What CFOs need to get right when adopting subscription models - Aptitude Software



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What CFOs need to get right when adopting subscription models

January 11, 2023
Posted by Sarah Werner

Previously published in The Digital CFO Magazine

With subscription models continuing to expand across industries and verticals, the CFO has a significant role to play in making sure organizations can launch, manage, track and account for recurring revenue streams.

There’s nothing a CFO likes more than predictable revenue. While that whale-sized, surprise deal might make a quarter or career, it’s the steady, ever-increasing revenue that is rewarded by the market. In fact, research has shown introducing a recurring revenue business model could increase a company’s
valuation by up to eight times.

As consumers are becoming more comfortable with subscription and pay-as-you-consume business models in areas like entertainment, retail, transportation and food and drink, they have spread to a new batch of industries, including B2B. Subscription models seen in the market today include medical device companies offering pay-as-you-consume pricing on million-dollar machines, subscription-based insurance plans, and banks replacing standard fees with more tailored subscription offerings.

Ben Martin, Partner at CFGI, observes, “It’s kind of wild now. Everyone is moving to a subscription or a SaaS-based model. I think the biggest thing is that it allows you to forecast and get a better understanding of your top-line revenue. My clients are saying, hey, at the end of the day we want to be able to forecast what our revenue looks like over the next 6-12 months. I think it allows organizations to wrap their head around what that revenue ecosystem looks like a little bit easier.” A recent survey from Prophix Software indicates that only 20% of finance teams have the ability to forecast revenue and earnings beyond 12 months, indicating revenue forecasting is still a major challenge for CFOs.

While recurring revenue models can help with revenue predictability, introducing them into a business isn’t without its challenges. It requires changes to the way an organization sells, manages, distributes, tracks, and reports on products and services. Consumer engagement models and products are now required to deliver a great customer experience month after month, and companies must commit ongoing investment into their offerings or risk losing business. While it’s true the CFO might not own the product experience; they do play a direct role in the success or failure of facilitating and accounting for these new business models.

So how do CFOs and their teams ensure the shift to a recurring revenue model goes smoothly? Here are four areas CFOs need to get right.

Automation is a must-have

In the past, the primary business model for an organization may have been an annual contract that required few changes during the year or consumer transactions that happened at a point of sale with a clear exchange of goods or services. While not ideal, finance could manually account and
report for those contracts and transactions if necessary. Not anymore.

Launching multiple recurring revenue models can introduce highly complex, detailed agreements which change constantly depending on upgrades, downgrades, promotional options and more. A host of new things must be considered including revenue recognition rules, usage tracking, payment success, pricing changes, and costs of the subscription service. As innovative and more complex subscription models evolve, a finance function must be able to account seamlessly for revenue streams. This automation must extend from business rule application to automated journal entry postings across multiple GAAPs, to revenue recognition reporting to ensure new subscription models don’t result in manual processes and End-User Computing applications in finance.

For consumer-focused businesses that are shifting from individual, point-in-time sales to a recurring revenue model, this rule still applies. Revenue and accounting systems must be able to automate changes, pauses, payment failures and other lifecycle events. Finance needs to remain ‘better, faster and cheaper’ as new and more complex subscription models are implemented.

Plan for new KPIs

FP&A teams should be very involved in a move to recurring revenue models as the introduction will shift the metrics finance must measure. Some of the big ones like monthly and annual recurring revenue may already be captured, but the business will now need real-time reporting on things like customer cost per acquisition, lifetime value, churn rate, renewal rate and others. From a planning perspective, as new models – or even new products within an existing subscription model – are conceived, finance functions should be advising on what metrics are needed and the data points and system integrations necessary to support the reporting.

“I think one of the biggest headaches I’ve seen for organizations has been figuring out how to have your tech stack take you from business model A to business model B without total disruption. If you’re not thinking ahead in terms of how you’re going to organize your data, how you’re going to report off of it, then you’re walking into a mess before it’s even happened,” states Martin.

While recurring revenue models can help with revenue predictability, introducing them into a business isn’t without its challenges. It requires changes to the way an organization sells, manages, distributes, tracks and reports on products and services.

Model the impacts

While marketing and product teams may take the lead on crafting product bundles, offerings and promotions, finance can add value to the process through scenario modeling the impact of the offer on the balance sheet. Having integrated subscription management and revenue accounting capabilities can simplify this and provide accounting with the ability to change assumptions on recurring revenue models and dynamically tweak products to better conform with regulatory requirements or KPI goals.

FP&A teams can also make good use of the ability to combine enhanced customer data with revenue data to help the function deliver better analysis and insights to the business.

Pay attention to payments

When you extend product offerings from transactional sales models to subscriptions, the sheer number of repeat payments you need to collect will undoubtedly rise. This increase in the number of payment transactions can mean added complexity for finance teams around expanding payment choices for consumers, meeting regulatory requirements and minimizing churn stemming from payment issues.

In today’s digital environment, streamlined buying journeys and one-click payments are a day-today occurrence and consumers have a certain expectation around payment choice and experience. A 2022 study from Worldpay, Inc. reported that digital wallets comprised almost half of e-commerce transaction value globally in 2021 and are projected to rise. At the same time, Alternative Payments including digital wallets, account-to-account (A2A) payments with open banking and buy-now-pay-later (BNPL) are continuing to consume market share. Organizations need to understand what payment types to offer and support while ensuring they have the systems and processes to scale and measure cost effectiveness.

In addition to having the right payment options available for your customers, organizations need payment systems that are secure and compliant with regulations like PCI-DSS Level 1 compliance, which regulates the processing, storage and transmitting of card payment data, as well as regional standards such as Strong Customer Authentication (SCA), a new requirement of the second Payment Services Directive (PSD2) which went into effect in 2020. This will ensure that digital payments are processed with multifactor authentication, to increase payment security.

“PSD2 was a big, big flag to everyone about the importance of strong customer authentication, data and personal information storage and country-specific rules. And I would say taxes are now another new area that is relevant for payments. In addition to tax variations across jurisdictions, we’re also starting to see digital service taxes applied in certain areas,” states Paul Roberts, Head of Payments for Aptitude Software.

There are several other areas to consider for payments, including routing to optimize transaction fees or the management of each business entity, fraud and protection layers, speed to access funds (merchant of record), as well as other compliance standards like Card-on-File and Transaction Flagging. What is important for CFOs, however, is to minimize this with a single point of integration for global payment methods, compliance, and expertise without the fuss of managing multiple vendors.

Moving Forward

In survey after survey, business leaders are asking CFOs and the finance function to move into a more strategic role within the organization and tasked with driving business growth. With subscription models exploding and recurring revenue rewarded by the markets, finance leaders must be thinking about how to implement these business models in a way that is automated, profitable, and delivers an exceptional client experience every time.

The Digital CFO Magazine (Fall 2022) cover page

 

Download the Fall 2022 Issue of The Digital CFO Magazine

 

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This blog post was written by:

Sarah Werner
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