Many businesses are evolving to a subscription-based business model to build recurring revenue, implement new revenue streams and remain competitive within their industry.
For companies that offer several elements such as products and services, bundled subscriptions can become more complex from an accounting perspective and heavy in administrative effort.
The more customers you convert to subscription, the more transaction intensive your business becomes. In recent years this has led to a sharp increase in billing platform sign-ups, however not without consequence. Whilst many platforms meet the basic requirements to automate your billing cycle, challenges are often faced with the General Ledger and the outcome usually includes a series of data export-and-import cycles if there aren’t standard connectors to your accounting system. Do not overlook the future necessity of a centralised platform for both subscription management and financial accounting.
In a competitive landscape it’s important not to underestimate your offering; it might be a simple product and service now, however as your business continues to evolve, you might need to adapt your subscription catalogue to exceed customer expectations and grow your market share. Depending on your industry it could include the use of items (usage or consumption), bundled services (maintenance and monitoring) and even 3rd parties (products and services) which become increasingly difficult to transact and track. As you ramp up your subscription business, it is of utmost importance to plan for not only Accounts Receivable functions but also related Accounts Payable functions and accommodate “servitization” as your model matures.
From an Accounting perspective this can be a big challenge as some companies either try to manage this on spreadsheets or sign up to yet another standalone tool in a bid to make it simpler. Simply put, if you charge a subscription for a service or item you intend to deliver in the future, specific accounting rules must be followed to ensure the money is properly accounted for – this is known as revenue recognition. If your subscription matrix combines items, services or 3rd
parties, allocating the revenue of each item or deferring the revenue to the right period can become an administrative nightmare. Humans are error-prone and calculation errors and remedial actions not only skews the numbers, but it can affect crucial decisions you make to minimise risk.
The common denominator across these challenges is simple: scale. On the journey to transform your business you are faced with many aspects at once:
- the product/service you sell,
- the way you sell it, and
- execution with a technology that supports it.
The model itself is core to your business strategy and whilst scale is often cited as an excuse for investing in bolt-ons and add-ins over time, it has the potential to damage the model for future growth.
Scale to grow
The good news is that the answer to the scale-problem is also scalability. Adequately planning your subscription road map provides you with the blueprint you need to define key factors that will play a large role in your success as a subscription-based business. A good example is ERP selection: When you select a new ERP, your decision isn’t solely based on the functions your business is performing now, but also whether it will meet the expectations of your business strategy over a longer period. Similarly, when you consider a technology road map for your subscription model, you need to focus on customer billing, the complexities of your subscription and the related financials with your business strategy in mind.
Contact us here for a meaningful discussion about a scalable road map for your subscription business.