Recurring revenue is an idyllic concept for businesses. In what other context can you begin each month with an almost certain knowledge of your revenue baseline? Certainly, predictability and consistency are the reasons many traditional businesses switch to a recurring revenue model.
But there’s more to the story.
Subscription billing can create efficiency bottlenecks for businesses that lack adequate backend support. Without the right set of conditions, the subscription business model can be difficult to manage and maintain.
Worst-case scenario? Revenue leakage, increased customer churn, an overworked accounts receivable (AR) department…
Businesses can navigate these concerns by understanding the realities of recurring revenue and adjusting their tech stack to address them.
Expectation: recurring revenue guarantees a healthy cash flow.
Your business has 100 clients, each paying $100 monthly for their subscription. That gives you a guaranteed monthly cash flow of $10,000. Predictable, healthy, straightforward business.
You started the month with 99 customers, only signing the 100th (who is very graciously keeping this hypothetical math nice and round for us) on the 20th of the month. Because your billing department is busy and modestly staffed, there is no option to prorate by hand. Customer 100 won’t pay anything until next month.
Another three customers don’t pay their bills.
A common scenario: the average owed American credit card balance is $8000, and around half of the population struggles to pay their bills on time each month. If a customer gets the bill before they’ve been paid, or if their card expires and they forget to tell you, that revenue can’t be collected.
The phenomenon described here is called “revenue leakage.” Around 42% of companies lose 5% of their revenue to it every year.
In the scenario provided above, the numbers seem modest. No one wants to see $400 go up in smoke but in the broader arithmetic of business, this can be chalked up as a reasonable, even negligible loss.
Two things: first, when you stretch this scenario out to cover an entire year, the loss comes to $4800—a number that’s harder to ignore. Then there’s the issue of scalability. When you grow, your leaks can reasonably be expected to grow with you.
The bigger your business gets, the more you lose to leakage.
Automated billing changes this by automating proration and dunning to plug up leaks and make your collections process more efficient.
Expectation: adopting the trendy subscription model will give you an advantage over your competitors.
Around 75% of consumers have reported interest in acquiring more subscription billing-based products and services. The recurring billing system has been rising sharply in popularity for years and the future outlook is equally promising.
Consumers prefer the relationship aspect that comes from a subscription—they want to make recurring payments. You want to collect them. This heaven-made match should give you an advantage over competitors who have yet to adopt recurring billing….shouldn’t it?
Not if you use a subpar subscription billing solution. An older or less capable bill system makes it difficult to add new features and products to your catalog.
To cleanly add a new item to the menu, developers need to be called in. Not only is this expensive and time-consuming but it can also cost you the advantage you gained when you adopted a recurring billing process.
If your competitors are consistently beating you to market with new features it won’t matter how popular your billing model is. They will win the day.
The best subscription billing software eliminates this concern by allowing for effortless catalog updates, putting the ball back in your court.
Expectation: thanks to the nature of subscriptions, your customers will stick with you forever.
If only it were so. The average churn rate is 3-8% monthly which means—well, you’re already familiar with the concept of churn. And you’re equally familiar with involuntary churn so we can just move on to—
Ah. There it is.
Involuntary churn is a less commonly contemplated scenario that occurs when willing customers are inadvertently bumped out of your network. It accounts for between 20-40% of all churn cases and can cost a fortune.
Here’s how it happens: a customer misses a payment. Because your subscription management system lacks the capacity for a robust dunning strategy—and your AR team is busy enough just getting invoices out on time—you can’t track that customer down and try to bring them back into the fold.
It’s easier to just churn them out. And why not? They weren’t paying anyway, right?
Here’s the thing: there are many reasons a bill can go delinquent. Many of those reasons are entirely innocent. If you boot a well-meaning customer from your network most of the time you will lose their business forever.
A good subscription billing software eliminates this concern by automating:
- Payment retries. When a bill doesn’t go through, you try again in a day or two. Often, the customer won’t even know there was an issue.
- Card updating. Credit cards expire every three years or so. Add to this that the average consumer has twelve active subscriptions at any moment and it’s clear that they probably won’t think to update their card information in a timely fashion. A good subscription management platform will work directly with credit card companies to update payment information automatically.
- Customer communications. Finally, the best subscription management services automate dunning communications. The customer can resolve the problem themselves while your billing department can focus on other tasks.
Retention is a key component of subscription management. With the right recurring billing systems, you won’t have to worry about losing customers for silly reasons.
Expectation: switching to a usage-based subscription billing model is an easy way to increase revenue
Nearly half of all SaaS businesses utilize some form of usage-based billing. Customers like paying for exactly what they use, and the system provides your subscription business with valuable data points on how your product is being used.
Here’s the thing: without a good subscription management system, handling usage-based billing is next to impossible. Your billing department is now on hyper overload and will be for the rest of eternity. They become stressed. Scalability becomes difficult. Instances of human error increase.
It’s a mess.
With the right subscription management system, this problem is neutralized. Meter-based billing is automated. The customer gets a nice, clean, accurate invoice, and your billing department gets to stop pulling out their hair.
Expectation: the subscription business model is super simple to maintain.
Well. It can be. Here’s the thing: subscription-based businesses need to comply with a unique set of standards and regulations. Of these, none is more dreaded than the requirements set around revenue recognition.
ASC 606 is the current GAAP revenue recognition standard. It’s notoriously difficult and violations are met with fines (best-case scenario) or jail time (decidedly the worst-case scenario). The Securities Exchange Commission (SEC) reports that 60% of their actions against fraud now go toward addressing revenue recognition violations.
With stakes this high, what is a subscription-based business to do?
Invest in billing solutions that automate revenue recognition. Most good subscription management services automatically create a clean, dual ledger-supported revenue recognition record that will keep your business ASC 606 compliant.
Your business stays out of trouble and automates a task that would have otherwise been very difficult. It’s a win-win.
The realities of subscription billing
Subscription billing does provide businesses with plenty of pleasant advantages. Predictable revenue. Valuable customer data. The benefits that come from participating in a trend that seems poised to stay.
That doesn’t mean subscription billing is a magic formula for success. It has its hurdles and pain points, just like any other business model.
Modern subscription management systems neutralize these problems. When you use the right tools, the customer gets better service. Your business becomes more efficient and scalable.
You just have to make sure you come correct.