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Subscription Economy: The New Normal – More and more customers pay subscriptions for services

The concept of subscriptions is nothing new. The increasing digitalization of purchase behavior, the emergence of new product groups and business models, and of course the coronavirus crisis are leading to a veritable boom in new subscription models. Subscriptions are available for a growing number of products, and market penetration is increasing. Gartner predicts that by 2023, around 75% of all companies will offer subscriptions with direct sales. The advantage is obvious: Subscriptions make it easier to plan sales and income streams, which has positive effects on company processes. If subscriptions really are part of the new normal, now is an especially good time to check back-end processes for suitability. Can flexible payment models be activated without any accounting issues? How can you optimize the risk assessments? And where can automation help to overcome higher order volumes more quickly?

I go jogging and listen to a crime drama offered by an audiobook subscription service. When I arrive home, a box of delivered ingredients for tasty dishes lies at my doorstep. While my dinner gets ready in the oven, I check the latest news on my tablet and download a film for an upcoming train journey. If you’ve been paying attention, you’ll have counted four subscriptions that I use in these one or two hours alone. And I’m probably still below the average. After all, ever since you can subscribe to socks and mineral water, it’s clear that subscriptions are establishing themselves in almost all segments and industries. This mega trend is slowly becoming normal. A quarter of all Germans use streaming services like Netflix, Joyn, RTLnow or Disney plus every week – across all age groups. Subscriptions give companies the enormous benefit that they can make business forecasts. Customer contact is relatively close in subscription models, and there is a large number of touchpoints. Upselling offers or one-time purchases can be placed effectively, optimizing products with customer data and direct feedback.

Here, the challenge lies in the underlying processes. When introducing subscriber models, companies often underestimate the complexity of payments processing and subscription accounting. That’s because the various subscription models need to be provided with the right payment types and associated processes – in combination with proper, compliant accounting.

Flexibility is an absolute must
Nowadays, it’s normal that customers sign up for trial months to try out services for a period of time and then pause or cancel them, or perhaps return again at some point in the future.  With upselling, companies can also integrate one-off purchases that may be booked using the same customer account but a different payment method. All this needs to be suitably handled by processes and accounting. This calls for comprehensive product and price catalogs, which can be flexibly combined with contract terms and campaigns. The complexity of the back-end systems is often reflected in billing. Since many merchants come up against their limits when bundling subscriptions and one-off purchases, the customer receives a separate invoice for each product. These invoices need to be settled independently from each other, leading to a degree of frustration among customers and more costly follow-up processes, such as dunning.

For consumers, it’s more practical to pay for a subscription once a year. For companies, these payments reduce the risk of bad debt losses and are therefore also associated with a small discount in many cases. In accounting, these revenues have to be set aside for 12 months. Accounting should therefore ensure that the range of products as well as the range of use cases (e.g. free months, subscription breaks etc.) are correctly taken into account in this context. This is where automation can help prevent potential errors which may otherwise arise in manual bookkeeping. And of course, it can help prevent the extra cost of corrections.

Direct debit is king for subscriptions
Flexibility is also essential in terms of payment methods. As mentioned above, subscriptions generally represent an excellent model for profitable, long-term customer relations.  But at the beginning of this business relationship, it’s difficult to assess customers accurately. Is this customer willing and able to pay? The resulting risks can be minimized by offering secure forms of payment for first-time buyers, such as PayPal or credit card. This can reduce the default and fraud risk, since PayPal and the acquirers detect a large amount of fraud attempts with their anti-fraud engines.

Loyal customers usually pay without any problems at all. For this reason, PayPal and credit cards are relatively expensive forms of payment over the long run. For long-term customers, it’s therefore advisable to offer direct debit as another method of payment. Assuming the customer is willing and able to pay their subscription fees, direct debit is far more cost-effective in comparison. But if chargebacks do occur, you’ll need to have your back-end processes in order. Besides a suitable dunning system and bank statement processing, the integration of a reliable debt collection partner is hugely important. You can either implement these processes yourself or outsource them to specialized providers. The costs are generally far lower than the costs charged for PayPal or credit cards.

Companies that leverage this current shift effectively will be able to benefit from plenty of positive effects in the subscription business: new products and services, tapping into new customer groups, and improved sales. Those who seize the opportunity and sort out, simplify or outsource the back-end systems will also be fit for the next trends: pay per use or sharing.

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