The subscription economy has been booming for well over a decade now and the COVID-19 pandemic only accelerated its rapid growth. UBS Financial Services expects the subscription economy “to expand into a USD 1.5 trillion market by 2025” up nearly 3X from its USD 650 billion size in 2020.
This massive growth isn’t surprising either. Subscriptions and other recurring consumption models such as usage-based products and services offer myriad benefits for both consumers and businesses. Whether in a B2C or B2B setting, consumers of subscription services enjoy flexibility, convenience, and predictability. Plus, having the ability to pay for a product or service incrementally over time is financially attractive as well.
According to Bank of America: “Subscription services benefit customers by making payments as frictionless as possible. When customers initiate a recurring payment – typically monthly – they know they can expect regular delivery of goods or services.”
The benefits for businesses may be even greater. Adopting a recurring or subscription-based revenue model serves to:
- Create a new, predictable revenue stream and deliver consistent cash flow
- Increase customer loyalty and engagement
- Generate data-based insights into customer behavior and product usage
- Provide a low-risk approach for market testing new products/services
While SaaS providers were the first industry to take the digital subscription economy mainstream, recurring services are now commonplace in every industry. Powered by the Internet of Things and ubiquitous digital connectivity, the equipment-as-a-service model is reshaping the heavy machinery and MedTech industries. Predictive maintenance enabled by “smart” devices and AI has transformed traditional field service and on-site maintenance into a subscription-based business.
Common Business Challenges Associated with Recurring Revenue Models
Revenue Recognition: Like anything else however, adopting a subscription-based model isn’t without challenges. For starters, recurring revenue must be recognized incrementally over time and not all at once as is the case with traditional products and services that are paid for when purchased. Meeting defined accounting standards also requires an evolution of internal business processes and revenue recognition methods.
Subscription Management: Subscription management is another challenge that businesses with recurring revenue models must tackle. It’s common for firms new to the as-a-service world to experience growing pains in this area if there is the expectation that sales will handle subscription renewals, upgrades, downgrades, cancellations, etc. This manual, sales-dependent process may have worked with low-volume, one-off purchases, but it will quickly become an albatross for any high-volume, recurring business model.
Legacy Technology/Lack of Integrations: Subscription and usage-based products are, in their very nature, dynamic and fluid. To properly support these recurring revenue models, a business must have an agile, modern technology stack in place that is well-integrated. As with the subscriber management challenge discussed above, many businesses attempt to support new, recurring product lines with legacy internal processes and technology infrastructure. From our experience, this leads to poor customer experience, lack of scalability, nightmare-scenario financial reporting, and error-prone invoicing processes.
Revenue Leakage: While every business is prone to some form of revenue leakage – the difference between revenue sold and revenue recognized – companies that sell subscription-based products and services are especially vulnerable due to the recurring nature of these revenue streams. In the as-a-Service world, revenue leakage can appear as benign as a missed invoicing opportunity caused by poor renewal management. While one month of revenue, from one customer, won’t hurt your business, multiply that by a hundred or a thousand and the impact is significant to your bottom-line.
The Benefits of Automated Billing with Salesforce Revenue Cloud
When it comes to digital transformation in high-tech industries, pivoting toward a subscription or usage-based revenue model is a popular strategy – one that requires automation of the entire billing process to reach its full potential. Here’s how Salesforce Billing can help:
Improved Cash Flow: Recurring invoices are automatically created based on subscription level/per-period usage and sent to subscribers, eliminating manual AR workflows that are time-intensive and error-prone.
Streamlined Revenue Recognition: Revenue recognition schedules are automatically created upon order product activation for revenue recognition over associated contract term.
Automatic Renewals Management: Renew expiring subscriptions automatically, eliminate revenue leakage, and free the sales team up to win new business instead of chasing renewals.
Forecasting & Reporting: Provide management and investors with real-time insight into the short-term and long-term financial health of any business that sells recurring or usage-based products/services.
Business Agility: With a scalable billing automation solution in place, the organization will have the required agility to launch new products/services and efficiently collect and recognize recurring revenue no matter how fast the new subscription-based business grows.
Improved Customer Experience – Full transparency from lead to payment, error-free, on-time invoices, and self-service account management capabilities all become possible with an automated billing management solution.
Unified Sales and Finance – When deployed and integrated with a Configure, Price, Quote (CPQ) platform, a billing automation solution will unite sales and finance operations by providing complete visibility across the customer lifecycle.
Is your business in need of an automated billing solution or are you looking to make the pivot toward a recurring revenue model? See how Argano has helped various companies supercharge revenue operations with Salesforce CPQ & Billing.