Subscription revenue: A model for generating long-term, sustainable revenue

In today's fast-paced digital economy, businesses are constantly seeking sustainable revenue streams that provide them with stability and long-term growth.

One model that has gained significant traction with businesses in recent times and has proven to be effective in generating consistent revenue and building strong customer relationships is subscription revenue.

This blog explores why the subscription revenue model is such a compelling model for generating long-term sustainable revenue.

What is the subscription revenue model?

The subscription revenue model is a business model whereby customers pay a recurring fee at regular intervals – usually monthly, quarterly, or annually - for access to a particular product or service.

The model has become increasingly attractive to businesses, particularly in the software, media, entertainment, and e-commerce sectors.

The fundamental principle underlying the subscription revenue model is the creation of a predictable and stable income stream by the fostering of ongoing customer relationships.

Benefits of the subscription revenue model:

1. Predictable revenue:

One of the subscription model's key advantages is its predictability. Subscription businesses can forecast revenue more accurately because they are able to understand subscriber numbers and the recurring nature of subscription payments. This allows for better financial planning, resource allocation, and investment decisions.

2. Customer retention and loyalty:

Subscription businesses thrive on building strong customer relationships. They can enhance customer satisfaction and loyalty by providing ongoing value, personalized experiences, and continuous updates.

Additionally, recurring subscriptions incentivize businesses to focus on customer retention and reduce churn, resulting in long-term revenue growth.

3. Scalability and growth:

The subscription revenue model enables businesses to scale-up efficiently. As their customer base grows, revenue scales accordingly without significant increases in operational costs.

This scalability allows businesses to reach a wider audience and expand their market share without the limitations of traditional transactional models.

4. Enhanced customer insights:

Through the use of cookies and with appropriate customer consents, subscription businesses are able to access customer data to better understand their customers’ behavior, preferences, and needs.

Subscription businesses can then deliver targeted marketing campaigns, personalize offerings, and continuously improve their products or services to meet customer expectations.

Strategies for building subscription revenue

Value proposition:

A strong value proposition is critical for attracting and retaining subscribers. Subscription businesses must communicate the unique benefits and value that customers will receive from subscribing to their service or product.

These may include added features, access to exclusive content, ongoing customer updates and support, or other incentives that differentiate the subscription offering from one-time purchases.

Pricing and packaging:

The pricing structure should align with the perceived benefits of the subscription offering. Different tiers or pricing options allow subscription businesses to cater to various customer segments.

It is important to balance affordability and profitability, ensuring customers perceive a subscription as worthwhile.

Customer engagement and retention:

Customer engagement reduces churn and helps foster long-term relationships. Regular updates, personalized recommendations, and listening to customer feedback contribute to the overall subscriber experience.

Implementing retention strategies such as loyalty programs, special offers, or early access to new features can also help reduce churn rates.

Continuous innovation:

To stay competitive in a rapidly evolving market, subscription businesses must continuously innovate and improve their offerings.

Regularly introducing new features, expanding content libraries, and exploring partnerships can add value and incentivize customers to maintain their subscriptions. By embracing a culture of innovation, subscription businesses can differentiate themselves and gain a competitive edge.

How does subscription revenue accounting work?

Subscription revenue accounting follows specific principles to ensure accurate revenue recognition over a subscription period. The accounting process includes the identification of performance obligations, revenue recognition timing, and the proper allocation of revenue.

Here's a breakdown of how subscription revenue accounting typically works:

1. Performance obligations:

When a customer enters into a subscription agreement, the first step is for the subscription business to identify its performance obligations under that agreement.

For example, in the case of a software subscription, performance obligations may include the provision of access to software, updates, and customer support.

2. Revenue recognition timing:

Subscription revenue is recognized over the period in which the performance obligations are fulfilled. There are typically two methods of revenue recognition in subscription businesses:

a. Time-based recognition:

Revenue is recognized evenly over the subscription period, assuming a customer receives a substantially equal benefit throughout the subscription term. For example, if a customer subscribes to a one-year software service for $1,200, the subscription business would recognize $100 of revenue each month; and/or

b. Usage-based recognition:

If a customer's usage or consumption is a significant factor in the subscription value, revenue recognition can be tied to that customer's actual usage. This provides a reliable and measurable way to track and attribute revenue based on usage metrics.

3. Allocation of revenue:

In some cases, a subscription agreement may include multiple performance obligations that are distinct and separately identifiable.

For example, a media streaming service may offer a bundled subscription with access to movies and music. In this type of agreement, the money received from a customer needs to be allocated to the various elements comprised in the bundle, based on how much each element would cost if sold separately.

4. Unearned revenue:

As revenue is recognized over the subscription period, an "Unearned revenue" or "Deferred revenue" account is established. This account represents the portion of the subscription fee that still needs to be earned.

For instance, let's say a customer pays for a whole year of service up front. Instead of recognizing all the money paid as revenue right away, the revenue is spread out over the year on a monthly or quarterly basis. As the service is provided each month or quarter, the amount of money not yet earned (the unearned revenue), goes down.

5. Accrued revenue:

In certain cases, some subscription businesses may provide a service for a period before receiving payment. In such instances, they may recognize revenue based on the estimated amount expected to be collected.

This is referred to as accrued revenue, representing revenue that has been earned but has not been billed or received.

6. Disclosures:

The financial statements of subscription businesses typically include additional disclosures to provide clarity regarding their subscription accounting policies.

These disclosures may include information about the nature of the subscription arrangements, the timing of revenue recognition, significant judgments and estimates made, and any potential impact on future cash flows.

Challenges and considerations

Subscription businesses deciding to adopt a subscription revenue model may face various challenges. Here are some important things to keep in mind:

Customer acquisition:

Acquiring new subscribers can be challenging,
particularly in a competitive market. Subscription businesses must invest in effective marketing strategies and customer acquisition channels to attract new subscribers and convince those potential new subscribers to choose their subscription service over others.

Retention and churn:

Retaining subscribers is crucial for long-term revenue stability. High churn rates can significantly impact subscription revenue. Businesses must focus on delivering value, providing excellent customer service, and continuously engaging subscribers to reduce churn and retain customers.

Pricing and value perception:

Setting the right price for a subscription service can be challenging. It's important to balance offering a price that customers find attractive and ensuring profitability for the subscription business. Additionally, customers need to perceive the value they receive from a subscription as being worth its price.

Market saturation and competition:

As subscription models become more popular, the market is becoming increasingly competitive. Subscription businesses must find ways to differentiate their offerings and provide unique value propositions to stand out from competitors.

Payment and billing systems:

Managing the technical infrastructure for billing and payments can be complex. Setting up a secure, user-friendly, and reliable subscription billing system is crucial to ensuring a seamless billing experience for subscribers, to help reduce potential entry barriers.

Regulatory and legal considerations:

Depending on the nature of the subscription, businesses may need to comply with certain laws and regulations, such as data privacy laws, consumer protection laws, or licensing requirements. It's important to stay up to date to avoid legal issues and reputational damage.

Key to building a robust subscription business with Billsby

The subscription revenue model offers a compelling framework for subscription businesses seeking long-term sustainability and growth in today's fast-changing commercial landscape. The improved predictability of revenue generation, customer loyalty, scalability, and enhanced customer insights are invaluable assets to any business.

The creation of a robust and successful subscription business that generates sustainable revenue can be achieved by focusing on value proposition, customer engagement, continuous innovation, and simplifying subscription billing and the collection of payments.

About Billsby

Billsby is a leading cloud-based subscription billing software company, helping businesses manage the issuing of invoices and the collection of recurring payments, whilst providing award winning customer service support.

Ranked by G2 as the Number 1 subscription billing platform, Billsby provides the simplest and easiest to adopt software for businesses choosing to adopt a subscription billing model, helping them to maximize their subscription revenue potential.