Transitioning to a Subscription Business Model – What you need to know

The idea of ‘ownership’ has been steadily changing over recent years. The subscription economy has given rise to a new era where utility trumps ownership – people would rather have access to a resource when it suits them than to actually own it. 

It represents a shift in consumer’s perception of value, and their spending habits. Goods are now being repackaged as services, and more companies are now looking to shift from a traditional business model to a subscription business model.

The transformation from a traditional to a subscription based model impacts the whole organisation – from sales, marketing, product, IT, finance and service teams.

Here are some considerations for businesses looking to “make the shift”.

One of the keys to success for a subscription business is adjusting your offer to acquire new and retain customers. You need the ability to add new and adjust products and pricing without facing bottlenecks or creating an unmanageable burden for the finance or IT department.

As a subscription business you face the complexities of pro-rata payments for mid-month sign-ups, contract changes, and mid month cancellations. You’ll also need to manage contract terms and renewals – ideally with an automated system that doesn’t have you sinking in spreadsheets. 

No longer is an invoice a one-off for a single transaction. Your bill becomes part of your regular communication with customers – in many cases it will be your primary point of communication. How will you make this most of this? 

A system that lets you not only brand your invoices, but send targeted communications to specific customer segments can be a very valuable weapon in your marketing arsenal.

An efficient collections process is critical for a subscription business. Management of direct debit processes, proactive and reactive communication regarding past and potential payment failures (i.e. expiring credit card details) are essential capabilities to minimise involuntary churn rates.

Subscription finance has specific requirements – including differences in forecasting and revenue recognition. How will your billing system work alongside your accounting system and how well do they integrate?

KPIs for a subscription business differ from a traditional business. Consider whether KPIs like cost per acquisition, churn rate, and customer tenure can be tracked and reported on.