5 Things Every CFO Needs to Know About Subscription Billing

As more and more businesses in every industry are shifting to subscription models, the benefits of these models—from revenue predictability to customer loyalty—have become increasingly apparent. And yet, successfully embracing subscription models requires a little more effort than simply declaring the switch. Businesses that want to reap the benefits of subscriptions have to be prepared, with billing systems in place that enable them to take full advantage of everything these models have to offer.

As CFO, it’s your responsibility to make sure your business is setting itself up for successful subscriptions, starting with these five critical concepts.

Automation Is Key

To many, subscription models may seem "basic" or "simple," however, they are much more than that. As the volume of customers (in different regions with different taxes, regulations, and currencies) and the complexity of the models (with tiers, discounts, add-ons, and renewal terms) grow, so do the management challenges. While juggling subscription models and all their variables manually or making do with billing systems that only partially get the job done may seem like the economical choice at first, however, the costs of this path will quickly outweigh the benefits. Even the sharpest finance teams are liable to get bogged down in manual subscription management, leading to delays, errors, frustrated customers, disengaged employees, and, eventually, decreasing revenue and a declining brand reputation.

On the other hand, investing in automation is a critical way to ensure every aspect of your new billing model — from initial quotes to invoicing, renewals, and collections and dunning to revenue recognition— hums along efficiently and accurately, with minimal manual intervention. Yes, there may be some upfront cost and legwork. Still, the increased operational efficiency means higher revenue potential, increased customer loyalty, and more time and resources to grow the business.

New Billing Models Require New Insights

Companies offering simple, straightforward business models such as one-time purchases or perpetual licensing can use simple, clear metrics in their financial reporting. But tracking performance under a subscription billing model is a little different, and companies adopting these models will need to look at a new set of indicators to ensure they're on the growth path.

Specifically, there are 10 critical metrics for CFOs to track when it comes to subscription billing models:

1. Monthly recurring revenue
2. Annual recurring revenue
3. Average revenue per user
4. Churn rate
5. Renewal rate
6. Days sales outstanding
7. Conversion rate
8. Customer acquisition cost
9. Customer lifetime value
10. Earned revenue

We explain these metrics in detail in our recent blog post, but here, what’s important to note is that, because the key metrics for subscription billing are unique, it’s important to ensure your billing systems are equipped to provide full transparency and real-time insights around each one. This requires the ability to handle high volumes of variable data in near real-time — a critical capability if you’re looking to proactively identify opportunities, prevent costly errors and oversights, accurately project revenues, and streamline the costs of doing business.

Predictability Is Powerful, but Flexibility Reigns Supreme

One of the biggest benefits of a subscription billing model is its predictability. When you have X customers paying Y dollars per period for recurring products or services, it’s pretty easy to create revenue projections. However, successful subscription models are far from “set it and forget it” situations.

Customers today demand more flexibility than ever in how they purchase goods and services — from what they buy and how much they pay for it to how they pay for it. This need for flexibility has supercharged the growth of subscription models as consumers searched for cost savings through product-as-a-service offerings, but it’s also required that businesses be flexible in the way they package and manage their subscription offerings. This includes pairing simple subscriptions with pay-per-use and other usage-based options, and it also means offering multiple ways customers can purchase (or renew) and pay for their goods and services. In today’s landscape, where potential buyers have endless choices for where to spend their money, being flexible enough to do business their way is a key competitive advantage for businesses.

Be Prepared to Scale — Up or Down

We’re all accustomed to the seasonal ebbs and flows of demand. Some businesses see a huge increase in demand over the holidays while others tend to quiet down a bit, for example. Even in the most “normal” of times, every business deals with both busy seasons and lulls, some expected and others not. But if there’s one thing the last couple years have taught us, it’s that demand can swing wildly at any time. So, what helps businesses make the most of the peaks and weather the valleys? The key, in large part, is having billing systems in place that empower scale (up or down) and enable businesses to adjust both their capacity and their offerings on-demand. For most companies, this means embracing cloud-based billing, which provides the elasticity to increase or decrease capacity at the drop of a hat. You can learn more about how that empowers scale in our recent blog post.

But the ability to scale isn’t just about handling the surprise or expected shifts in demand; it’s also about keeping your business growing at a steady rate. As you welcome new clients through your subscription and usage-based models, you’ll find your capacity — in terms of data storage and processing as well as human resources — beginning to feel stretched. Here again, implementing a billing system that automates key processes is a highly effective way to empower scale by minimizing resource requirements, optimizing relationships, and making room for growth.

Keep Accounting Up to Speed

Finally, subscription business models lead to additional challenges — and vigilance — for the accounting team in terms of regulatory compliance and revenue recognition as well as simply issuing invoices and collecting payments. With customers on all different renewal cycles, subscription tiers, payment methods, and more, it’s easy to get bogged down in certain details while others slip through the cracks. The consequences here can range from angry customers to steep fines for compliance violations.

The key to keeping accounting ahead of the game? You guessed it: automation. A sophisticated billing system designed with subscriptions — and all their variables — in mind can automate the workflows, processes, and quality checks that keep your accounting practices accurate, efficient, and fully compliant.

For many businesses and their CFOs, the sophisticated billing management required to support successful subscription models is unfamiliar or uncharted territory. But as these trends continue to accelerate, the right platform will no longer be a convenience — it will be a must-have for companies that want to retain customers and meet their growth projections. The Gotransverse platform is designed to do all that and more. To learn more about the Gotransverse platform and how we can help your business make the most of its new or existing subscription models, we invite you to take a virtual tour of our platform today. Then, when you’re ready, request a demo to speak with one of our experts about whether Gotransverse is right for your organization.