Decoding the challenges in subscription business models

Decoding the challenges in subscription business models(source: SaaS Industry)
At a Glance

Exchanges started with the Barter system. Thanks to their inequality, then came the concept of money in the form of valuables to banknotes and cryptocurrencies today. With it came the idea of ‘pay and get’, which the world largely follows today, irrespective of the tangibility of the product or services one avails.

The payment schema today has been changing. Businesses are transiting from straightforward one-time transactions with customers. Subscription business models are the trend these days, with impactful players like Dropbox, Netflix, Adobe, and many others siding with the recurring revenue stream. 

Reports quoting International Data Corporation (IDC) statistics have indicated how by 2022, 53 percent of all software revenue will be purchased with revenue models. Businesses have been scouting ways to earn recurring income.

As attractive and efficient as they are, there do come some pitfalls and challenges to be addressed with such models.

Spotting the potholes

Building a subscription-based model targeting recurring revenue still relies on the fundamental principle of a fair exchange between business and customers.

Irrespective of how big an organization offering a service or a product is, there remains the necessity to convince and retain customers in the long run to sustain revenue levels. Payments processes can also become complex when companies have to adjust and adhere to interstate and international tax laws.

Other complexities are drawn from the types of recurring revenue models such as usage-based billing, freemium, or a hybrid billing model. Despite the types, it is still necessary for companies to manage subscriptions. Challenges are plenty in terms of changing subscription offers or converting free customers to paid ones, like in a freemium model and in billing.

Making up for the funding gap is another concern. In a subscription arena, businesses often tend to hit roadblocks while facing long-cash flow gaps. For instance, a company that once used to get one-time payments from customers now depends on the same revenue spread across months or weeks. 

With customers having the liberty to choose payment plans (yearly or monthly), a gap falls, which can sometimes prevent them from reinvesting their profits into acquiring customers and product development.

The cost to acquire customers (CAC) payback period, a SaaS metric that determines the time (months) it takes a company to earn back the money invested in getting them. It includes the total cost of marketing and sales divided by the number of customers gained during the period. This, alongside the ability to monetize them, customer lifetime value (LTV) becomes a massive concern for businesses when the CAC becomes significantly higher than the LTV. The problem is similar for startups and large companies if CAC value far exceeds LTV.

Alongside finding ways to onboard more customers, businesses are also faced with tasks of encouraging customers to increase the usage of their products or service. Eventually, even if companies can retain customer acquisition costs and keep their churn rates lower, they end up requesting customers to keep pumping in cash.

Finding solutions

 Cash constraints and Subscription-based recurring revenue issues will have to be controlled. Billing options must be easy to manage for all types of subscriptions. Reports, blogs, and articles from experts in the field have constantly stressed the need for companies to figure out ways to take advantage of a subscription model without compromising their business, or revenue with increased debt and equity capital or worrying about managing the increasing complexities of subscription-focused billing model. 

Exploring new options that allow businesses with recurring revenue to scale sustainably by supporting internal billing operations and providing access to capital without sacrificing valuable equity can help.

New financial instruments integrated with subscription billing systems like that of Chargebee help solve billing complexity problems and allow recurring revenue businesses to scale. This will enable companies in subscription e-commerce to address their payment issues and fund and scale without turning to equity financing or debt.

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