We are, without a doubt, in the era of the ‘subscription model’. You can subscribe to anything from magazines and food delivery through to pimple cream and condoms. But, just because it’s the model du jour, is it right for your business?
One of the biggest hurdles to jump over when moving from a one-off-payment style business model to a subscription model is understanding the impact of the different payment methods.
What’s the best payment structure?
A subscription model typically has two different methods; in advance or in arrears. These are then further expanded by payment period.
Common periods are monthly and yearly, but there is really no limit. For example, utilities often operate on a quarterly period. At MailGuard we provide our services on a 12 months in advance basis. This ensures coverage for the cost to sell and serve.
Per-month subscriptions, or recurring billing, will prolong your return-on-investment (ROI) because payments are much smaller and often paid in arrears. To overcome this, you need solid forecasting and plan for per-month payments.
If your clients choose to pay 12 months in advance obviously your revenue will spike for that month, but you won’t see the predictable revenue stream which is a staple of running a recurring billing service. This means managing your cash flow can be a tricky experience.
Managing cash flow
In a subscription-based model, managing your cash flow becomes a dynamic proces that requires early planning and solid forecasting.
If you’re starting a business from scratch and wanting to open with a subscription model, you need to consider cashflow and capital expenses to ensure that your profit margin gives your business a chance to grow.
Remember, it takes a lot more clients to see the same early return than it typically would in a one-off payment revenue stream.
In short, you need to expect growing pains.
Conversely, existing companies will be able to use their existing projected sales and growth rates. It’s just a matter of adapting these to suit the fact that each client’s return-on-investment will be smaller in the short-term. Although, be aware that ultimately growth and sales will remain similar.
And, while we’re touching on sales, it is important to note that base salaries, commissions and targets for your sales team require heavy consideration to suit your new business model.
You may find that because payments are coming in much smaller increments, your sales team can’t immediately meet the same targets as they could in a one-off payment model.
At MailGuard we calculate our monthly sales targets based on the first invoice of each subscription. If a contract is for $50 per month, but is being paid 12 months in advance, then the amount calculated towards that month’s target is $600. Likewise, if the contract is a recurring, monthly fee, then it would only contribute $50 towards the target.
Managing these targets can be difficult at first but, once you find the sweet spot it’s not a big issue.
So, is it right for you?
I want to clarify a few things before I start; any business in any industry can operate with a recurring billing service.
According to technology research company Gartner, more than 40 per cent of media and digital-products companies will operate in a subscription model by 2015. Clearly, more and more businesses are seeing the benefits of a subscription revenue stream.
Everything from cleaning and lawn mowing businesses, to newspapers and magazines to infrastructure and software companies – they can all comfortably operate in this model.
I will add that cloud-based businesses, like MailGuard, typically operate in a subscription model because there is no ‘hard copy’. That is, there’s nothing physical to buy, store and reuse so, it makes sense to offer a subscription fee for the service.
But, is it right for you?
Well, as I just mentioned, a subscription model could work for any business; but there are some who will have a leg-up.
Here’s three simple questions to answer before deciding to move in this direction.
1. Are you offering a service?
If you’re planning to start a business which offers a service rather than a ‘box’ (including cloud services) then obviously it makes sense to charge a recurring subscription fee. Likewise, if you already offer a service then it could be financially more beneficial to operate in this model.
2. Are your customers loyal?
This obviously only applies to existing businesses. Most business owners will tell you their customers are loyal, but as we have discussed before, this is often exaggerated. In saying that, if your business does have loyal customers then the transition will be a lot easier.
3. How strong is your forecasting?
A subscription model can bring financial stability but, it also requires a great finance team to accurately forecast and plan for the always changing dynamic between the varying payment methods.
The most important thing to remember when deciding if this model is right for you is, that there will be some growing pains that you will need to endure before reaping the benefits.
This can be especially true for existing companies, even ones with loyal customers, because clients are comfortable and can be opposed to change.
However, once you have entered into ‘The Subscription Economy’, you will find the benefits far outweigh the initial challenges.
Mitch Ogden formerly worked at MailGuard – the world’s leading independent cloud security provider. He helped to build and manage MailGuard’s brand by delivering content in the online space. He is an experienced writer, researcher and editor.
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