Subscription Services Can Revamp Business But Challenge Contact Centers

simpler, and financial planning becomes less volatile.

Often, product companies do not have much insight and have difficulty forecasting their future sales because it is not clear who will purchase their products. Subscription companies have a keener insight because customers sign an agreement that usually lasts one year and sometimes as many as three or five. Theoretically, by adding up all the subscribers on the books in a month, a business can get a good idea of what will happen in the next two or three months.

The Evergreen Model Gains Traction

Common subscription models may be fixed-term, which establishes an end date with optional renewal, or evergreen, which keeps the subscription in place until the customer cancels. Historically, the former approach was implemented more often, but recently, evergreen subscriptions have been gaining traction. "Companies go to evergreen renewals because customers do not often drop their subscriptions," Pombriant states.

But the subscription approach creates business challenges, with revenue recognition being the first issue. Financial analysis has grown up on the notion of companies selling products rather than signing up subscribers. With a product, they collect their money in a month or two and move on to the next big sales opportunity.

Subscriptions present a mixed bag of revenue recognition. A subscription fee is often referred to as monthly recurring revenue (MRR). Here, the item's full price is spread out into a series of incremental payments. Unfortunately, there is also a possibility that some of the MRR will not be realized because the customer may either cancel or not renew, resulting in customer churn.

So What Does the Bottom Line Mean Exactly?

To get a complete picture of their revenue, subscription businesses need to subtract their churn rate from their MRR. However, churn is subject to interpretation. Calls often come into the contact center when customers want to cancel their service. Unlike traditional sales, subscriptions involve prorated billing (meaning that payments are stretched out over time). Figuring out what has been used and what may be credited to the subscriber's account is a complex task because corporations rely on varying accounting metrics. In some cases, the initial subscription payments are weighed more heavily than the later ones. For instance, with a mortgage, the bulk of the initial payment is for the interest and only later does the consumer start to pay off more of the principal.

Also, with an evergreen subscription, customers may forget to cancel—or not realize that they need to. Months later, they place a call and demand full refunds for products they did not use. Backdating charges for multiple months may be beyond the purview of the contact center agent. In such cases, customers may feel duped and taken advantage of by unsavory business practices that put them in a situation where they cannot easily cancel an unwanted service.

New revenue recognition methods mean new back-end software. The popular enterprise resource planning (ERP) solutions support traditional pricing and revenue recognition and do not work well, sometimes not at all, with subscription services. In response, back-end systems have been emerging from start-up suppliers. Fusebill is an Ottawa-based automated-billing provider with more than 100 subscription customers. Tien Tzou, CEO of Zuora, is an alumnus of Salesforce.com, having been its CMO and chief strategy officer before starting the subscription billing enterprise.

Falling Short of Expectations

While the number of subscription billing system options is growing, these solutions lack the features and functionality found with more mature payment systems. In some cases, businesses may not find a system that meets their needs and be forced to build their own billing system either in-house or with the help of a third-party specialist.

New systems are needed on the front end as well. BishBashBox provides a turnkey storefront that makes it easier for firms to create and run online subscription services. OrderGroove introduced its enterprise-class subscription commerce platform in 2008. 

Related Articles

Traits of Successful Subscription Commerce Programs

Understand the core concepts that make this model work.