Monthly or annual? What’s the best subscription model?

Have you decided to bite the bullet and implement subscription selling in your business this year? If you answered in the affirmative, you’re in good company. 

Around Australia, enterprises of all stripes and sizes have become alive to the advantages that enabling customers to utilise their goods and services, rather than owning them outright, can deliver.

They include the opportunity to build a regular, reliable revenue stream and open up the market to customers who can’t afford to pay for the offering in question upfront, as well as the chance to cross-sell complementary products and services in to established accounts.

Over time, businesses that make a good fist of subscription billing will also be able to boost their customer lifetime value (CLV) – music to the ears of marketing chiefs everywhere!

The devil in the billing details

But while the question of whether or not to implement subscription billing may be a no-brainer, how best to do so is not. 

The billing frequency you opt for can have a material effect on the success of your subscription selling model. It’s therefore worth investing some time to determine the optimum option or options to offer. 

For many organisations, it boils down to a choice between monthly and annual billing. Of course, it’s possible to offer both, but one of the two may be significantly better for your business and bottom line.  

The case for and against monthly billing

Implement a monthly billing model and, just like that, your barriers to entry plummet. New customers can try your products or services at nominal cost and risk; giving you the opportunity to accelerate your growth rate significantly. 

There could be more flexibility to raise prices over time – an incremental monthly increase being less noticeable than a one-off annual bump – and there will be many more chances to engage with customers, via the monthly invoice. 

On the downside, customer retention rates may drop, given cancelling a monthly subscription has minimal cost implications. Forecasting churn is likely to become more challenging and that has implications – negative ones! – for cash flow.

Tracking and following up on delinquent payments may also get trickier, given there’s likely to be a higher volume of them overall.

The argument for annual billing

Conversely, steer your customers down the annual billing route and it may be a tougher sell initially, courtesy of the fact they’ll be locked in for a full four seasons. Decent discounts may need to be offered – anywhere from 10 to 25 per cent is the norm – to induce them to sign on the line.

Manage to do so, however, and you’ll enjoy the benefits of a sizeable advance payment and the increased chance of your customer allowing the arrangement to tick on over for another year when the renewal date rolls around.

That’s good for cash flow and for your accounting overheads too, given the reduced accounting ‘effort’ needed to send and process a single annual account. 

Greater surety of income and improved visibility into the financial status of the enterprise, beyond the next four-week period, may make your organisation more appealing to investors too.

Tools to make the task easy

There’s no right answer – it boils down to what’s right for your business – and it may be necessary to experiment with both subscription billing options before deciding which way is best to jump.

Doing so will be a straightforward business, provided you have the right billing technology in place. That is, a revenue management solution capable of providing full quote-to-cash support for whatever monetisation model and billing frequency, or frequencies, you choose to put in place.

Adopt a cloud based platform that has the capacity to generate reports that lay open the customer journey and you’ll be able to gauge the success, or otherwise, of your various market offerings and make data driven decisions to enhance them. 

It should also be possible to extract actionable insights that allow you to make some of your internal processes, such as new business development and debt recovery, more efficient.

And, ideally, it will integrate seamlessly with the ERP solution that powers your business, be that SAP or Microsoft Dynamics, as well as the eco-system of other financial solutions in your technology stack.

Building a better business for tomorrow 

The case for subscription billing has already been made out: for many Australian companies the question is now how best to derive a sustainable revenue stream from this new monetisation model.

Having the right foundation technology in place is critical. If your organisation has yet to invest in a robust, scalable revenue management platform that can support the pivot, you’re missing an opportunity to supercharge profitability and growth.

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