Recurring revenue management is an essential aspect of any subscription-based business. Recurring revenue analysis provides many important clues and insights into the company’s operations. It is one of the decisive factors of a subscription-based company’s valuation, which investors look at. It allows the company’s management to define, whether the business is expanding or contracting. Finally, in-depth studies of recurring revenue business models allow analysts to detect the key customer behavior trends. Based on such analysis the company can develop or adjust its strategy in order to improve customer experience. It can also implement steps to attract new customers and investors, and generate new revenue streams.
Our Paylosophy blog features a whole series of articles on various aspects of recurring billing. In the current article we will addresses the needs of subscription-based businesses in greater detail. First, we will explain the concept of recurring revenue, and then – outline the key factors that influence it.
What is a Recurring Revenue Business Model?
Recurring revenue business model is a common modus vivendi of subscription-based companies. Such businesses are based on customers’ subscriptions, that is, commitments to pay for products or services on a regular basis. The regularity of payments depends on specific service. They can be weekly, monthly, or annual payments. Well-known examples of subscription-based companies include fitness centers, Internet providers, and the famous Netflix.
Let us assume, you are a subscription-based business. Recurring revenue is the value of all your subscriber relationships calculated for a fixed period of time (month, year). Monthly recurring revenue is used to calculate customer lifetime value, predicted future revenues, and average selling prices.
Effective recurring revenue management calls for analysis of two sets of factors.
- Billing-related factors (business aspect)
- Processing-related factors (technical aspect)
Analysis of each set of factors provides the basis of an optimal strategy.
Let us take a closer look at both sets.
Recurring Revenue Management: Business Aspect
According to the experts, common present-day recurring revenue business models include four key components, directly related to billing. These components are as follows.
- New monthly recurring revenue. This component includes revenue from newly acquired customer subscriptions.
- Expansion monthly recurring revenue. This component includes the value of upgraded subscriptions and payment plans. For example, customers switch from basic to premium service packages, add more users to their accounts etc.
- Reactivation monthly recurring revenue. This component includes the value of returning subscribers, reactivated and unfrozen payment plans.
- Churn monthly recurring revenue. This component is the only negative one among the four. It reflects the value of customers who downgrade or cancel their subscription plans. At the same time, churn revenue analysis helps businesses with recurring revenue understand the key reasons behind customer churn. So, this component might be the most important one when it comes to analysis and feedback.
A business should carefully analyze each component and developments within it during the reporting period. Managers should be able to clearly see the number and reasons of subscription cancellations and freezes. If a customer cancels a subscription, the company might offer him or her an alternative product (and, potentially, turn churn into expansion). Those who are using standard subscription plans might benefit from upgrading the service to primary offering.
As we can see, billing-related factors allow a business to analyze the nature of changes and adjust its strategies accordingly. Also, thanks to analysis, the business becomes more responsive and efficient when addressing the respective issues with customers.
Recurring Revenue Management: Technical Aspect
Processing-related or technical factors include issues emerging when payments don’t come through. A business should be ready to address these issues.
For cases when transactions are declined, the business should have decline recycling mechanisms in place.
To address the cases of “insufficient funds”, the company should make provisions for subsequent reattempts of the original payment {link to decline recycling}. At the same time, the issues around expired cards and account number changes can be addressed by using account updater logic.
For example, card number, expiration date or name spelling of the cardholder might change – all these scenarios might cause declines. The business has to be able to deal with them.
While for a retail company a decline is a one-time event, for recurring revenue business model it can turn into a major issue. Depending on the decline reason, the decline may continue to reoccur over and over again. And if there is a predominance of certain decline reasons, it makes sense to understand if there is some issue behind.
In some instances, the formatting of a transaction may need to change. An example might be the case when “recurring” flag is not properly included into transaction description.
Decline Analysis Outcomes
Just like analysis of churn and downgrades, analysis of declines provides plenty of valuable information. A clear big picture of transactions declined during a certain reporting period allows the management to answer several important questions. Examples of these questions are as follows.
- Which kinds of declines prevail?
- Which of declined transactions call for repeated (reattempted) processing?
- When the company needs to notify or call cardholders to verify their profile details?
- In which typical cases it is appropriate to use account updater engine?
The overall goal of this analysis is to minimize decline rate and maximize revenue from customers that want to pay for subscription.
Transaction Pricing
Another important component of recurring revenue management is analysis of transaction processing costs. Smaller businesses, usually, partner with large providers (Stripe, PayPal), who offer them fixed price (say, 2.9%). So, these businesses have very limited options of negotiating better processing terms until their transaction volumes grow. At the same time, businesses, that have a “cost plus” pricing arrangement (and pay interchange plus service fees), should carefully analyze the nature and size of the interchange fees they are charged.
For example, you may notice that a large proportion of your subscribers is using reward credit cards. Servicing of these cards is quite expensive. So, it might make sense to motivate these customers to switch from costly reward credit cards to ACH or debit cards.
To summarize
A huge share of merchants of different sizes uses the recurring revenue business model. Effective recurring revenue management requires careful analysis of both billing-related and processing-related factors. “Learning from mistakes” is a good strategy for subscription-based businesses including recurring revenue SaaS companies. Knowledge of the key reasons behind customer churn and transaction declines might become the basis of a successful recurring revenue management strategy.
Feel free to contact our specialists at UniPay Gateway to learn how to improve your recurring billing business. We have been working in the industry for more than a decade, and subscription-based companies represent an important segment of our customers. To meet their needs, UniPay Gateway payment management platform features a universal recurring billing engine, called UniBill. So, we might have ready-made solutions for your specific business case.
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