In the fall of 2012, Hurricane Sandy devastated the East Coast of the United States, killing 285 people and causing almost $70 billion in damage. At the time, Sam Rosen was traveling on business. He rushed home to help his girlfriend clean up her flooded apartment in New Jersey.
The two worked together to recover what they could, and put the salvaged contents in a storage unit. As they were leaving the building, Rosen asked if she had her winter boots. Frustration grew as they dug through the contents of the storage unit to find them. Wouldn’t it be so much simpler if one could just flip through a storage unit to find things like one can flip through files on Dropbox? Rosen asked himself.
MakeSpace, a subscription-based storage option, was born. With a monthly subscription, customers can make a reservation to have their items picked up, stored, and delivered. Subscriptions vary by the volume of storage needed.
With a little ‘outside the box’ ingenuity, just about any concept can be turned into a subscription-based enterprise with predictable recurring revenue. Customers desire the convenience, along with the perceived value of a low monthly payment. Numbers demonstrate the growing consumer attraction to subscriptions.
Trends for SaaS (Software as a Service) businesses, for example, suggest that by 2020, the marketplace will grow to $76 billion.
In 2018 alone, SaaS management platform Blissfully reports that companies spent an average of $343,000 on SaaS, up 78% from the previous year.
However, as customer interest grows and more people purchase subscriptions, it’s important to make sure they don’t get “lost in the shuffle”.
Blissfully reports that on average, the employee of a company uses at least 8 different apps for work. While an IT department monitors the apps, different segments of a business may have purchased them. As many as 32 different billing owners may be tied to just one subscription. Who should that invoice go to every month?
Conversely, 71% of businesses also have at least one application that has no owner whatsoever. This might be because the person who brought that subscription on board left the company.
How does a subscription business handle communicating with 32 different subscription owners… or no owner at all? Without the right tools, a business doesn’t even know where to send invoices.
On the subscriber’s side, the wrong contact person might have to spend valuable time forwarding invoices to the correct person every month. If the contact person forgets to forward the invoice one month, the subscription business suffers.
This is where a subscription business needs the right tools, such as subscription management software. However, in order to understand how technology such as subscription management software factors into the relationship between businesses and their customers, it’s important to get to know the ins and outs of subscription management.
Sometimes, the terms ‘subscription management’ and ‘recurring billing’ are used interchangeably. But just like peanut butter and jelly are separate entities that work together to make a time-honored lunch favorite, subscription management and recurring billing software are complementary, not interchangeable.
What are the differences between the two?
The difference between subscription management and recurring billing
Subscription management is oversight of the interaction between a business and its customers. This can include:
- updating customer information
- upgrading subscriptions
- downgrading subscriptions
- performing customer-oriented tasks
- handling of customer communications and dunning management
- providing access to insightful reporting based on revenue and subscribers
Recurring billing, on the other hand, is the process of:
- generating an invoice, including handling of proration and location-based taxes
- tracking payments on a pre-determined basis
- safely storing payment information
Storing payment information should be done in compliance with PCI (Payment Card Industry), the industry standard to protect cardholder data.
As mentioned before, subscription management and recurring billing mesh together so symbiotically that they are often used interchangeably. Obviously, it’s critical to making sure that payments come in on time—after all, consistent payments yield a predictable revenue stream. A solid subscription billing platform helps achieve this.
Sometimes, subscription-based businesses, particularly those in the startup phase, try to manage subscribers using spreadsheets or with a platform they built in-house, instead of utilizing proven subscription-management software.
Managing your subscribers yourself can work at a smaller scale. But when it comes to growing your business, more subscribers means increased challenges in managing the complexities of customer relationships, compliance issues, resource allocations, and the customer experience.
The bottom line is, if you fail to keep your subscribers happy, satisfied with your product, and confident in your credibility as a company, you will start to see churn. This will negatively impact your subscriber growth numbers from early scaling.
Let’s take a deeper dive into the critical role subscription management plays for your organization.
7 ways subscription management software complements your subscription business
From the onset, subscription businesses have many moving parts where subscription management software can streamline the entire customer management process.
1. Subscription management software empowers your business with pricing agility.
The pricing strategy a subscription business selects is a critical component of its success. Before bringing your first customer on board, a pricing plan has to be in place. In order to create that plan, it’s essential to ensure that you are creating value for your customer.
There are several ways product pricing can be tweaked to meet market expectations and succeed. Here are some critical questions to consider:
- Will my pricing structure be standardized pricing, or will there be a different schematic?
Standardized pricing means that the same price will be attached to any unit
Tiered pricing is when a discount is offered to customers who buy different units
Volume pricing is similar to tiered pricing, but depending on the number of units, the unit pricing would be based on the tier reached
Stairstep pricing is also based on volume purchases, but the customer pays a flat rate for the level they fall into
Hybrid pricing is recurring pricing based on any of the above models, along with one-time payments or multiple combinations of one or more models
b. Should I offer discounts?
Discounts can be offered at any time during the customer lifecycle. They can be in the form of:
- Cost—$15 off your next purchase
- Percentage—15% off your next purchase
- Service term—Get your next month free
Pricing is not cut in stone. As your business grows and you add more features to your product line, it can be tweaked. However, this experimentation and fine-tuning should be handled with care. If you overcharge customers, you’ll be seeing chargebacks (when a customer’s bank forces the reversal of a payment) or issuing refunds. If you undercharge, you are eating into your profits.
Without the right tools, such as subscription management software, a business can’t make quick course corrections if they need to make pricing changes.
- if a business has an emerging competitor that has a similar product with a radically lower price tag, that business may need to change their pricing, or add other incentives, such as “customer appreciation discounts”
- customer demands can change, requiring flexibility in pricing plans and access to different product price “tiers”
Without an adaptive subscription management software, pricing changes might not be easily shared with the billing system, impacting accounting processes. If there are frequent pricing changes, the incompatibility will likely bog down both the system and subsequent processes. Without the necessary agility afforded by subscription management software, this often serves as a significant challenge for your marketing department.
The lack of agility can negatively impact product launches and hinder an expanding catalog. A lot of work goes into creating and launching new products; imagine losing that momentum because of sluggish billing practices.
Subscription management software empowers the finance team to track all pricing changes and efficiently create invoices to reflect those new terms, plan changes, etc.
Additionally, dedicated subscription management software also provides critical reporting. This allows you to really dig into your customer’s buying behavior by comparing historical data with current data. If, for example, you are considering bundling different products, you can run a report of sales by product to determine the strongest sellers and the more sluggish movers.
Bundling a less popular product with one that has more sales traction can increase your MRR, or monthly recurring revenue.
With the insights gained from reporting, and a pricing adjustment plan in place, subscription management software provides the flexibility to easily implement any pricing changes. Simply make the change once in the software, and it will be automatically updated for each subscription plan.
2. Subscription management software easily tracks changes with the customer, allowing extensive flexibility within a subscription.
Flexibility is essential for any subscription-based business. Contact information changes, credit cards expire, and users may decide to upgrade or downgrade their subscription. Subscription management software allows changes to be made at any point in the customer lifecycle.
However, some industries produce even more changes. In the utilities industry and the Internet of Things (IoT) environment, for example, subscriptions may be centered around data, which fluctuates with every billing cycle.
Even more complexities occur in the telematics industry, which captures multiple pieces of data from sensors, then bills customers accordingly based on speed, braking habits, miles traveled, etc.
ClearPathGPS is a telematics business that provides vehicle tracking services with no long-term contracts. Because the customers for ClearPathGPS do not have contracts, the subscriptions are prorated on a daily basis.
Capturing and prorating daily subscriptions can be problematic, or next to impossible, to track manually. Combined with the data that ClearPathGPS can track, including driver behavior and speeding, odometer reporting, maintenance reporting, routing, etc., manual tracking on a daily basis would be impossible.
With subscription management software in place to oversee all the moving parts of the telematics operation, managing these facets is simplified. As Chris Fowler, Cofounder and CEO for ClearPathGPS says,
“Fusebill’s feature-rich platform has given us a powerful way to seamlessly manage our entire subscription business.”
Pricing changes, such as offering a temporary reduction to combat competition, were mentioned earlier. Imagine having a current customer take advantage of that incentive. Perhaps that discount is 50% off the regular subscription rate for 2 months. The customer is happy and you saved him from churning out. But what if you are manually adjusting the price and forget to turn the discount back off? Now, you have revenue leakage, because you aren’t charging the correct price for your product.
Subscription management software can stop revenue leakage by automatically turning off temporary price reductions at the end of the allotted time, maximizing flexibility with both your pricing and your customers. This provisioning capability has a positive impact on your bottom line.
3. Subscription management software contains self-service portals that empower your customer to make necessary changes.
Customers that purchase subscriptions have come to expect the ability to customize their subscription preferences. They want to be able to instantly make changes themselves, versus contacting customer support and burning up valuable time.
Subscription management software provides self-service portals, which give users easy access to their account information. Self-service portals aren’t limited to selecting features or subscriptions. A customer can also:
- make changes to their details (contact information, password, etc.)
- update credit card information
- view invoices
- view subscriptions
- upgrade or downgrade subscriptions
- cancel subscriptions
Not only is easy account information access an important feature for customers, it is also ideal for subscription-based businesses. Allowing users to make changes frees up the business to focus on other customer concerns and questions, optimizing the focus for their customer service department. This improves the customer experience, and keeps operating costs down.
4. Subscription management software improves your customer's experience by enhancing communication between the user and the business.
Communication is essential for the preservation of the business-customer relationship. Unlike the one-time communication a customer encounters when making a traditional purchase from a physical store, communication between a subscription business and its customer is ongoing.
Dunning management is a critical feature of subscription management software. With dunning management, a subscription business uses a pre-determined communication approach to reach out to customers throughout their lifecycle.
While the ‘dun’ in ‘dunning management’ initially meant to ‘make demands for payment,’ current applications of the term are more tactful.
Current dunning methods can:
- contact a subscriber to let them know their credit card is about to expire
- communicate when a payment or transaction fails
- let a customer know their subscription is about to expire, due to failed payment attempts
- tell customers how much is due for a payment
- give them the date that their credit card will be retried, in the case of a failed payment
Gracefully telling customers that there are issues or potential issues with their payment method helps keep your churn rates low.
In many cases, payments are an average of 9 days overdue before a small business receives them. Dunning management can mitigate a tremendous number of headaches by automating this process and ensuring revenue recovery.
Scaling is critical for any subscription-based business, as SaaS survey provider Typeform can validate. In 2013, the cloud-based software company launched by beta testing a free version.
Current measurements suggest that through the forms, surveys, and questionnaires that Typeform generates for its customers, they receive and process nearly 10 million responses each month.
Successful businesses want to grow, but adding customers without the capability to scale can be problematic. Consider the tremendous amount of subscription-related data that has to be managed for each customer, including billing periods, contract terms, usage, contact information, payment methods, etc. In a rapid-growth situation, such as businesses that merge, hundreds or thousands of new customers can be brought on very quickly.
Managing the scaling process while maintaining focus on customer satisfaction takes finesse. It is not something that is easily accomplished without subscription management software.
For example, Agility PR Solutions was acquired by a global services company. They then purchased a suite of PR tools, from PR Newswire two years later. In a short amount of time, their customer base grew from thousands to tens of thousands. The standard accounting software used up until this point made generating invoices and collecting payments a challenge as the company expanded. They absolutely needed a subscription management platform to streamline and automate their recurring billing process.
5. Subscription management software allows your business to meet compliance standards.
Compliance issues surrounding revenue recognition (often referred to as “rev rec”) took effect in 2018 for public companies, and are going into effect this year for private businesses. Revenue recognition means that a payment made to a business is not documented immediately as revenue; instead, portions of that payment are applied over a longer period of time.
This is of particular importance for a subscription business, especially when a customer pays at the beginning of a billing period. GAAP (Generally Accepted Accounting Principles) ASC 606 rules dictate that the payment be split over the course of that period. For example, if a customer pays $60 every month for a subscription, that money is split into two different revenue streams: earned and deferred income.
On day 1 of the billing period, $2 of that $60 payment is earned, while the remaining $58 is deferred. Each day, the earned and deferred income shifts by $2. So on day 20, the earned revenue is $40 and $20 is deferred. On the final day of the billing period, all $60 is earned income.
The ability to accurately differentiate between earned and deferred revenue is extremely complicated and time-consuming to manage with spreadsheets or outdated billing systems. This can mean there is no critical audit trail and there are fewer forecasting and reporting capabilities.
With subscription management software, however, a business is able to calculate this information quicker, and automate much of the processes that would otherwise fall to someone manually making these additions. This means that a business can add subscribers without having to add employees, which saves on valuable overhead costs.
6. Good subscription management software allows seamless integration with other platforms to manage important business variables, such as accurate bookkeeping.
Subscription businesses that utilize a robust subscription management software benefit from seamless integration with other platforms.
A comprehensive subscription management platform can be tailored to efficiently interact with other integrations, pulling in information from other platforms, or pushing out critical information as needed.
For example, customers often couple their subscription management software with a CRM (Customer Relationship Management) platform such as Salesforce by synching up customer data, subscriptions, invoices, and purchases. The two can even work together to structure deals or provide refunds.
Subscription management software that supports the double-entry accounting process integrates easily with accounting software, like QuickBooks Online and NetSuite. With the double-entry accounting system, each processed transaction has both a debit and a credit transaction, which is essential to distinguish earned income from deferred income.
If a business uses subscription management software that is not fully integrated with general ledgers (GLs) and built on the double-entry accounting system, it will be difficult to push the transactions into accounting software.
However, when subscription management software is built on these accounting principles, it is easy to integrate with accounting software. Integration gives you the ability to see the financial history of, and determine trends within, your business. It also predicts future fluctuations.
Armed with revenue stream predictions, a business can effectively make aggressive changes to their plan, like changing up pricing to bundle features, or preparing an up-sell campaign for existing customers.
7. Subscription management software protects your customers’ information, including payment methods held on file.
One recent survey suggests that nearly half of all small businesses are concerned about breaches compromising customer credit card information. It’s no wonder the concern is so high when the same report indicates that after a cyber-attack, 60% of companies go out of business.
Recognizing the importance of security, the PCI created four levels of compliance based on the requirements of major credit cards, including Visa, Mastercard, American Express, etc. The levels range from Level 4, working with merchants that have less than 20,000 transactions in a year, up to Level 1: merchants that process more than 6 million card transactions every year.
Well-constructed subscription management software is built with security as an essential cornerstone. When a service is PCI Level 1 compliant, it means that businesses can be assured that any credit card data their customers provide is secure.
This world-class security measure provides essential peace of mind, both for the businesses that elect to employ subscription management software, and the end-users who work with those businesses.
The subscription-based business landscape is an ever-moving environment with changing trends and customer preferences. The ability to monetize opportunities surrounding this niche requires the right technology. Subscription management software provides your business with the agility to maximize customer experience and recurring revenue potential.