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Subscription providers should be ready for the FTC’s Click to Cancel Provision

Subscription providers should be ready for the FTC’s Click to Cancel Provision

Businesses offering subscription-based goods and services should be paying close attention to the FTC’s proposed Click to Cancel rule that would make it easier for customers to cancel subscriptions. The rule comes after complaints of consumer difficulty in canceling subscriptions, especially those subscriptions procured through a third party. The FTC’s rule would allow the consumer to cancel the service in the same way in which it was ordered, most likely online. Consumers would not need to make a telephone call or appear in person to cancel, which are two options that some subscribers use that make it more difficult to discontinue a service. Subscription businesses should anticipate that easier cancellation procedures will be put in place and use this time to make sure their revenue and customer relations practices are in good shape.

For B2B companies offering subscription services, the cancellation terms are most likely tied to the customer contract, so the Click to Cancel rule will not have the same impact. There are some areas that B2B companies should note when it comes to cancellations and recognizing revenue, and these will also be examined in this post.

 

Subscription Services Payments

It is no secret that subscription-based services are big business for B2C companies, especially in the period following COVID restrictions. Take Over the Top (OTT) TV and revenue services, which have grown in popularity and are expected to reach $215 billion by 2029. To meet the rapid growth of OTT and other services, providers needed to make service sign-up and billing seamless and automated. Many of these businesses put procedures in place that allow the deferred revenue from the services agreement to be collected and recognized in line with the guidance of ASC 606 / IFRS 15. Many times, these businesses also offered an incentive for customers to sign a longer contract, which would help with the business’ projected revenue and give the customer a bonus (most likely a lower price).

For example, a music streaming service that offers a subscription for $20 a month may decide to offer a year’s subscription for $175 if paid in full up front. The customer would have access for a year at a lower rate, and the company would have revenue in hand, but they would need to recognize or reconcile it each month as though it were a regular contract. Should this customer decide to cancel, the next steps would depend on the terms of the contract. The company could have made the terms such that it would cost $175 for a year’s subscription with no refunds available. Or, it could have allowed a cancellation and associated refund with the contract, In the cast of the latter example, the company could only count revenue up to the time of the cancellation.

For B2B subscription service offerings, the model is attractive for both the buyer and the subscription provider. For buyers, subscriptions typically result in lower up-front costs and the accounting expense moves from the capital expenditure to the operating budget. Also, businesses can switch vendors more easily with a subscription agreement, allowing them flexibility. For businesses supplying the subscription services, the model allows them easier channels to acquire customers as well as a lower customer acquisition cost, which is the amount a business spends to get a customer to purchase its services. The subscription supplier also has a steady, predictable revenue stream. An example of this is a marketing agency that buys subscription access for its employees for digital marketing tools.

Another B2B service model gaining in popularity is consumption-based billing services. In this case, the supplier would offer access to software or use of a service to a customer, billing the customer on the amount of the software / service used, typically measured using a metering system. The price would depend on the value metric associated with the service as well as market rates of competing service providers. An example would be a business that provides cloud storage services and that charges its clients based on the amount used each month.

 

Subscription Services and Revenue

For a regular customer contract, the streaming music provider would use the monthly payments to determine their monthly recurring revenue (MRR) from subscriptions. The MRR, in turn, determines the company’s annual recurring revenue (ARR), or the total amount of predictable and recurring revenue that the music provider expects to receive from its customers over the year. MRR and ARR and important financial markers for subscription services.

In the case of a regular customer contract for the digital marketing tools in the B2B example, the supplying company would determine monthly billing, converting the number to MRR, which would drive the company’s MRR. This should be a predictable revenue stream for the supplier, given that there would be a contract in place.

For the supplier offering storage services on a consumption basis, the MRR and ARR would be slightly different. Both measures would be determined by the amount of customer activity, and that could cause both numbers to fluctuate. In this type of model, suppliers should keep refining usage and revenue projection data to have a guide of potential revenue earned.

 

What Easier Cancellation Means for Revenue

Making it easier to cancel services could affect the MRR and ARR of subscription services. A recent study from Stanford estimates that business revenues are from 14 percent to more than 200 percent higher than they would be if consumers were more proactive about managing their unwanted accounts. The Stanford study also analyzed what impact reminding customers to renew or cancel their subscriptions at different time intervals would have on company revenue. They estimated that requiring subscribers to act at six-month intervals would translate to about a 50 percent reduction in the additional revenue gained from consumer inattention. This study shows that companies should expect some type of drop in MRR from easier cancellation policies. The percentage will depend on factors including the service provided, customer loyalty, and incentives for customers to stay.

 

How the FTC’s Rule Could Help Subscription Businesses

Relying on revenue from customers who find it difficult to cancel or who forget about their subscriptions is not a good long-term revenue strategy, and the FTC’s potential ruling serves as a reminder that customer knowledge and engagement are the best ways to grow revenue. All subscription service businesses should take the FTC’s potential action as a sign to review the customer journey through their sales and CRM channels and look for any improvements. In addition, these companies should plan to cultivate long-term customer relationships through the following:

  • Incentives for long-term engagement. Subscription businesses have options such as offering rewards, add-on services for little or no cost, or special terms, such as early access, to keep their subscribers as long-term customers. The incentive will depend on the business type, but it should be the type that will increase over time, making it less likely for a subscriber to be tempted by a competitor’s offer.
  • Engage customers. Customers who feel like they are a part of the company’s team will be more likely to stay loyal. Engagement can include perks or rewards, but the goal is to get the customers involved in publicizing, discussing, or otherwise broadcasting the subscription brand.
  • Offer special services to long-term subscribers. Many customers love the idea of being offered exclusive services, and this is one way that a subscription business can increase the customer-to-business bond. For example, TikTok is testing “Sub Space,” which will allow LIVE creators to interact with their subscribers to build community and offer subscribers an additional perk. This type of add-on exclusive service can turn subscribers into long-term customers and brand ambassadors.

For B2B subscription or consumption service providers, the click-to-cancel law likely won’t make a difference. Most of these services are done via a contract, and the terms of the contract would dictate how and when to cancel.

Subscription services are a boon for revenue, but their long-term success relies on traditional customer engagement and loyalty programs. In addition to calculating MRR and ARR, subscription businesses should look at customer churn and the customer lifetime value (CLV), a metric for the total expected revenue a business can earn from a customer throughout their entire relationship with the company. Forward-looking subscription companies will also look at customer engagement levels, including how much a customer uses the service, interacts with the brand or brand loyalty programs, and how likely they are to step up to undertake ambassador roles. This latter metric – engagement level – could be a good way to spot and nurture long-term customers.

 

How SOFTRAX RMS Can Help Your Subscription Billing with These New Changes

The SOFTRAX Revenue Management System combines subscription billing with revenue recognition all in one platform. It deploys easily for simple and complex subscription models, captures all stages of revenue, and eases reporting for ASC 606 and IFRS 15. SOFTRAX RMS can:

  • Simplify your subscriptions
  • Manage dynamic contracts
  • ASC 606 and IFRS 15 compliant
  • Support multiple contracts
  • Gain powerful insights from cross-system data

Contact us to learn more about how SOFTRAX RMS can simplify and automate your complex billing and revenue recognition processes.

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