Subscription model businesses may just be the best kind to run.
The recurring revenue model offers you a significant number of advantages over traditional business models—cash flow reliability and predictability being major ones. This model also makes software, information, or products and services more accessible to customers.
The recurring billing model offers a lot of opportunities to bring recurring value to customers as well. Businesses using this model can offer their subscribers convenience, greater personalization potential, and continuous access to the latest and most up-to-date versions of products and services.
But it’s not all sunshine and roses: businesses operating under the subscription model face some unique challenges that traditional business leaders don’t. Here are seven of those challenges, plus some tips for overcoming them.
1. Customer subscription management is a never-ending job
The recurring nature of the subscription model means everything is ongoing. That means:
- customer records must be kept up to date at all times,
- billing and invoicing for each customer happens monthly, quarterly, or annually—not just once, and
- communications like dunning messages need to hit just the right note—after all, you’re trying to maintain a relationship with your customers; it’s not just a one-and-done transaction.
An inaccurate customer management database or an inefficient subscription management system can damage relations because mistakes are easily made. These mistakes often come down to repetitive manual tasks that lead to human error, or gaps in data and relevant information—staff not knowing what level of service customers have, whether they’re on a trial, or when their subscription period ends, for example.
To avoid this, you need to use an effective subscription management system that can categorize where in the customer journey an individual or business is and detail any previous interaction they’ve had with your business.
If this kind of software has hosted self-service portal capability, it can help your customers take charge of their subscription info. They can update billing information, migrate seamlessly between plans as needed, and access detailed invoice records of all their financial transactions.
2. Manual billing and invoicing become impossible
As your subscription-based business scales, manual invoicing becomes troublesome, to say the least.
Remember, recurring billing, well…recurs. So getting one billing cycle’s invoices out on time isn’t enough. It has to happen consistently, every period. And naturally, as your business grows, this becomes tough to do based on sheer quantity alone.
The potential for human error increases if you have customers on different payment frequencies, subscription levels, and with customized add-ons and discounts.
One of the best ways to solve this is to use an automated recurring billing system that leverages your customer database and the data from your customers’ individual, customized subscriptions to automatically generate and distribute your invoices.
3. The security of recurring payments becomes higher-stakes
Subscription model businesses face a unique challenge in keeping customer payments secure. If your business stores customer credit card data to simplify recurring payments, it’d better invest in keeping that data safe.
That’s because a cyberattack is a costly mess to clean up. The cost of a data breach reached an all-time high in 2022—$4.32 million. And then there’s the cost of negative PR. If your subscription business can’t guarantee its payment system is secure, prospective customers are likely to think twice before signing up.
When selecting the tools in your payments ecosystem, look for indicators of adherence to industry best practices, like PCI Level 1 certification.
4. A flexible subscription catalog is a must
Most subscription businesses have different levels of service—different plans offering different features to fit different customer needs.
Offering multiple subscription levels is a great business strategy and is likely to grow your business by offering more affordability and choice to the consumer. There’s always the opportunity to upgrade and add on for more value for both the customer and your business.
However, it can create complexity that makes recurring billing difficult to manage without the right tools.
To combat this complexity, you need to use an effective recurring billing software program with a flexible catalog that will manage subscription plan and pricing changes with ease. Not only should your business be able to update pricing and discounting as and when needed, but it should also be able to apply these changes at the customer and subscription levels.
This real-time flexibility gives your business competitive go-to-market capability and greater customer appeal.
5. Recurring revenue leakage and involuntary churn
With so many customers subscribed to your business, it can be difficult to notice when a failed transaction has taken place. It’s an ineffective use of your time to go through the list of transactions manually to check each one. This task is almost impossible if you have hundreds or thousands of customers.
So, businesses need a way to automatically highlight when transactions haven’t been processed and to inform both customers and internal AR specialists of payment failure.
Adaptive subscription billing platforms indicate clearly when payments have been unsuccessful. From there, the payment system can automatically resolve the issue by finding a solution for payment to be made, such as by reattempting the payment method. Additionally, after a predetermined grace period, they can cut off the customer so they don’t get access to the products or services until the payment has been made.
These platforms also perform numerous other useful dunning management functionalities, including automated communications about failed payments. They also track aging accounts receivables over time to make sure your team knows who they need to follow up with.
6. Subscription discounts and promotions management
To grow and build their customer bases, subscription businesses may require special promotions and discounts to entice target audiences to sign-up. This can be tough to manage manually and often requires significant work on the development side that can make implementation financially inefficient.
By using an effective subscription billing platform with this business model, businesses can implement and automate a discounting strategy across their entire catalog, on specific plans, or on a customer level—all in real-time. They can also track the number of discounts redeemed and the effectiveness of the marketing and sales efforts as well as seamlessly manage the billing.
With the right billing system in place, your team won’t worry about forgetting to adjust or remove discounts at the end of the period. They simply automate the process and remove the risk of revenue leakage.
7. Multi-currency and language support
While some subscription businesses only offer their products to customers in one country, SaaS products are particularly easy to sell globally. This causes numerous problems with billing international customers.
Not only may their language requirements differ, but they may be less likely to buy your product. Since international charges may fluctuate with exchange rates, customers may choose not to buy a product that charges only in a foreign currency.
A good subscription billing system should be able to manage invoicing and payment collection no matter where the customer is located. This may be through native capabilities or integrations with other tools that fill in the gaps.
Read more: Take Your SaaS Business International with the Right Recurring Billing Software Integration
8. ASC 606 revenue recognition compliance
A big revenue-related challenge subscription model businesses face is accurately recognizing their recurring revenue. According to GAAP and its ASC 606 standard, while subscription businesses may collect revenue from customers for products and services at the beginning of a payment period, these businesses cannot recognize the revenue in full until the end of the payment period.
Adaptive recurring billing software automates the revenue recognition process, tracking deferred revenue and recognized revenue behind the scenes to ensure your business remains compliant.
It even lets you automate the revenue recognition process, turning it into a “set it and forget it” style of task.
Automation solves subscription business model challenges
There are numerous challenges subscription businesses face while setting up their services and maintaining their customer relations. One of the only ways businesses can overcome this is by using an effective, automated recurring billing and payment system that can address these issues.
Does your business need recurring billing and subscription management software? Contact one of our experts by clicking here.
Quick FAQs about Subscription Model Businesses
Q: What are the main challenges faced by subscription model businesses?
Subscription model businesses encounter several unique challenges, including maintaining accurate customer records, managing recurring billing cycles, ensuring secure payment systems, handling multiple subscription levels, and dealing with international billing complexities. These challenges require efficient systems and strategies to overcome and maintain customer relationships.
Q: How can businesses manage recurring billing effectively?
Businesses can manage recurring billing effectively by implementing automated billing systems. These systems leverage customer database information to automatically generate and distribute invoices, reducing human error and ensuring consistent billing cycles. This is especially crucial as a subscription business scales.
Q: What role does a subscription management system play in a business?
A subscription management system helps businesses categorize customers’ journey stages, track interactions, and manage billing and invoicing efficiently. It facilitates customer self-service portals, allowing customers to update billing information, switch plans, and review their transaction history, thereby enhancing customer satisfaction and reducing administrative workload.
Q: Why is data security critical for subscription businesses?
Data security is paramount for subscription businesses because they often store sensitive customer information, such as credit card details, to facilitate recurring payments. Ensuring data security helps prevent costly data breaches and maintains customer trust. Businesses should adhere to industry standards like PCI Level 1 certification to demonstrate their commitment to data security.
Q: How do subscription businesses handle different service levels or plans?
Subscription businesses can manage different service levels or plans by using flexible billing software that accommodates pricing and feature variations. This software should allow for easy updates to pricing and discounting at both customer and subscription levels, providing real-time flexibility that enhances market competitiveness and customer satisfaction.
Q: What strategies can be used to reduce customer churn in subscription models?
To reduce customer churn, subscription businesses can focus on delivering continuous value, personalizing customer interactions, and ensuring seamless service transitions. Offering flexible plans and easy upgrades, along with proactive customer engagement and support, can help retain subscribers and reduce involuntary churn.
Q: How can subscription businesses manage international billing challenges?
Managing international billing challenges involves using a billing system capable of handling multiple currencies and languages. This system should also address exchange rate fluctuations and integrate with global payment processors to provide a seamless billing experience for international customers.
Q: What is the importance of automated dunning management in subscription businesses?
Automated dunning management is crucial as it helps identify and resolve payment failures without manual intervention. Adaptive billing platforms can automatically retry payment methods, inform customers of failed payments, and manage access restrictions until payments are completed, thereby minimizing revenue loss and maintaining service continuity.
