complexities of subscription billing?
A subscription management platform can help automate processes, manage complexity, and provide the tools needed to bill, collect, manage, and analyze a subscription business. It can automate customer communications, provide self-service portals, and offer crucial insights into subscription metrics.
Q: What is revenue leakage in a subscription business?
Revenue leakage refers to losses incurred when transactions aren’t billed correctly, estimated to comprise 0.25% to 1% of the top line. This can occur due to the flexibility of subscriptions and can be mitigated through a robust subscription management system.
Q: How can a business overcome the challenges of scaling a subscription model?
Businesses can overcome these challenges by leveraging a robust subscription management and billing platform to automate their processes, manage customer data effectively, and ensure a superior customer experience.
Q: What are the benefits of advanced subscription software automation tools?
Advanced subscription software automation tools allow businesses to customize all customer communications, manage failed payments, expired credit cards, and past-due invoices. They also provide self-service portals for customers to manage their subscriptions and enable immediate insights into key subscription metrics.
