3 Tips to Better Manage a Subscription-Based Business

Global sales in the music industry rose 0.3 percent from year-to-year in 2012, the first increase since 1999, according to the International Federation of the Phonographic Industry. Revenues dropped 3.9 percent globally the following year due to Japan, the world's second-largest music market, experiencing a sharp 16.7 percent decline in sales that year. Steve McClure, writing for the Japan Times, said the country's failure to embrace digital music subscription services like Spotify and Rdio is the primary culprit for the steep drops in revenues.

The subscription-based business model saved the music industry from imminent demise, and has subsequently attracted the attention of startup entrepreneurs. Granted recurring revenue models for businesses are nothing new. But the consumption of goods in American households has decreased over the past 20 years, while service consumption has risen, according to data compiled by the Economist.

The most successful subscription-based businesses today are utilizing all the latest technology and tools, while still providing good old-fashioned customer service. There are no hard-and-fast rules to ensure a profitable enterprise, but these guidelines can help steer you in the right direction.

Billing and Compliance

Whether you collect monthly or annual dues, managing the collection process can get complicated. Netflix, for instance, offers at least 16 different plans ranging from $7.99 to $43.99 per month. Customers may want to upgrade, downgrade, cancel entirely, or change the credit card used for monthly billing at any time. There are several Software-as-a-Service (SaaS) options that provide billing solutions to handle all this for small and medium-sized businesses.

SaaSy is one of the most customizable and simple options available. Customers can pay initial fees, then the software handles recurring payments and chargebacks. SaaSy also complies with all Payment Card Industry (PCI) standards and handles the security of your customers' sensitive data. Zuora is another popular option due to large companies like Dell, Zillow, and IBM utilizing their services. Aria and Recurly are two more solutions to consider.

Most cloud billing services charge a flat rate per transaction or a percentage. It's best to take advantage of free trials or developer versions of these applications first before committing to ensure you're getting all the features necessary to smoothly run your operation. Keep in mind, Symantec ended up paying nearly four million customers $10 each to settle a lawsuit for non-compliance with PCI regulations. Make certain the solution you choose has safeguards in place to protect your company from these types of issues.

Tracking and Managing Sales

Subscription-based companies have a major advantage over their one-time purchase counterparts. They have the ability to analyze monthly profits and adjust prices and features on the fly. Pandora, for instance, eliminated its annual plan and raised the price of its monthly plan from $3.99 to $4.99 for new subscribers in March 2014. The company cited higher royalty fees as the reason for the price hike and called the modest increase “necessary.”

Pandora was able to predict future cash flow and profitability, and determine just the right amount to raise prices without agitating customers. The ability to accurately analyze the impact of price and plan changes is crucial, particularly for startups still building customer loyalty. Cloud-based sales forecasting and pipeline management applications can crunch historical sales data and help determine the impact of any potential price hikes and structural changes to subscription plans.

It's always best practice to notify customers in advance of any price increases. The first time they become aware of the increase should never be from an unexpected higher invoice.

Review Sites

A 2013 study by SEO firm BrightLocal found that 79 percent of consumers trust online reviews about companies and their products in much the same way they do personal reviews from friends and family. Review websites like My Subscription Addiction and Subscription Boxes are like Yelps specifically catered to subscription-based businesses. Register your company on as many of these sites as possible. Some of charge sign-up fees, but consider it a marketing investment that can potentially turn leads into paying customers.

American consumers are willing to pay monthly or yearly fees for a good products. Companies that follow the aforementioned guidelines have the best opportunity to take advantage of this growing phenomenon.