Do subscriptions make sense for your business?

Subscription billing has been around for as long as newspapers and magazines. The idea of paying a fixed or variable amount on a regular basis for a product or service has definitely carried over to the digital world.

Companies are abandoning the notion of simple one-time charges for their product as they realize these sales are no longer enough to assure profitable growth from the digital channel.

The subscription business model has gone mainstream because it offers a predictable, recurring revenue stream. But is it the best option for your company and customers? Let’s explore the pros and cons of the subscription model.

Pros of subscriptions:

1. Recurring stream of revenue

By definition, subscription models offer continuous and recurring streams of revenue from each subscriber, without needing to lead them through a checkout process again. Data from Custora suggests that Customer Lifetime Value (CLV) of repeat customers in commerce businesses is over six times that of one-time buyers.

2. Convenience for the customer

On service subscription, customers get the convenience of a regular supply of whatever product or service you are selling. Instead of having to remember to come back to your website once a month, the customer gets the products automatically.

3. Improved business planning

The subscription commerce model enables more definitive business planning. It enables you to plan the customer acquisition costs, determine the lifetime value of a customer and the churn rate, providing key data for improved planning and business expansion.

4. More customer data

Because the relationship is ongoing, you have the opportunity to learn more about your buyers’ behaviors. Usage data is the best lens through which to increase customer lifetime value. Knowing what marketing promotions to run, what cross-selling strategies to use and whom to target with rate plans changes are all powerful results of harnessing usage data.

5. Increased focus on customer relationships

Customer relationships are critical to any business. However, the subscription model forces companies to change their mentality about customers and raises the importance of the relationship. Unlike transactional model companies where, often, only the sales and marketing teams track customer relationships, in a subscription business model, the core business metrics are fundamentally about those relationships. Churn, for example, is one of the most important metrics to a subscription business. Since the metrics drive business, customer relationships in a subscription business are core to the whole organisation, from top to bottom, and not just select departments.

6. Reduced CapEx for B2B customers

Many businesses are cautious about making capital expenses for items such as enterprise software. However, subscriptions allow customers to shift software spending from capital to operating budgets. Reducing CapEx costs looks good on a companys balance sheet and leaves more cash on the books to deal with potential or unknown problems. Additionally, B2B customers typically have the right to adjust their subscriptions to reflect a lower or higher headcount or changes in application requirements. Not being locked into a fixed situation is something many businesses prefer.

Cons of subscriptions:

1. Possible customer concerns

A common fear among digital vendors is that many customers hesitate to sign contracts where they are re-billed on a pre-defined schedule. These fears are certainly valid, making it even more important to understand the different options you have when selling products on a subscription basis.

2. Complexities of managing subscriptions

Subscriptions success entails much more than merely switching from one-time to recurring billing. Subscription management can be quite complex. As companies grow their subscription businesses, they often find that existing ERP and billing systems are not well equipped to handle the real-time tracking of new success metrics, including ARPU (average revenue per user), churn, M/ARR (monthly and annual recurring revenue), recurring profit margin and customer lifetime value, said Amy Konary, research vice president, IDC.

This can get even more complex with B2B subscriptions because traditional systems typically cannot handle the management of new processes, like single orders which create multiple invoices, an invoice that generates multiple revenue recognition processes, multiple orders on one invoice and the combination of all orders to create a renewal invoice.

3. Does not always transfer to global success

While subscriptions have certainly exploded in countries like US, this isn’t always the case globally, where a subscription product has the potential to become a big hassle for customers using offline payment methods. For example, in Germany, wire transfer is the most important local payment method and, in Japan, the Konbini payment method, which requires cash on delivery, is a popular alternative. Both payment methods lean toward an up-front payment model. After all, how many US consumers would consider going to a Western Union location every month to pay their monthly Netflix subscription?

However, if you are planning to offer offline payment methods for your subscription/SaaS products, here are some considerations and tips to increase conversions and reduce churn .

In their eagerness to earn more revenue and keep up with trends in global ecommerce, too many businesses want to dive headfirst into the subscription commerce pool. Before you take the plunge, consider how youre going to build a subscription service and how your customers will interact with it. Make sure youre building it to meet the needs and interests of your target market. Ask yourself: What are the key customer benefits? What customer pain points does it solve? Will customers engage with the product?

About Craig Vodnik

Craig Vodnik is a co-founder of cleverbridge, a global subscription billing provider. Prior to cleverbridge, Vodnik held the position of project manager, North America for one of Europes leading ecommerce providers. At the beginning of his career in 1995, he served as the Webmaster of the Chicago Tribune, where he was instrumental in launching the newspaper onto the Internet. Vodnik has over 18 years’ experience in the financial services, advertising and ecommerce industries as well as with experience with several Internet startups. He holds a Bachelor of Arts degree in Nuclear Engineering from the University of Illinois, Champaign-Urbana.

 About cleverbridge

cleverbridge provides global subscription billing solutions that help companies build long-term customer relationships and grow recurring revenue streams. With its flexible, cloud-based billing and monetization platform, cleverbridge integrates seamlessly with client systems, simplifies subscription business models and delivers an optimized online customer experience. Leveraging cleverbridge expertise, technology and services, clients monetize products and services more effectively, rapidly expand their global subscriber base and maximize customer lifetime value. Headquartered in Cologne, Germany, cleverbridge has offices in Chicago, San Francisco and Tokyo.