How to manage the challenges behind the subscription-based business model with leading revenue management software solutions.
Trends from the past years consistently show that buying preferences have shifted from ownership to usership. This presents incredible revenue growth opportunities for subscription businesses and those looking to adopt the subscription business model. It also presents new and complex challenges that call for scalable subscription-based billing solutions and revenue recognition solutions.
While the telecom industry may have paved the way for this increasingly popular business model, businesses with all varieties of offerings are embracing the subscription business model. In these instances, a business’s “product” may be a service, and the value being provided isn’t ownership, but access. As home-delivered meal, clothing, health, and skincare boxes have grown in popularity, so have these service-based subscriptions. Car subscription companies provide drivers with the ability to rent cars for occasional trips rather than owning one, while fitness brands are turning customers’ basements and living rooms into membership gyms.
Why more companies are adopting a subscription-based business model
During the beginning of 2020, lockdowns and other safety measures seemed to slow subscription revenue growth, yet when lockdowns returned during the end of 2020, subscription revenue growth accelerated at a rate of 21% (7x faster than S&P 500 companies’ growth rate of 3%, as depicted in the graph below).
BarkBox is a monthly subscription service that provides boxes full of dog products, treats, and experiences to over one million dogs monthly through BarkBox and Super Chewer subscriptions and retail distribution. The company experienced a 58% surge in subscriptions for calendar 2020, to over 1 million as of December of 2020. Having completed a merger in 2021 with Northern Star Acquisition Corp, a publicly traded special purpose acquisition company, Northern Star CEO, Joanna Coles, notes:
“You’re seeing groups of people that never bought online now having to buy online, breaking decades-old shopping habits to create new habits online. And you’re seeing movement from one-time purchases to subscription purchases for staples.”
With revenue of subscription business growing increasingly faster than both the retail sector and the S&P 500 it’s no surprise more and more businesses are turning to adopt the subscription model.
Since such business models are based on recurring payments, subscription models offer a consistent source of revenue that business leaders can count on for strategic planning and investment purposes as well. For businesses, subscription models can also offer deeper customer insights.
Following the “set and forget” idea, consumers also tend to stick with a subscription service once they’ve signed up.
However, the larger move to subscription services does have a downside. Flexibility in pricing and bundling offerings may be great for sales and the front office but creates some incredible challenges for the back office.
The challenges of offering subscription services
Both the order-to-cash and order-to-revenue recognition processes had to rapidly evolve to accommodate this new model and rate of change. The result: existing automation in enterprise resource planning (ERP) and other financial systems is often left in the lurch. This means billing and revenue recognition—critical for reporting how well or how poorly a company is performing in terms of earnings—become much harder.
When a product changes ownership in exchange for money, the recognition event of revenue is easy to spot. When a product or service is delivered over time, revenue recognition is harder to identify—especially when the payment amount is a function of a number of different variables. To make things even more difficult, subscription arrangements often change frequently as clients change consumption types or habits, triggering incredible complexity in the proper recognition of revenue according to existing Contract Modification guidance (sections 10-25-(10-13) of the current ASC 606 revenue recognition guidance).
Increasing customer demand drives the need for stable subscription billing solutions
Usage of subscription services by adults has been continuously growing with 78% of international adults currently subscribed to one or more services. With customers preferring the benefits that come with subscription services such as convenience, cost savings, and variety, it’s no surprise that research from the past year shows subscription businesses have consistently outperformed sales revenue growth of non-subscription businesses.
Businesses lack sufficient infrastructure to properly bill, recognize, and collect recurring payments from thousands – or even millions – of customers in the context of the challenges described above. With subscription usage expected to continue its upward trend as consumers drive the demand, companies need to evaluate and ensure they have a stable revenue management system in place, capable of handling the unique challenges of subscription revenue models.
ERP and subscription arrangement
Before the advent of the “recurring revenue economy,” companies tended to rely on their ERP or other financial systems to handle their order to cash and order to revenue recognition processes. Most of these systems were designed in an era when manufacturing was the main mode of doing business and have trouble dealing with billing and revenue recognition where frequently changing and multiple element arrangements are involved. In short, they just aren’t made to deal with today’s dynamic, subscription-driven world.
That doesn’t mean it’s time for drastic measures. ERP systems provide a solid backbone and can still be very beneficial for many companies. The costs for replacing them can be huge in terms of time, money, and risk. If you are a company that deals in or is considering subscription arrangements, the most efficient and cost-effective way forward is to keep your core system in place but bolster it with a platform built for all forms of billing and revenue recognition, including the unique challenges of subscription billing.
3M Health Information Systems (3M HIS), a division of 3M Company, and a leader in clinician, revenue cycle and performance management technology and services for the healthcare industry, needed to integrate a significant and sizeable acquisition that brought new requirements to offer subscription and consumption-based billing.
Following a broad search for a new billing and revenue recognition system, 3M HIS integrated SOFTRAX’s solution and now uses one of the most broad-based revenue management applications available.
With SOFTRAX solution in place, 3M HIS has met the complexities t the complexities of subscription billing and its impact to revenue recognition. Tom Zauli, SVP and General Manager of SOFTRAX notes:
“This [augmentation] places the company at the top in terms of financial controls, minimization of risk and optimization of efficiencies in the back office.”
Contact our experts today for further detail on augmenting your company’s ERP system with SOFTRAX’s comprehensive Revenue Management System (RMS) to handle the revenue challenges of the recurring revenue economy. Read about more companies like 3M who have found success with SOFTRAX in the Customer Case Study Library.
Transaction, subscription, and usage-based billing management solutions with SOFTRAX
For over a decade, SOFTRAX has provided software solutions that support transaction, subscription, and usage-based billing with SOFTRAX Enterprise. More than a simple billing solution, the SOFTRAX Revenue Management System (RMS) supports multi-tiered pricing, transaction-based charging, milestone billing schedules, and full compliance with the ASC 606 / IFRS 15 standards for recognition of revenue.
The SOFTRAX RMS readily integrates with your existing enterprise application infrastructure, taking data from front office CRM/CPQ and usage-based metering systems and providing results to back office financial applications to give you unparalleled control over your revenue management processes. In addition to handling complex contract information, SOFTRAX Enterprise also gives managers critical forecasting capability on company revenue streams. Read more about this on the SOFTRAX website.
As SOFTRAX prepares to release exciting news this spring, we’re thrilled to announce we’ll be hosting a webinar this March featuring more insight into the subscription economy. Stay tuned for a full agenda for this event to be released soon! Access the SOFTRAX Webinar Library to watch replays of every webinar hosted by SOFTRAX with special guests and finance and accounting experts in the industry.
Follow SOFTRAX on LinkedIn for more information on this upcoming free and CPE eligible webinar as well as updates on future SOFTRAX news.