Pulling in a healthy monthly recurring revenue (MRR) to achieve a steady cash flow is critical to every subscription business’s success.
Many factors contribute to effectively capturing recurring revenue each month. From the quality of customers you sign to the efficiency of your billing process, each step along the journey comes with both opportunities and hurdles to collecting enough revenue to succeed.
To help you avoid falling into MRR-sucking traps, I’ve compiled a list of the most common mistakes subscription businesses make that hold earnings back. I also wanted to share some examples of how some businesses have overcome these very challenges.
Check out these five mistakes that prevent maximum MRR and see if your business could be retaining more.
1. Too many bad-fit customers
Perhaps the biggest drag on monthly recurring revenue, at least for startups, is a subscriber base packed with bad-fit customers. These are customers whose pain points aren’t something your business resolves. Some businesses onboard these customers anyway in a bid to generate profit by any means necessary.
However, this strategy ends up wreaking havoc on your monthly recurring revenue, lowering your average revenue in the long run and completely ruling out the possibility of bringing in expansion MRR. Bad-fit customers won’t have their needs met by your business’s products or services. Without this alignment, they’re destined for frustration.
This inevitably creates more work for customer service when they reach out with issues. Eventually, most bad-fit customers will cancel their monthly renewal agreement, churning out and taking future revenue with them and ultimately raising your overall customer acquisition costs (CAC).
In at least one instance, just three bad-fit customers have cost a SaaS business $1.2 million in recurring revenue. Taking on customers who weren’t a good technology fit just to land $75k in annual recurring revenue (ARR) led to:
- lost acquisition costs,
- an overburdened customer service team,
- zero chance at expansion revenue, and
- bad reviews that cost the business 13 additional $25k customers.
Is your sales funnel capturing only good-fit leads? If not, it’s time to rethink your strategy. Develop an ideal customer profile to begin shaping your marketing and sales processes.
2. Subpar onboarding
Once good-fit customers are acquired, the next opportunity for maximizing recurring revenue comes from a surprising place: onboarding.
Onboarding is your chance to really educate your customers on your product and set them up for success. They need to know how to get the most use out of it if they’re going to stick with your business for a while.
However, common mistakes during onboarding abound. These include failing to:
- create a map of the onboarding journey,
- set realistic expectations,
- highlight the best features,
- celebrate milestones,
- provide self-help resources, and
- iterate on the onboarding process.
Bad onboarding, as it turns out, is extremely costly to a business’s bottom line. McKinsey shared research on one media company experiencing high churn and found that the onboarding process was at fault:
“Take new-customer onboarding, for example, a journey that spanned about three months and involved an average of nine phone calls, a home visit from a technician, and numerous web and mail interactions. At each touchpoint, the interaction had at least a 90 percent chance of going well. But average customer satisfaction fell almost 40 percent over the course of the entire journey. The touchpoints weren’t broken—but the onboarding process as a whole was.”
A 40% dip in customer satisfaction is nothing to sneer at. The solution? Regularly revisit how you onboard customers, and work to constantly optimize the experience for them. Keep customers happy, and they’ll stick around—which, in turn, keeps your subscription revenue healthy and encourages MRR growth.
3. Error-ridden invoices
You’ve done everything you can to attract and retain good-fit customers, now it’s time to dig into the actual dollars.
The first place some subscription businesses drop the ball when it comes to collecting MRR is invoicing. With just a handful of customers, manually collecting customers’ monthly fee might make sense. But as a business scales, this process becomes increasingly difficult to manage. Juggling spreadsheets and invoicing software for dozens or hundreds of customers simply can’t be done by hand.
An overworked billing team will unsurprisingly make errors, and these are reflected in the invoices customers see.
Incorrect invoices contribute to 61% of late payments, according to the Credit Research Foundation. That tied-up money can inhibit growth and, if eventually left to collections, lead to other issues which we’ll discuss in a moment.
Then there’s accidental underbilling and overbilling.
- Accidental underbilling causes your business to leak revenue, while
- accidental overbilling upsets customers and can lead to churn.
By contrast, billing software that automates invoicing reduces errors, workload, and drain on recurring revenue. HR software provider JustLogin, for example, reduced its time spent billing by 90% and created enough efficiencies to scale three times over without needing to hire additional employees.
4. Stagnant collections
For unpaid invoices that go to collections, another potential revenue leak emerges.
Billing teams are often already overwhelmed with:
- creating accurate invoices,
- getting those invoices out on time,
- responding to billing questions, and
- re-issuing inaccurate invoices.
Understandably, dunning can fall to the wayside if this entire process is done manually. But the longer payments go uncollected, the higher the likelihood they’ll stay that way. Only 21.4% of receivables are collected after they’re past a year due, according to the Commercial Collection Agencies of America.
Optimizing dunning and collections is possible with the right tools. When you can automate:
- credit card updating,
- payment retries, and
- dunning communications, as well as
- have detailed accounts receivable aging reports at your fingertips,
your subscription business can easily recoup revenue.
One business that saw this in action is bitHeads. A software solution innovator, bitHeads has delivered thousands of unique development and BaaS services to Fortune 500 brands. With such a complex, usage-based pricing model, however, the business wasn’t initially able to easily and accurately bill for and collect on its diverse projects.
Thankfully, a robust subscription billing platform rose to the challenge. And thanks to built-in dunning automation features, bitHeads now recovers 5-10% of its monthly recurring revenue that would otherwise be lost to failed payments.
5. Billing with the wrong software
In case the last two mistakes weren’t indication enough, using dedicated billing software to manage your business’s invoicing and payments is the easiest and most effective way to maximize recurring revenue.
Sometimes, businesses try to handle billing through software that wasn’t designed for the job. They might use a module in their CRM, for example, that isn’t equipped to handle things like dunning or complex invoicing.
This also leads to another problem: the inability to leverage a flexible catalog. As your subscription business grows and evolves and customer needs change, any ‘billing software’ not designed for subscription billing won’t be able to handle complex:
- product offerings,
- subscription plans,
- pricing modules, and
- tax requirements.
Construction software provider CoConstruct was all too familiar with the problem. Its CRM billing add-on couldn’t handle multiple subscription products or multiple subscriptions for individual customers. Collections and taxes were also getting messy to handle manually.
After implementing an automated billing software solution, however, CoConstruct now recovers an average of $2,000 in leaking revenue each month. It also saves 40 hours a month on its billing processing—retaining recurring revenue by not spending it on operations.
Maximize recurring revenue with billing automation
Adopting a modern billing automation platform can help prevent and even undo the damages of most of the mistakes we’ve discussed.
Billing software accomplishes this by:
- Facilitating recurring billing automation. Cut out manually intensive invoicing processes and reduce potential for human error.
- Offering a suite of dunning management features. Automated emails and SMS messages, payment retries, credit card auto-updating, and accounts receivable aging reports all come standard with robust subscription billing software.
- Providing catalog flexibility. This facilitates easy pricing changes, quicker time to market, and the ability to easily offer promotions, discounts, and coupons.
- Reporting on subscriptions and financials. Reports by customer, subscription plan, or cohort all aid in identifying good-fit customers and creating an ideal customer profile.
A billing platform that automatically plugs recurring revenue leaks is the most surefire way to avoid subscription business snafus and increase predictable revenue for your SaaS company. Paired with excellent sales teams that avoid bad-fit customers and stellar onboarding that retains good-fit ones, your business will be sure to maximize its bottom line.