Within the software industry, a subscription model has long been viewed as a successful alternative to a transactional – or one-off purchase – model. The subscription model in the software and technology sectors, known as software-as-a-service (SaaS), has revolutionised the sector and is well accepted in the marketplace by customers.
The entertainment industry has been fast to catch on too. Audio and TV streaming services like Netflix and Spotify have transformed the delivery of entertainment services. The British spend more than £2 billion each year on subscription services. And the market is growing, with other sectors embracing the model. Retail, consumer products and healthcare providers have all begun offering subscription packages, so we’re seeing beauty boxes, meal kit subscriptions and even shaving clubs.
You may already sell products or services as one-offs, but have you considered subscription offerings too? Adding a subscription model to your business can reap new benefits for your company.
Perhaps the most appealing benefit of having a subscription model is that there is a certain degree of assuredness about your finances. With a known subscriber base, paying a set recurring fee, you have a high degree of certainty about your future income. Having a steady income stream gives a greater consistency to your cash flow. Managing your cash flow forecasting is therefore simple and facilitates the rest of your financial planning.
Knowing your numbers in advance puts you in a better position when it comes to forecasting. Without large fluctuations in income, your future planning can be more accurate. If you sell physical stock, knowing your sales volumes lets you precisely plan in the right levels of production and purchasing. If you sell a software subscription, you can plan in your staffing for the development requirements as the business grows. And financial forecasting for all businesses is easier when one variable – your income – is already predictable.
If you offer products for sale – rather than on subscription – many of your customers will have come to you after shopping around. And they will certainly shop around again in future. Customer churn rates vary for different industries and for different companies. But you will certainly be sacrificing some loyalty when you sell on a transactional basis. With a subscription though, there is less need for your customers to switch supplier and they become your loyal customers.
That customer loyalty keeps the revenue coming in, and you have the opportunity to build on that trust and foster even better customer relationships, which in turn builds better retention levels.
Even if they’re not entirely happy with you or with your product, it can be hard – psychologically – for a customer to go ahead and cancel a subscription. While this in no way advocates for poor customer service on your part, it does allow you a little leeway to make amends for any issues so that you have time to redress the situation and recover their loyalty.
With a retained, loyal customer base, you have the opportunity for regular communication. An engaged base is more likely to respond to your upsells or cross-sells, leading to business growth.
Also, when you launch new products, you will already have a significant base to which you can promote your new offering. Building a substantial audience for a new product from scratch – without this existing customer base – would be far harder and costlier.
With the economy in decline, much of the population is having to manage a reduction in income. Being more strapped for cash in this way can preclude a large purchase of, say £150. But the option to spread that out over a year can seem much more palatable. It’s easier for consumers to justify an expenditure of £12.50 a month, especially while they are still gaining the same, or similar, advantages.
For your company, despite the vagaries of the economy at the moment, the subscription model can give you a good insight into your revenue and costs in the coming months and years. So, you will be better able to accurately estimate your future acquisition, retention and customer churn rates and also plan in your marketing efforts.
A company that has a recurring revenue stream is an attractive prospect to investors. For all the reasons already mentioned – growth, known incomes, customer loyalty and retention – a company with a subscription model is appealing to investors, who see subscription-based businesses as sound investments. These models bring more resilience and give better visibility into growth and cash flow.
Of course, with a subscription model, there are additional challenges for finance teams. They need to be able to keep track of several different pricing and subscription plans, as well as promotional offers. Each customer needs to be billed correctly, sometimes according to usage or to variable rates.
Combining one-off payments with recurring, monthly fees is complex and needs to be managed. And if a customer account changes, the financial system needs to be able to respond to the downgrade or upgrade in the subscription, or be able to pause a subscription and put a customer on hold.
On top of this, there are rules surrounding revenue recognition and how revenue should be reported and accounted for.
Operating a subscription model might not be right for every brand. But the subscription economy is booming and is surely worth some serious consideration. NetSuite meets all the financial challenges, with automated subscription and billing management and revenue recognition. Let us help you with your deliberations on a subscription model. Book an appointment now or contact us for a free business consultation or a quote tailored to your company.
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