By Saumil Thakkar, Director, Enterprise Solutions, KPMG US LLP
Subscription-based selling is becoming the new normal among Gen Y, Gen Z, and Gen Alpha consumers. With this modern approach comes many advantages for you and your customer. Companies can have long-term recurring revenue instead of single-transaction encounters. But subscriptions also come with a lot of complexity related to revenue recognition and its reporting.
On the plus side, subscriptions help you reduce your customer cost of acquisition, build long-term relationships, provide sustainable income and present numerous upsell opportunities by offering customers flexible consumption and usage-based product and service bundles. And customers like the practical cost model, which allows them to get goods and services with a low-upfront entry point and pay-over-time options.
But with the introduction of the ASC606 / IFRS 15 accounting standards, revenue recognition calculation, forecasting and reporting have become highly complex for subscriptions. Many companies try to use their existing ERP systems designed to support traditional pricing models—but not the dynamic nature of subscriptions. Companies that decided to use a standalone revenue recognition system fall into the trap of unmanageable integrations and reconciliation tools, while others are still using spreadsheets. While the ERP is essential to overall business management, an integrated revenue management solution is critical to getting revenue recognition calculation and reporting right.
You’ll need to manage the lifecycle of data that intersects with customer experience, quote to contract, order orchestration, subscription management, billing, forecasting, and reporting—or risk revenue leakage and improper revenue reporting. There are three critical areas you’ll need to look at while designing your solution:
- Bundling and product design. Configuring and designing product and service bundles is critical to optimizing revenue.
- Contract orchestration. Effectively delivering, tracking, and managing goods, services, and professional services is vital. Keeping track of what you sold, where it is used, by whom, and what services are expected is extremely important.
- Billing for goods and services. Your invoices must capture all the components included in the subscription, physical goods, software, and services (including accurate usage), to determine what the customer will pay for and when to recognize revenue appropriately.
Companies can reap significant benefits by designing these elements correctly. At KPMG, we help our clients look at the complete customer journey and associated data lifecycle to avoid subscription-model pitfalls.
At KPMG, we have helped several clients implement a subscription based business model and overcome the challenges encountered during the journey.
If you are planning a transform to a subscription-based business model, or want to improve your existing revenue management solution, you can learn more about this topic by watching a replay of our recent webcast on Revenue Management for Subscription Business Models.