It may have been a while since I was a financial accounting student, but I recently overheard a conversation between two students on a train that reminded me of a topic that was the cause of much head scratching not too many years ago. That topic was accruals. It seems that business administration students continue to grapple with this, admittedly, very dry topic. Accrued income, deferred income, actual and expected taxation – these are accounting issues liked by few, and often not by students or retailers.
I’ve been working in accounting long enough to now have a firm grasp of them. Such things are more straightforward in practice than they were in the books I had my nose planted in back then. Accruals have the greatest relevance to companies selling their products or services as subscription models. Such companies have the greatest challenge processing the discrepancies between payments and actual costs and yields on their balance sheets.
Let’s look at an example that almost everyone is familiar with: It’s nowadays common practice for cable and energy companies to use premiums to attract new customers. However, customers only receive these premiums after having used the service for a defined period and after having regularly paid their monthly bills. On the one hand, the provider has the assurance of having tied in the customer. On the other hand, it must issue the premium or (as in the majority of cases) deduct it against the monthly bill after the agreed number of months.
The issue is even more complicated for flexible subscription models, which have enjoyed increasing popularity over the past years. Music and video streaming services such as Spotify and Netflix can be canceled at any time. Customers initially have an eight-week trial period. They are then likely to continue using the service for a few months. At some point, they will probably cancel their subscription. Then, at a later date, they are likely to resubscribe. It’s clear how the overview can be quickly lost in accounting and billing when dealing with large numbers of subscribers.
Things become even trickier when companies have to wait for their money. What happens when a customer continues to subscribe but is unable to pay due to financial or technical reasons? Who are you supposed to send a friendly payment reminder to? Who requires notification that credit card details need updating? Which customer do you have to send an overdue notice to? And, in a worst-case scenario, who do you have to bar from your services?
Finding the answers to all these questions requires a light touch. After all, retailers and manufacturers don’t usually wish to gamble an often painstakingly developed relationship to a customer. Personal communication with customers across a variety of channels is immensely important. Otherwise, consumers will soon start looking around for an alternative – and there plenty to find in almost every sector.
Don’t misunderstand me. I think flexible subscription models are precisely the right models for responding to the ever-changing patterns of consumer behavior. Whether it’s streaming services, carsharing, or software solutions, customers want to be able to manage, augment, or even suspend their subscriptions quickly and spontaneously. However, the greatest challenge confronting subscription model companies is rising to meet such a dynamic and then adapting internal processes accordingly.
We at Arvato Financial Solutions can help retailers and manufacturers with new business models, such as flexible subscriptions, by handling the processes needed to make them work. Our Aqount solution facilitates the real-time integration of both billing and accounting processes. This keeps companies close to their customers, improves their churn management through personal customer contact, and thereby increase revenues over the long term.
I would have liked to tell those two students on the train that in the real world there are now good and reliable service providers who handle accruals. However, I quelled the impulse as it probably wouldn’t have helped them in their exams.
Would you like to know more about the challenges and opportunities of flexible subscription models? Download our new ebook for the most important real-world tips you need to know when offering your product as a subscription.
Director Operations Accounting & Collection | Arvato Financial Solutions