In some ways a subscription model is a chief financial officer’s dream come true. They encourage customer loyalty, provide steady, predictable revenue and offer detailed data on how each individual behaves.
Introducing a recurring revenue model can also increase a company’s valuation by up to eight times, according to research by finance firm Consero Global. This is especially appealing for businesses looking to attract investment or raise capital ahead of an initial public offering (IPO).
But the shift to a subscription model is not without challenges and finance leaders play a vital role in its success or failure; from identifying what financial levers can be pulled to boost the value of the subscription, to establishing effective pricing strategies and laying the groundwork for long-lasting relationships with subscribers.
Subscriptions are here to stay
Once the province of newspapers and magazines, subscriptions are now capturing the attention of businesses across almost every industry imaginable. Airlines are offering ‘all you can fly’ passes with yearly or monthly memberships. BMW has just announced it is selling £18-a-month subscriptions to heated seats in its cars (signing up allows drivers to have this hardware feature enabled). There are even subscriptions to track your subscriptions.
The sector has attracted criticism from those that claim consumers are growing tired and frustrated with the sheer number of subscription options. But talk of ‘subscription fatigue’ has been “largely overhyped.” So says Guy Meyers, regional director of customer success at Recurly, a billing service for subscription services such as Soundcloud and Blinkist.
Instead, as people have gotten savvier and more selective about their subscriptions they’re willing to pay “more than ever” for a service or product they deem worthy, he says. “Overall subscriber numbers are not going down and retention is still really high. We’ve seen a 16% growth in overall subscriber numbers in the customers we work with and there’s been an increase in businesses looking to launch a subscription service for the first time.”
Despite predictions of a “subscription apocalypse” on the horizon, they remain a central part of people’s daily lives, with the average Brit paying out nearly £500 every year on subscriptions.
And there’s room for further growth yet: the subscription market is growing 18% year-on-year and is set to be worth £1.8bn by 2025. “Subscriptions are here to stay,” says Meyers. “But what it takes to be successful is evolving.”
Why businesses lose subscribers
One top priority for finance chiefs is reducing the loss of subscribers – what is referred to as ‘churn’. This is so important for successful subscription offerings because the cost of acquiring a new subscriber is usually more than retaining an existing one, says Philip Watson. He is CFO of Paddle, a UK software company that helps businesses manage their memberships and a subscription service itself.
Watson says poor pricing and product strategies, inadequate billing methods and no longer delivering value for the customer are the biggest reasons businesses lose subscribers.
Subscriptions are here to stay, but what it takes to be successful is evolving
“Companies used to be able to get away with much worse behaviour than they can today with regards to how they treat subscribers,” he says. Now, as people have become more comfortable with subscriptions, they expect businesses to be “more attuned” to their needs.
Ultimately, the success of any subscription business is dependent on the habits they create in people, says Dr Ylva Baeckström, a senior lecturer in finance at King’s Business School and a practising psychotherapist. Her research in behavioural finance shows people’s willingness to engage with subscriptions is “very easily upended by a lack of trust-based emotional connection.”
Constant, irritating prompts to subscribe to services and bad behaviour by companies that deceive people into signing up for subscriptions or make cancelling difficult are all detrimental to a business model that “thrives on loyalty,” she says. “If you want to create trust you need to be open, transparent and honest in all of your interactions with customers. People don’t like to feel cheated or caught out.”
From a business psychology perspective, Baeckström says subscriptions that make people feel more in control by giving them options to choose from, plus the ability to stop or restart their subscription at any time are more likely to “keep people coming back for more.”
Making payment as painless as possible
In Meyers’ view, “the most successful subscription services are the ones that make it so that the easiest thing to do is continue subscribing.” For finance chiefs this means finding effective ways to minimise churn stemming from payment issues by making it as “painless” as possible for people to pay.
This could mean streamlining and automating processes to avoid accidental cancellations, such as someone missing their payment or a card expiring and providing clear communication and transparency around how much, and how often, payment is taken. “Free trials have been known to catch customers out due to vague payment terms,” Meyers explains. “The same goes for what comes up on billing statements where it isn’t clear what someone is being charged for – if it’s a name they don’t recognise they’ll panic and cancel.”
A failure to cater to someone’s payment preferences can result in losing customers: a recent survey by payment company Adyen found that 44% of people say that if they can’t pay how they want, they won’t pay at all.
CFOs need to ensure they have the systems and processes in place to support a full range of payment opinions, from debit and credit cards, to Apple Pay, Google Pay, Klarna, invoices and local payment providers.
“Subscription services that don’t support multiple currencies or payment methods will grow at a much slower rate,“ says Watson. This creates an additional layer of complexity for finance teams, due to the increase in the number of transactions, the expanding payment choices and the need to meet different regulatory requirements. “It sounds simple and intuitive, but it is really powerful and not easy to do.”
Mastering the art of pricing
Finance chiefs must also master the difficult art of pricing; “the most cited reason for users to end their subscriptions,” Watson says.
A key challenge is bridging the pricing gap between the acquisition of users and their retention. Making a low-ball offer can get subscribers on board, but how do you continue to retain and incentivise them over time? This is especially tricky, when people know how to game the subscription system; using multiple emails to access free trials, sharing passwords or squeezing providers for discounts by threatening to leave.
“This is an ongoing challenge and it might take some experimentation,” says Meyers. “But there are rules you can put in place to block those kinds of transactions. For example, using specialist fraud companies or limiting the number of times the same IP address can sign up. It can also help to reassess how your free trials work and how long you leave access open once someone has failed a payment.”
Most importantly, don’t go overboard on acquiring customers by giving away the product or service for free, Meyers adds. Investment should be funnelled into providing value to loyal customers, as opposed to chasing bad subscribers.
The most successful services are the ones that make it so that the easiest thing to do is continue subscribing
Successful subscriptions are built and sustained through a constant delivery of value. But as customer preferences change, finance leaders will need to find the “sweet spot” for the price of a subscription and the value it offers to the customer, says Måns Ulvestam, co-founder of podcasting platform Acast and audio and digital content monetisation platform Sesamy.
This is poised to become even more of a challenge: a new law soon to come into effect in the UK will require businesses to notify customers in advance of any recurring payment. This will make it easier for consumers to opt out of subscriptions so they are not stuck paying for something they no longer want, but Ulvestam predicts it will also lead to a surge in declined transactions.
Indeed, when India’s central financial regulatory body passed a similar law in 2021, requiring an additional layer of authentication for recurring transactions, even heavyweights such as Netflix felt the impact. Following a loss of subscribers the streaming platform reduced prices for its service in India.
“CFOs are going to have a rough time with it,” Ulvestam stresses. “They will need to reassess pricing structures or turn to more innovative methods to retain subscribers.”
One approach is to introduce multiple subscription tiers. The Economist has launched a new £4 ‘podcast only’ subscription aimed at younger people and students who may not have the money to pay for the full service. The idea being that if you draw subscribers in when they’re young, they’ll increase their commitment (and budget) over time.
In tough times, it can be tempting to keep prices down to win over cost-conscious consumers. But Meyers says people are happy to pay more so long as the experience evolves too. “Finding little, personal ways to continuously prove the value of your service can justify price increases and remind people why they signed up to begin with.”
Music platform Spotify does this very effectively with its end of year ‘Spotify Wrapped’ feature in which users are ‘gifted’ a playlist containing their most played songs of that year.
The value of data
A shift to recurring revenue requires new data metrics and KPIs that the finance team should be advising on and measuring, such as customer cost-per-acquisition, lifetime value and renewal rate.
There’s also an opportunity for CFOs to combine customer data with revenue data to help the function deliver better analysis and insights to the business, Watson says. “There is no substitute for having the right data on your customers to know how best to target them and improve your business model.”
When people sign up to coffee subscription Bottomless they receive a Wi-Fi–enabled weighing scale that allows the company to track customers’ coffee consumption, learn their habits and reorder at just the right time. Whether creepy or convenient, it shows how finance teams can make forecasts based on real-time customer activity and manage spending if the projections are not in line with expectations.
The biggest benefit of the subscription model is recurring revenue. But now people want flexibility, choice and freedom to access services on their terms, adjusting as necessary without long-term commitment. Finance teams need to be able to support that flexibility though variable pricing mechanisms, such as upgrades, downgrades or one-time offers. Ulvestam says this makes it more difficult and more expensive for them to predict revenue.
In his view, this is where advancements in AI can help to improve scenario modelling – a system for helping finance teams to understand how a range of events might impact operations using historical data. “We use it to understand how different pricing mechanisms will impact the balance sheet or retention rates, allowing us to see which offers are more profitable in the long run. For instance, is two months for free more cost-effective than a 20% discount right now?”
The shift to a subscription model is not without challenges; it requires the CFO to implement new systems and processes across the finance function and to work across different parts of the business to keep subscribers coming back for more.
Four subscription metrics CFOs need to know
This is the percentage of people who are unsubscribing in a given time. Even minimal increases in churn percentage can be ruinous to planning so CFOs need to understand what churn is and how to analyse it.
This is a calculation to determine how much a business spends on advertising and marketing to gain a new subscriber. It costs more to attract a new customer than hold onto an existing one, so it’s critical that CFOs know exactly how much and how long the payback period will be.
This looks at how much money a customer will spend over the duration of their subscription. Measuring this gives CFOs a view of the quality and loyalty of customers.
This measures the predictable recurring income generated from customers on a monthly basis. By using data from months of consistent revenue, CFOs can begin to assess where they’ll be and plan accordingly.
In some ways a subscription model is a chief financial officer’s dream come true. They encourage customer loyalty, provide steady, predictable revenue and offer detailed data on how each individual behaves.
Introducing a recurring revenue model can also increase a company’s valuation by up to eight times, according to research by finance firm Consero Global. This is especially appealing for businesses looking to attract investment or raise capital ahead of an initial public offering (IPO).
But the shift to a subscription model is not without challenges and finance leaders play a vital role in its success or failure; from identifying what financial levers can be pulled to boost the value of the subscription, to establishing effective pricing strategies and laying the groundwork for long-lasting relationships with subscribers.
