Subscription management defined
Subscription management is the process of managing your customers’ subscriptions and making sure that their experience with your product or service is a happy one. The process starts once a customer signs up to "subscribe" to your product or service, and it ends when the customer cancels their subscription.
Subscription management CRM solutions allow organizations to pursue new business models by offering dynamic pricing/purchasing and ownership options to their customers. Customers reap the benefits of subscriptions in various ways, such as:
- Lower cost barriers to the access of goods or services that might otherwise be unattainable
- Blended and customized product and service bundling that delivers additional value
- Cost savings from the adoption of operational expenditure (OpEx) accounting rules as opposed to capital expenditures (CapEx)
Introduction to subscription management
Subscription management is the process (and technology) required to support dynamic purchasing, ownership, and maintenance models. These are complex models that require an entirely new level of real-time oversight to connect, track, and manage every possible variable for efficient and accurate fulfillment and revenue recognition.
What is subscription pricing?
Subscription pricing models generate recurring revenue at predictable intervals in exchange for access to a good or service for a specific billable time period—monthly, quarterly, half-yearly, or annually.
Traditional pricing models usually rely on a single transaction with a one-time payment for ownership rights, service, and maintenance responsibility (if applicable). On the other hand, subscription pricing models offer businesses and their customers the chance to develop more dynamic and fluid relationships.
Unlike fee-for-service models, which might require payment for each maintenance, service, and support interaction, subscription pricing adds additional value by bundling technical services, repairs, and maintenance to the advertised price. With subscription pricing, customers have access to a broad range of offerings.
Why is subscription pricing important?
Subscription pricing models can take various forms and have taken root in both B2B and B2C sales environments.
Subscription pricing has lowered the barriers customers have faced when trying to access products and services that may otherwise be too costly to own and maintain outright. As a result, these pay-as-you-go models can expand a company’s total addressable market for a given product or service and can create new revenue opportunities by bundling products and services together.
Businesses that offer subscription pricing experience greater revenue predictability thanks to the recurring relationships formed with their customers. Regardless of the interval at which customers are charged, revenues are normalized to a monthly value that can then be used to forecast financial performance and labor required for the included services.
Subscription pricing advantages and disadvantages
Subscription pricing has some key advantages for customers, including:
- Gain access to a broader range of products and services compared to one-time, traditional purchases.
- Switch spending to operational expenditures instead of capital expenditures.
Subscription pricing provides benefits for businesses, including:
- Stronger customer relationships and a reduction in customer churn through greater value creation.
- Higher levels of revenue predictability that can be normalized to a monthly value and used to forecast financial performance and resource allocation with greater accuracy.
The disadvantages of subscription pricing include:
- Difficulty in managing the model if the right technology solution is not in place.
- Customers, sellers, account managers, and contact center representatives all need access to make, modify, and cancel subscriptions. In addition, all subscription changes must be appropriately reflected in the ERP systems to ensure accurate fulfillment and revenue recognition.
- Incomplete or inaccurate data not only destroys the customer experience by creating customer service nightmares and renewal issues, it can also lead to erroneous revenue recognition and financial reporting.
- Revenue recognition also requires businesses to adhere to a different set of accounting compliance standards, such as ASC 606 (PDF) and IFRS15.
Subscription management vs. subscription pricing
As mentioned above, subscription management is the internal process that supports dynamic purchasing, accurate fulfillment, new ownership and maintenance models that are focused on building ongoing relationships across the customer lifecycle.
Pricing is a subset of subscription management and refers to the way products and services are bundled, priced, and billed. Subscription pricing may refer to the recurring charges accrued at regular intervals (monthly, quarterly, half-yearly, or annually) or the charges accrued based on customer use (usage-based pricing and billing).
How does a subscription management model work?
Subscription management models are designed to maximize value for the customer while providing greater revenue predictability and resource allocation forecasting for businesses. Deployment and maintenance of these models requires proper oversight to ensure that orders are fulfilled correctly, revenue is appropriately recognized, and customers are satisfied.
The proper dataflows must be supported and put into place. For example, customers, sellers, account managers, and customer service representatives may require the ability to create, modify, or cancel a subscription. Those changes must be appropriately reflected in the ERP system to ensure proper fulfillment, revenue recognition, and customer satisfaction. Organizations that attempt to manage these processes manually, without integrated data and workflows, can erode their financial health and lose customer trust.
Subscription management solutions ease these models’ inherent complexity by ensuring that CRM data from across the applications is seamlessly shared with the ERP.
By connecting data with financial and resource management data, subscription management extends the customer relationship through numerous customer lifecycle iterations. It gives organizations the ability to deliver unique solutions to every customer, maximize customer lifetime value, enhance customer experience, and achieve greater revenue predictability that can lay the foundation for more innovation.
How do I manage recurring revenue?
Managing recurring revenue requires consistency and accuracy when it comes to data collection. In a subscription model, revenue recognition happens at predetermined intervals, which is why the creation, modification, or cancellation of the subscription made at any customer touchpoint must be captured fully and accurately reflected in the ERP system.
Recurring charges must be normalized to a monthly value to represent the monthly recurring revenue (MRR) generated by a subscription. Annual, half-yearly, and quarterly billing is divided by 12, 6, and 4, respectively, to determine the MRR. It’s important to note:
- MRR doesn’t include any one-time charges, such as activation or setup fees.
- MRR doesn’t include suspended subscriptions.
- Businesses can choose to include usage charges in the calculation of MRR. (Refer to the new accounting compliance standards, such as ASC 606 (PDF) and IFRS15, for details.)
Recurring revenue vs. subscription-based billing
Recurring revenue represents the amount of income a company generates from active subscriptions. These are most commonly represented in MRR (monthly recurring revenue) or ARR (annual recurring revenue).
Subscription-based billing is the method for charging customers at predetermined intervals (monthly, quarterly, half-yearly, or annually, for example) for ongoing access to products or services, which are typically bundled in ways that provide added value to the customer.
What is subscription-based software?
Subscription-based software—or software-as-a-service (SaaS)—typically refers to cloud-based applications that people have access to as long as their subscription licenses remain active. Unlike the perpetual license model, where a one-time payment is made in exchange for software that begins depreciating as soon as it’s purchased, subscription-based software is in the cloud and is usually offered at a lower recurring cost. It provides users with ongoing access to the newest features and security enhancements without additional fees.
SaaS vs. subscription-based software
There is a difference between SaaS and subscription-based software. In SaaS, the software is delivered online and usually hosted by the software vendor (or another third party). The software—and usually the necessary infrastructure, maintenance, updates, and support—is sold as a subscription. SaaS models can be classified as subscriptions since users have ongoing access to the software as long as their account is in good standing. But not all subscription models are SaaS models.
What is a subscription license?
A subscription license typically refers to a software-as-a-service (SaaS) model. A license, or seat, is held by a single individual and provides access to a particular piece of software. Many SaaS offerings are provided in packaged tiers, including a specified number of seats, each with an individual account with access to all or a qualified subset of features.
What is a perpetual license?
A perpetual license provides access to a single product, such as software, in perpetuity, for a one-time payment. A perpetual license is limited to the specific version purchased. Access to functionality updates and security enhancements are rarely, if ever, included.
What is the difference between a subscription and a license?
Licenses refer to the access that users have based on the terms of their purchases. A perpetual license may provide access to a single product, such as software, in perpetuity. But the license may be limited to the specific version purchased. A subscription typically provides revolving access to a set of complementary applications. For a recurring fee, the user gains access to the newest features and enhancements at no additional cost.
What is a subscription management platform?
Subscriptions are inherently complex business models that require proper oversight to ensure that orders are fulfilled and billed correctly, revenue is appropriately recognized, and customers are satisfied. Despite this complexity, they can create significant added value for customers and new revenue opportunities. A subscription management platform (or system) is a type of application that’s used to help a business connect, track, and manage all these variables with greater efficiency and accuracy to streamline financial and operational management.
What is a subscription-based business
A subscription-based business is one that generates revenue from dynamic business models that eschew more traditional one-time, a la carte sales for bundled complementary goods and services that are billed at predictable intervals. It’s been said that subscription management and subscription pricing have marked the end of ownership—for sellers and buyers. It’s the first step to building a recurring customer relationship—one that is mutually beneficial to both parties. Rather than transferring ownership rights to buyers upon sale, a subscription-based business grants them the right to access products, services, or experiences for a specified time period.
Why adopt a subscription business model?
There are many reasons to adopt a subscription-based business model. Here are just a few of the benefits:
- Provide companies with the ability to bundle products and services to address their customers’ unique needs with greater precision and more value.
- Strengthen customer relationships by moving away from traditional, one-time purchase models, where chasing new business is emphasized more.
- Provide customers with a consumption model that they have embraced to boost customer experiences and satisfaction.
- Capture greater lifetime value from every customer, instead of having customers look elsewhere for new services or products.
- Offer greater revenue predictability and spread out the cost of goods sold (COGS) over time, which can lead to more accurate labor and resource forecasting.
- Help companies reduce the amount of fixed and intangible assets on their balance sheets, which manifests in higher return-on-asset ratios.
- Provide more opportunities for businesses to offer better entry-level pricing with the ability to add features as customers mature.
- Deliver new opportunities for ongoing up- and cross-selling to increase share of wallet within the existing customer base.
Is subscription management from Oracle in the cloud?
Oracle Subscription Management is part of Oracle CX on Oracle Fusion Cloud.