The subscription market continues to thrive despite inflation and changing economic conditions, with consumers valuing subscription services for convenience and choice. What has changed are customer expectations of membership and billing options, with more consumers wanting the ability to pause a service. A study from PYMNTS found that 60% of merchants allow subscribers to pause their enrollment rather than cancel, representing an 8% increase since March 2022, and 40% increase over May 2021.
A Shift In Subscription Billing Usage
This is a shift in subscription billing usage, and companies in most industries should evaluate whether their billing system can meet customer demand. When the subscription billing model becomes one that is frequently paused and re-activated, companies need a billing system that is both agile and sophisticated, that links pricing, billing, and access seamlessly with the back-end technology.
Implications For Revenue Recognition
The increase in pausing subscriptions has implications for revenue recognition because it triggers complex areas of ASC 606 / IFRS 15 revenue recognition guidance, which has five steps:
- Identify the contract with the customer
- Identify the performance obligations in the contract
- Determine the overall transaction price for the contract
- Allocate the transaction price to the performance obligations
- Recognize revenue when performance obligations are satisfied
In the case of a paused subscription, the pause would affect the contract, performance obligations, and when revenue is recognized. The way to make sure the compliance obligations are met is to have the right data in place at the right time.
A System That Can Handle Subscription Pauses
A real-world example of a paused subscription could be a box service with a long-term customer. This person may feel overwhelmed and want a break from delivery but does not want to stop the service entirely. A pause feature would allow the customer to take a break without losing any of the perks associated with being a long-term customer, such as special offers or free items.
In theory, a business should be able to pause and re-activate seamlessly. However, many billing systems lack this capability, and the results are subscriptions that appear to be canceled, with the reactivation seeming to be a new contract. When this happens, the chance of errors and customer confusion increase, and the company’s churn rate can be misrepresented.
The system that companies should look to will have agility and sophistication, linking pricing, billing, and technology to achieve a seamless experience for the customer. Subscription service providers can take advantage of advances in technology, using multi-tenant cloud applications to manage revenue at any level of complexity and scale. This system would look at pauses in subscription billing in line with order management, contract renewal, and revenue recognition so that all aspects of billing are seamless.
SOFTRAX is the only vendor that provides an option to deploy revenue recognition for ASC 606 as an independent application, or as a complete Revenue Management System (RMS), combining support for complex subscription and milestone billing, contract renewal management, and revenue recognition against ASC 606 / IFRS 15 in a single system.
Contact us to learn how SOFTRAX can help with subscription billing processes.