The subscription business model has skyrocketed in popularity.
While strongly associated with software, this business model is used across a wide range of industries. From subscription boxes, meal kits, and transportation rentals, to internet of things connected devices, and services related to health, mental wellbeing, and even investment management. There are subscriptions for almost everything.
That said, common methods breed common problems.
There are certain struggles subscription business model leaders and their teams the world over can relate to. Some are just plain frustrating, while others have much more serious ramifications.
If you recognize your own business’s situation in any of the struggles below, keep reading for a solution to help tackle all 13.
1. Customer churn…
A churn rate of 5-7% is considered the modal benchmark most subscription businesses are trying to hit (or slip under). In reality, rates of churn vary pretty radically from business to business. But pretty much all industry leaders can agree that whatever their churn rate is, it’s too high.
Churn happens for a lot of reasons.
- Maybe your competitors are bringing a more enticing set of features and functionality to the market, or
- perhaps you’ve yet to digitally transform some of your recurring processes and it’s left your business’s response time a bit sluggish and its output a bit error-prone.
No matter what the cause, it always stings a little bit when customers say ‘adios’.
2. And also involuntary customer churn.
Worse yet is when your customers churn involuntarily. Though less common in many cases, involuntary churn is a unique sort of frustration for subscription model businesses because it never needs to happen at all.
The issue comes up when a customer is pushed out because of a failed payment or some other lapse in communication.
Their subscription product or service gets disabled without them even realizing it and without them being given the opportunity to take action to prevent it. And rather than take action after the fact to get themselves back in good standing with your business, they just move on.
Ouch.
3. Finding the perfect pricing.
While customer service continually moves toward being a top brand differentiator for businesses using subscription business models, price remains an important factor for buyers in every industry.
It’s not just about having the lowest price either. It’s about providing your customers with a wide range of pricing and usage options to suit their specific needs.
Customers want to pay in ways that:
- make sense to them, and
- reflect the value they’re receiving from your subscription services.
Without the right fintech to offer you subscription pricing and billing flexibility, it can be difficult to action, experiment with, and update different price points and strategies.
4. Going to market quickly and strategically.
Then there are the aches and pains of trying to update your subscription product catalog quickly.
Bringing a new or updated product or feature to market is exciting! Requiring your team of developers to get it properly programmed into your catalog and ready to roll out to customers is not.
Worse yet, businesses that move sluggishly toward updated offerings quickly fall behind competitors with agility on their side.
5. Maintaining accurate recurring invoicing.
The subscription business model is great because it means recurring revenue. But it also means continual recurring invoicing.
The process can run pretty smoothly if you’ve added automation to your workflow. But if you’re still using a lot of manual processes to review and post your invoices the whole endeavor can mean 40 or more hours of added labor. Every. Single. Month.
And when a human error gets made on a recurring invoice, it can keep showing up again until it gets noticed and fixed. Customers get frustrated, and your internal record-keeping becomes very messy.
6. Dealing with a disconnected technology stack.
Getting technology solutions to work together seamlessly for your subscription business is key for data accuracy as well as business agility.
For example, transitioning customer data from your CRM to your billing process, and then moving billing data into your accounting and ERP solutions can be a lengthy, clumsy process that has to be repeated endlessly.
On the other hand, you can eliminate opportunities for errors and omissions by building your tech stack with solutions that integrate with one another to optimize and automate your entire process.
7. All-over-the-place data.
Ah, the dreaded data silos.
When you have some information in your CRM, some in spreadsheets and some sprinkled in a few other places, a logistical nightmare begins to unfold. Not only does accessing information when it’s needed become difficult for your various team members, but the potential for error is overwhelming.
Multiple versions of data get created, mistakes get made, people get frustrated, and worse yet, it becomes nearly impossible to accurately report on your revenue and the overall health of your business.
You need a subscription management solution to ensure your business has a single source of truth for all your subsciption and accounts receivable data.
8. Recurring revenue leakage.
Up to 5% of a company’s earnings are lost to mismanaged or delinquent payments. Staggering, and tragic in a way, when you consider how needless much of that loss really is.
Revenue leakage occurs when a mistake has been made.
- It might be that a customer is getting charged for the wrong product or subscription service.
- It might be that a temporary discount was never actually canceled.
- Or it could be that your team doesn’t have an organized and automated way of dealing with its aging accounts receivables.
Whatever the case, it’s revenue loss that stings a little bit more because of its needlessness.
9. Recurring multi-jurisdiction taxation.
Taxes are tricky if you’re running a subscription business model business across various tax jurisdictions.
Every zip code can (at least potentially) be subject to a unique rate. Doing business internationally only furthers the confusion. And in all cases, the issue is complicated by the fluctuating nature of tax rates and tax laws.
Loads of businesses with legacy systems still attempt to handle all of this manually. It’s the stuff migraines are made of.
10. Accurate revenue recognition.
Subscription model businesses have to recognize their revenue in a very particular way to comply with Generally Accepted Accounting Principles (GAAP), and more specifically, the ASC 606 standard.
Not only is the job a hard one, but it also comes with added pressure from the IRS—an unforgiving audience with the ability to charge a business with fraud.
The legal complications are enough to leave any business leader reaching for the antacid. And simply choosing not to accurately distinguish between your subscription-based business’s deferred revenue versus earned revenue creates a murky financial situation—one with the potential to come at the cost of public opinion or your next round of funding.
11. Complex parent-child customer relationships.
In the realm of B2B, there sometimes comes the need to unify transactions that come from various branches and divisions of the same parent company.
Not only is this very time-consuming to accomplish manually, but it can also get pretty messy trying to maintain and keep track of complex customer relationships and their billing hierarchy.
Go about it the wrong way and you risk inaccurate billing and a poor customer experience.
12. Subscription plan migrations.
You have a customer that wants to upgrade to a higher plan. Great news, right? Not for the person that has to manually cancel the old subscription and then create a ‘new subscription’ every time a customer makes an account adjustment.
For subscription businesses with hundreds of customers, making frequent account adjustments—and doing it seamlessly—quickly becomes a struggle.
Not only do manual-heavy subscription management processes make plan migrations difficult, but they can also produce ‘false churn’—the term for when a plan migration has to be recorded as a cancellation. Legacy systems also force customers to contact support to make basic changes to their account—something they’re probably used to doing online through self-service portals with a lot of other companies.
Adding efficiency and improving your customer service can be as easy as taking a step toward digital transformation.
13. Endless aging receivables.
Last but not least, the aging receivable.
A customer has been charged for your service, but their payment never came. Now it’s your team’s job to chase down the money.
It happens a lot to businesses leveraging subscription models.
Tracking aging receivables can be difficult to keep on top of. And the reality is, the longer they age the less likely you’ll collect on them. This means the bigger your list gets, the more revenue you’ll likely be writing off one day.
Enhancing your revenue model requires implementing better subscription management solutions.
One solution for 13 subscription business struggles
A general theme here is that legacy and manual-heavy processes simply aren’t scalable.
Adding automation and digital transformation is key to solving the various struggles subscription model businesses face on the regular.
A modern automated recurring billing platform is one solution that eliminates many of the issues described above entirely and makes all of them a whole lot more manageable.
The right platform automates things like invoicing and plan migrations with little to no effort required on the part of your staff.
And when it comes to other things like tech integration, data management, and revenue recognition compliance, modern billing platforms organize key information in a way that leaves it simultaneously accessible and safe from the threat of human error.
For businesses struggling against the challenges of a subscription-based business model, an automated billing platform may mean the difference between merely surviving and fully thriving.
It may also mean that these thirteen struggles won’t be so relatable anymore.
Quick FAQs about Subscription-Based Businesses
Q: What are the common struggles faced by subscription-based businesses?
Subscription-based businesses often struggle with high churn rates, involuntary churn due to payment failures, managing recurring invoices, offering flexible pricing options, updating product catalogs quickly, handling revenue leakage, navigating complex tax jurisdictions, ensuring proper revenue recognition, managing customer relationships, and tracking aging receivables.
Q: How does customer churn impact subscription-based businesses?
Customer churn significantly impacts subscription-based businesses by reducing recurring revenue and increasing the cost of customer acquisition. High churn rates indicate customer dissatisfaction, which can stem from various issues like better competitor offerings, poor customer service, or lack of pricing flexibility.
Q: What is involuntary churn, and why is it a problem for subscription businesses?
Involuntary churn occurs when customers are unintentionally unsubscribed due to issues like failed payments or lapses in communication. This type of churn is problematic because it can lead to unnecessary revenue loss and frustrate customers who might leave without attempting to rectify the issue.
Q: Why is pricing flexibility important for subscription-based businesses?
Pricing flexibility is crucial because it allows businesses to cater to diverse customer needs and preferences. Offering various pricing and usage options can attract a broader customer base, enhance customer satisfaction, and reduce churn rates.
Q: How can manual invoicing processes affect subscription businesses?
Manual invoicing processes can lead to errors, inefficiencies, and increased labor costs. These issues can frustrate customers, damage the business’s reputation, and result in revenue leakage due to mistakes that go unnoticed over multiple billing cycles.
Q: What is revenue leakage, and how can it be prevented in subscription models?
Revenue leakage refers to lost revenue due to mismanaged or delinquent payments, incorrect billing, or unaddressed discounts. It can be prevented by implementing automated billing systems, ensuring accurate data management, and regularly auditing financial processes.
Q: How do data silos affect the efficiency of subscription-based businesses?
Data silos create inefficiencies by making it difficult for team members to access necessary information, leading to errors and miscommunication. They also hinder accurate reporting on revenue and business health, which can negatively impact decision-making and strategic planning.
Q: What are the challenges of managing tax compliance in subscription-based businesses?
Managing tax compliance is challenging due to varying tax rates across different jurisdictions and the constantly changing nature of tax laws. Businesses need to ensure accurate tax calculations and compliance to avoid legal issues and financial penalties.
Q: Why is automation essential for subscription-based businesses?
Automation is essential because it reduces the reliance on manual processes, minimizes errors, enhances efficiency, and allows businesses to scale effectively. Automated systems can handle invoicing, customer data transitions, revenue recognition, and more, freeing up staff to focus on strategic tasks.
Q: How can subscription-based businesses effectively manage aging receivables?
To manage aging receivables effectively, businesses should implement automated tracking systems, establish clear payment policies, and regularly follow up with customers regarding overdue payments. Prompt action can increase the likelihood of collecting outstanding payments and reduce revenue loss.
