Businesses of all types have increasingly adopted the subscription business model over the past decade, and The Subscription Economy Index report expects the market to grow to $1.5 trillion by 2025.
It’s safe to say that the revenue model is here to stay.
This article will focus on subscription management for SaaS companies and how to maximize the model’s potential to facilitate consistent cash flow and sustainable growth.
Let’s dive in.
TL;DR
- SaaS subscription management refers to the automated system of tools and processes that software companies use to facilitate and maintain customer subscription purchases.
- Your subscription management software should let you choose from a wide range of billing frequencies (weekly, monthly, annually, biannually) and pricing models (free trial, freemium, fixed-rate, user-based, etc) so you can offer lots of flexibility to your customers.
- You need to track metrics like CLV (Customer Lifetime Value), ARPU (Average Revenue Per User), CAC (Customer Acquisition Cost), MRR (Monthly Recurring Revenue), and others to have good visibility into the performance of your subscription revenue model.
Understanding the Basics of SaaS Subscription Management
SaaS subscription management refers to the automated system of tools and processes that software companies use to facilitate and maintain customer subscription purchases.
The system lets customers sign up for access to a product or service via a checkout page with the implied agreement that the customer will be billed at pre-determined intervals—whether that be weekly, monthly, bi-annually, or annually.
The automated nature of this system removes the need for manual subscription renewals, which is convenient for the customer.
It also ensures consistent cash flow for the software company, which aids in budgeting and planning.
There are several types of SaaS subscription models and what will work for one software company may not necessarily work for your own company.
The right model will depend on what you have the ability to offer and the peculiar needs of your customer base.
Here is an overview of the most popular types of subscription models:
- Free trials: your customers can use your SaaS platform or service for a given period, after which, they must pay to retain access. This approach gives your users time to understand the value of your product, which can lead to higher conversion and retention rates.
- Freemium: here you grant customers free permanent access to a basic version of your app or software, while requiring a subscription fee to unlock more advanced features. This model encourages users to try out your platform, which can lead to rapid adoption, but it comes with the risk of revenue loss if you end up having too many non-paying customers.
- Flat-rate subscription: your customers all pay a fixed price to use your software or service, which does not change irrespective of the number of users in their organization. The simplicity of this model makes it easy for users to track the cost of the product or service, but it isn’t suitable for customers who may not need many of the features in the all-inclusive package.
- Tiered pricing: here you have multiple pricing brackets, each with its own set of features, services, usage limits, and support options. It’s a flexible approach that lets customers select the pricing package that best fits their specific needs and budget, which has made it the most popular type of subscription model.
- Pay per user: your customers pay their subscription fee for a defined number of users in their organization, and will have to pay an extra monthly fee for each additional user. This model can be beneficial for businesses, especially with team-based SaaS tools, since they only pay for employees that are actively using the software.
- Usage-based pricing: here you meter the use of your product or service and only charge customers for the quantity that has been consumed during a billing cycle. This model is advantageous to customers, since they are only paying for what they use, but it can create an unpredictable revenue stream for your SaaS company.
Apart from the six different pricing models we just explored, you can also offer subscriptions with add-ons, where your customers pay a baseline fee for access to your core platform and then additional fees for any extra features they may require.
This approach has the advantage of letting your customers choose and pay for features as their needs evolve throughout the subscription lifecycle.
What is subscription management software?
Subscription management software is any platform that is designed to help businesses create and manage a seamless subscription process for their customers.
These dynamic platforms not only help you process subscription payments, they also help with crucial related tasks like customer onboarding, renewals, upgrades, cancellations, and more.
Subscription billing vs recurring billing
Subscription management and recurring billing are usually seen by customers as interchangeable revenue models.
This situation is further compounded by the fact that they often come together as features on the same subscription billing software.
For example, Stax Bill is a market-leading subscription payments and recurring billing & invoicing management solution that combines both features in the same platform.
The reality is that both models are closely related but different, and this difference is in the level of flexibility offered by each model.
They are closely related in the sense that they are both forms of automated invoicing for services rendered.
The difference is that subscriptions can offer diverse pricing options and give customers greater control over the services & features on offer, whereas recurring billing limits customers to a simple transactional relationship where they pay for predetermined services at regular intervals.
The lifecycle of subscriptions
Managing the subscription lifecycle effectively will help you maximize your recurring revenue potential and expand your operations.
Here are the four core stages in the subscription business lifecycle:
Onboarding
This is the phase where you systematically help your customers adapt to your product’s usage as seamlessly as possible. The stage also involves educating your users about the core benefits of your platform’s key features.
You will need to create and provide training materials (videos, online documentation, FAQs, etc) to help with the onboarding process.
Billing
A subscriber is charged a recurring fee for each billing period, and that fee is always paid at equal intervals on the first day of each billing period.
You will need subscription management software that will provide you with a centralized platform to manage recurring payments made across multiple billing cycles.
Renewals
The billing process may be automated, but the customer also reserves the right to continue the subscription or terminate it before the commencement of another billing cycle.
Your focus here will be customer retention.
You must constantly adapt to the ever-changing requirements of your customers and clearly communicate the continuing value of your product or service to their business.
Cancellations
A customer may decide that they no longer need your platform and cancel their subscription before the end of the billing cycle.
The billing cycle may also end without any automatic renewal due to a lack of funds in the bank account provided by the customer.
This cancellation or termination of an active subscription is what’s known as churn.
You can reduce chances of customer churn through effective dunning management and when customers do leave, you can use win-back strategies like adjusted offers, incentives, and personalized promotions to get them to re-engage.
Common Challenges in SaaS Subscription Management
While the SaaS subscription model has the core advantages of convenience and predictable revenue, it can also come with its own challenges, and here are a few:
Managing multiple subscription tiers
Your customers expect to be able to choose between multiple pricing plans, payment methods, and payment terms.
They must also be given the option to adjust existing plans: moving a subscription to another account, pausing a subscription, rescheduling payment for after the billing date, and so on.
Managing multiple subscribers, each with their own complex needs will be practically impossible without top-quality SaaS subscription management software.
The platform will automate the processes for you, and provide your customers with self-service features that let them make adjustments on the fly without reaching out to customer support staff.
Handling failed payments and churn
The goal of every SaaS company is to keep the churn rate low and customer retention rate high.
The problem is that failed payments (credit card declines) account for the vast majority of customer churn cases, and it can be very hard to notice failed payments immediately because the whole process is automated.
One way to prevent failed payments is to reach out to customers before the start of each billing cycle through notifications that inform them of the upcoming payment.
This will ensure that the customer will fund the account just in time for the payment date.
Integrating with existing systems and platforms
Your current business management apps and tools, including CRM, ERP, billing, sales automation, and accounting software must integrate with your subscription management platform.
If your subscription billing software doesn’t fit seamlessly with your current tools, it can lead to data discrepancies, which will undermine the information you rely on for business planning and financial reporting obligations.
Ensuring compliance with global regulations
There are numerous industry regulations designed to protect sensitive customer financial data, including PCI DSS (Payment Card Industry Data Security Standards) and GDPR (General Data Protection Regulation).
You also need to comply with tax regulations that are different from one country to another.
It’s crucial that your subscription platform provider complies with these regulations and also implements adequate fraud prevention measures.
Best Practices for Effective Subscription Management
Here are a few tips to help you maximize the potential of a subscription-based billing model:
Implementing a flexible billing system
Good subscription management means giving your customers lots of flexibility with your pricing models and payment methods.
There should be a free trial period and they should be able to pause, upgrade, and downgrade subscription plans.
You should also opt for a billing frequency that falls within the most financially buoyant period of the cash flow cycle of your customers.
This will ensure your customers will always have cash in hand come the payment date, which will drastically reduce failed payments.
Utilizing data analytics to track subscription metrics
You need to track metrics like CLV (Customer Lifetime Value), ARPU (Average Revenue Per User), CAC (Customer Acquisition Cost), MRR (Monthly Recurring Revenue), and others to ensure you have complete visibility into your business.
A top-quality subscription management software like Stax Bill will provide you with interactive dashboards that you can customize to track the most relevant metrics to your business.
You will be able to easily identify your most popular and lucrative subscription tier and also pricing plans that are causing losses.
Personalizing the customer experience for better retention
A tailored customer experience is the key to customer retention.
When each step in the customer lifecycle is customized to meet the specific needs of your customer, it stimulates loyalty and encourages them to stay on.
It also makes it easier to target customers with email marketing and promo campaigns tailored to their needs and interests.
For example, Stax Bill lets you create personalized incentive programs designed to help nudge a customer from a free plan to a paid plan.
The platform also lets you personalize how your customer interacts with your platform on a day-to-day basis.
Streamlining the onboarding process for new customers
The more complex your onboarding process, the harder it will be for your customers to manage their subscriptions, and the less satisfied they will be with your brand.
Your platform must have a streamlined onboarding process and there must be detailed tutorials and intuitive account settings that will help your users quickly identify the value and utility of your platform’s features.
Automating renewals and payment reminders
With a subscription management software platform to manage the recurring subscription payments aspect on your behalf, the subscription renewal process is already automated and you can focus your efforts on reducing the potential for failed payments.
This means creating and automating email notifications that will be sent to customers each billing cycle to remind them of upcoming payments.
Your platform should also make it easy to notify customers of failed credit card payments or outdated payment information.
Selecting the Right Subscription Management Tool for Your SaaS Business
Choosing the right subscription management software is crucial, since opting for the wrong platform will reduce your revenue potential and can cause inefficiencies that will drive customers away.
Here are a few factors to consider when evaluating the many subscription billing platforms on the market:
Multiple subscription models
Your subscription management platform should let you choose from a wide range of billing frequencies (weekly, monthly, annually, biannually) and pricing models (free trial, freemium, fixed-rate, user-based, etc) so you can offer the best package to your customers.
It should also make it easy for you to test different subscription plans against customer segments so you can identify what works best for your revenue goals and the needs of your customers based on data from real-time testing.
Customer experience
The platform should make it easy for your customers to control their subscription plans and pay via their preferred payment method.
Customers should be able to easily modify their subscription plan without your input and when they do need your help, there should be a help center feature that lets them submit billing support queries.
You should also be able to create personalized interactions during the onboarding process and send timely notifications about the status of the customer’s subscription plans.
Subscription lifecycle management
Your subscription management software platform should let you create targeted promotional campaigns that can aid revenue growth.
You should be able to offer custom pricing models, coupons, and discounts to customers that meet predefined criteria.
For example, ClearPathGPS is a B2B SaaS company that offers GPS tracking services to its customers.
The company uses a complex billing cycle with intermittent pricing adjustments that can drop from $20 to $5 from one month to another.
So, it signed up for Stax Bill to help it manage the hundreds of subscription plan adjustments it needs to make each day.
It has been a massive success, with Stax Bill automating the entire process, allowing the company’s management to focus on its core role of business strategy and execution.
Integrations
The subscription management platform is just one part of your business operations management ecosystem, and the software must integrate seamlessly with the payment gateways, apps, and other online tools you are already using to run your business.
Look at the information on the provider’s website to see the list of third-party integrations they support and also check out online review sites to see what current and past users are saying about the platform’s application support infrastructure.
Multi-currency support
You should be able to process subscription payments in the local currency of your customers if you have a global customer base.
Apart from seamless international payment processing, it’s also important that the platform offers multi-language support, so your customers can interact with your SaaS platform in their local language.
This will help expand your revenue potential and increase customer satisfaction.
Measuring Success in Subscription Management
Below is an overview of five KPIs that will give you a decent picture of how well your business is performing:
- Monthly recurring revenue (MRR): it helps you determine the expected cash flow for each month and it’s calculated by multiplying your total subscribers with their monthly subscription fees.
- Annual recurring revenue (ARR): you can use this metric to determine whether you are meeting your annual revenue goals and to identify your best-performing subscription plan. It is calculated by taking your MRR and multiplying it by 12.
- Customer churn rate: it helps you determine the pace at which customers are terminating or abandoning their subscriptions and it’s calculated by dividing the number of canceled subscriptions by the total number of subscribers you had at the beginning of the billing cycle, then multiplying the result by 100.
- Customer lifetime value (CLV): you can use this metric to see if each customer is generating more revenue than the cost incurred to acquire the customer. It is calculated by multiplying the customer’s value by the average customer lifespan. To get the customer’s value, multiply the average purchase value by the average number of purchases.
- Customer acquisition cost: it helps you determine whether your marketing efforts are cost-effective and the best indication of success is when your acquisition cost is less than your customer’s lifetime value. It can be calculated by first adding total sales and marketing costs together, then dividing the result by the number of new customers acquired in that billing cycle.
Adopting Effective Subscription Management on Your SaaS Platform
This article has shown you that having a top-quality subscription management system is a necessity if you want to effectively offer your customers the range of payment options, self-service functionality, and data protection they expect from you.
So, the software you opt for must not only come with a generic set of subscription management workflows, it must be customizable enough to help you satisfy the expectations of your customers, while also satisfying your business needs.