Recurring Subscriptions

What are Recurring Subscriptions?

A recurring subscription is a financial arrangement where customers agree to pay for access to a product or service at regular intervals — usually monthly or annually — without initiating each separate transaction. The customer provides billing information once and authorizes the company to automatically charge their payment method.

Recurring payments can either be…

  • Fixed (where the same amount is charged in every cycle)
  • Variable (where charges are based on usage or consumption levels)
  • Hybrid (where customers pay a flat rate, plus additional usage-based charges)

Businesses of all types use recurring billing. Digital services like streaming media and SaaS products are the newest adopters, but traditional services like gyms and utilities also bill their customers on a subscription basis.

Synonyms

The Growth of Recurring Subscriptions

Some business models have always depended on recurring payments. Utilities, for example, have been billing their customers monthly since the dawn of electricity. But the real birth of the subscription economy came with the rise of cloud-based digital services.

Traditionally, software companies sold licenses that allowed users to own a software version indefinitely. This carried the risk of software piracy, and updates were infrequent.

With the advent of cloud computing, companies no longer had to install software on individual computers. Instead, they could offer subscription-based access to software hosted on remote servers. This model, called Software-as-a-Service (SaaS) made it so they could fix bugs and deploy updates instantly and allow anyone with internet access to use their software.

At the same time this revolution in software delivery was taking over, there was a macro trend in consumer preferences for flexibility and affordability. People loved paying for services instead of owning them. They liked the idea of being able to customize their subscription plans. And thanks to advancements in billing automation, any software company could implement this.

Now, the subscription market is valued at roughly $1.5 trillion — 45% of which is cloud services. The average Millennial has 17 digital subscriptions. 98% of businesses use at least one SaaS vendor. And the average organization uses 80 different SaaS apps.

Benefits of Recurring Subscription Business Model

Businesses using a recurring revenue model don’t have to rely on one-time purchases. When the focus shifts from continuous new customer acquisition to retention and expansion, the benefits are significant:

  • Predictable and consistent cash flow
  • Continuous revenue stream
  • Higher customer lifetime value
  • Better forecasting and financial planning
  • Stronger customer relationships

Recurring revenue also facilitates product innovation. With a steady source of income, businesses can reinvest in research and development for new products and features without worrying about immediate ROI. This leads to much faster iteration and development cycles, ultimately resulting in a better product for customers.

Best Practices for Recurring Subscription Management

To effectively manage recurring revenue from subscriptions, businesses have to set up efficient and scalable processes for price optimization, billing, revenue recognition, and customer engagement.

Let’s dive into each.

Pricing Strategy

There are several types of subscription-based pricing models. Businesses normally incorporate a combination of some or all of the following into their overall pricing structure:

  • Tiered pricing Multiple product tiers, each with its own target customer and value proposition, with pricier ones including successively more features (e.g., “Basic,” “Pro,” and “Unlimited”).
  • Flat-rate pricing Each product tier has a fixed per-month cost that acts as the minimum subscription payment (e.g., “the Basic plan costs $49/month”).
  • User-based pricingWhen account holders add additional users to their subscription, businesses can charge an extra per-month fee for each new user (e.g., “$49/month up to 3 users, plus $10/user/month after that” or simply “$49/user/month”). 
  • Usage-based pricing Base cost plus additional monthly charges based on usage levels (e.g., “$49/month for the first 100 GB of storage, then $10 per additional GB”).
  • Freemium offers Most common among digital services, freemium plans consist of a free baseline product intended to entice customers to upgrade to a paid subscription with more features.

Your overall pricing strategy should reflect the nature of your product. For instance, a cloud services provider would want to implement a usage-based pricing model because usage levels naturally fluctuate for each customer. A CRM software vendor would want to use a combination of flat-rate tiers and per-user pricing to optimize for customer size and team collaboration.

Billing and Invoice Management

Subscription billing models are different from most others because they require automatic payments. To minimize revenue churn and perfect the customer experience, businesses need to pay close attention to the following billing functions:

  • Automated invoice generation for current customers
  • Billing cycle configuration options (monthly, yearly, etc.)
  • Integration with accounting software
  • Payment processing and security
  • Invoicing capabilities for add-ons, discounts, and upgrades
  • Automated dunning to handle failed payments
  • Web and customer portal integration for subscription modifications, cancellations, and upgrades
  • Subscription renewals

Depending on your chosen pricing strategy, you’ll also have to consider metering, tiers, usage tracking, and invoicing intervals.

Revenue Recognition

Since the billing process relies on upfront payments for a service delivered over the next month, the pricess for revenue recognition differs slightly with the subscription model.

Per ASC 606 (or IFRS 15 for international companies), businesses recognize revenue in the period it’s earned — that is, when the customer has received service. According to the revenue recognition standard, this means businesses recognize subscription revenue the following period, once the full month of access to the service has been granted to the subscriber.

So, if a new customer signs up for a $100/month subscription in April, the revenue is recognized in May once the month’s service has been fully delivered (i.e., you’ve “earned” the revenue). For annual subscriptions, you’d recognize revenue evenly throughout the year or on a monthly basis (e.g., $1,200/year subscription equals $100/month for 12 months).

Customer Communication

Since these types of businesses depend on recurring revenue to stay afloat, subscriber retention is the most important metric. In SaaS, it can cost an average of 5x more to acquire a new customer versus retaining an existing one.

Customer engagement in the subscription space is more about customer success and proactive communication than it is for traditional businesses. Here are a few tips:

  • Have clear and easy-to-understand pricing to avoid billing confusion.
  • Give subscribers access to a customer portal where they can modify, add to, and cancel subscriptions on their own.
  • Send automated account updates, billing reminders, and upgrade offers.
  • Use multi-channel communication (e.g., email, chat, phone) to personalize the interaction.
  • Deliver relevant web and email content that helps subscribers maximize the value they get from your product or service.
  • Use guided in-app tutorials to introduce users to important features (for digital subscription businesses).

Think of it this way: the customer experience should be as frictionless as possible. If there’s any unnecessary resistance, such as a difficult cancellation process or unclear billing statements, churn rates will skyrocket.

Recurring Subscription Management Technology

Once a business has a new subscriber, the engagement is mostly hands-off. If it weren’t, there would simply be no way to scale. It would be physically impossible to manually bill, service, and communicate with even thousands of subscribers, let alone millions.

In other words, it’s impossible to run a modern subscription-based business without technology. Specifically, these three platforms:

  • Configure, price, quote (CPQ) CPQ software helps subscription businesses quickly and accurately quote subscription packages. It can handle everything from basic subscription packages and add-ons to complex, multi-year ramp deals, usage-based pricing, and bundles.
  • Subscription management software Once the sale is closed, subscription management manages the entire subscriber lifecycle from start to finish. It helps businesses onboard subscribers, track different subscription phases, manage renewals, and oversee customer relationships.
  • Subscription billing software Billing software for the subscription billing model auto-generates and sends out recurring invoices, tracks usage metering, manages billing cycles and payment options and collections, sends renewal reminders, handles upgrades and downgrades, and integrates with your CPQ, CRM, accounting, website, customer portal, and other systems.
  • Subscription analytics With so much revenue tied to recurring subscriptions, you’ll need a dedicated platform for analyzing customer demographics, usage trends, renewals rates and churn metrics. Normally, it’s built into your subscription management and billing tools, but you can use standalone data analysis tools for more advanced insights.

People Also Ask

How do you determine the right subscription pricing model?

Choosing the right pricing model for your subscription business requires you to reflect your target market, product or service offering, and financial goals in your pricing structure. Subscription pricing strategies generally include flat rate monthly subscriptions, tiered plans based on usage or feature levels, pay-per-use plans, and annual subscriptions with a discount.

Most companies incorporate multiple pricing models into their overall pricing structure. For example, a SaaS company might charge a flat monthly rate for 3 pricing tiers. Within those tiers, subscribers can choose between monthly or annual billing for an additional discount. And if they want to add users to their plan, they will have to pay an additional per-user fee.

How do you handle voluntary and involuntary churn?

To minimize voluntary churn (from cancellations), customer retention efforts are key. Proactive customer success initiatives, customer advocacy programs, ongoing communication through web and email content, and in-app tutorials are all effective strategies to keep subscribers engaged and getting value from their subscriptions.

To prevent involuntary churn (from failed payments), subscription businesses should use dunning management processes, which automatically retries failed payments and notifies subscribers of account issues. For accounts that have been inactive for a certain period of time, consider reaching out with win-back campaigns to re-engage them.

What are the key metrics for measuring subscription health?

Some of the key metrics for measuring subscription health include customer and revenue churn rates, customer lifetime value (CLV), monthly recurring revenue (MRR), annual recurring revenue (ARR), average revenue per user (ARPU), activation rates, and renewal rates.