It’s no secret that for small firms, the domino effect of late payments can be one of the biggest hurdles in the smooth running of a business. It remains the number one issue affecting small firms with nearly half of all invoices issued in the UK last year paid late.
If you’re spending too much time chasing late payments, transitioning to a subscription model is an alternative business strategy that could help you take back control of cash flow with predictable recurring revenue. But would your clients and customers accept moving to subscription based payment? And what would a transition mean for your business?
Replace commercial debt with predictable revenue
Douglas McJannet, Founder of Cocktail Hour, reinvented his business to deliver ready-mixed cocktails to people’s homes after having to temporarily close his premises this year. He says a subscription business model allows him “to be able to plan ahead with confidence and find those unusual treats for our customers.” The ability to bulk buy for future sales translates into added value for the customer; Cocktail Hour benefits from being able to predict revenue, resources and stock requirements through recurring sales.
The recurring revenue generated by a subscription-based business can also significantly increase company valuation: “Its value will be up to eight times that of a comparable business with very little recurring revenue,” says McJannet. “We have forecast that in two-three years we will be generating revenue in the £3-5 million range, and of that, 60-75% will be on subscription.”
Understand customer behaviour
Knowing your customers’ behaviour and payment patterns is crucial to drawing up a subscription business strategy. To do this, you’ll need to look at demographics to understand if your customers are in segments that are more likely to use subscriptions; for example, younger age groups tend to be more accustomed to a subscription model. Behavioural and transactional data will show you who your most engaged customers are and how they use your products and services.
Sam Jordan, Executive Vice President of Manifesto Growth Architects, recommends getting direct customer feedback before launching your subscription model: “surveying customers about new ideas is a good way to start to build interest before actively marketing.” Fundamentally, you need to satisfy a simple equation: customer lifetime value (revenue x tenure) must exceed cost of acquisition and cost to serve. With this knowledge, you can model what break even and profit would look like.
Adopt the subscription business model mindset
The subscription business model mindset is about moving from a product-based to a customer-based approach, where you proactively cater to customer needs. Rewarding your team for customer retention, not just the initial sale, can help you make this transition.
“It’s a bit deeper than getting people to pay monthly. It’s a real shift in the way we do things internally,” says Carl Reader, Director of D&T accountants, who shared his experience of moving to a subscription model and managing late payments in our podcast Business Class: Money Minutes – listen and subscribe here.
Communicate with your clients
Communicate early and often with a clear, targeted marketing campaign to sell the benefits of a subscription. Jordan says a new customer “will typically take six-eight interactions with your brand to make this commitment, existing customers will normally need at least three.” To capture the recurring spend, you’ll have to be prepared to invest more on customer acquisition – but over time, happy subscribers will pay for the extra effort and you’ll move into profit.
Lay the technological foundation for a subscription model
There are many subscription management software options on the market, the one that’s right for your enterprise will depend on the sector you’re in, but integration is crucial: “Will their system work with the rest of the tech and financial software you use?” asks Jordan. “Remember this is supposed to make transacting easier, simpler and more reliable for you and the customer – their experience needs to be as seamless as possible.” Ideally, your team should provide the technical support with access to the subscription billing software and not the vendor.
Avoid late payments and focus resources where it counts
Taking bold steps towards your future with a transition to a subscription business model does more than just remove the hurdle of late payments and commercial debt. Having long-term, regular clients frees up valuable time otherwise wasted chasing late payments. It also makes it possible to more closely monitor customer metrics so you can invest resources where it counts - building for the future. “Think about how you can maximise value. You have their trust, their attention and a tonne of information about what they like,” says Jordan, “use it to sell them more things that they need.”
Predictable revenue is one of the key benefits of maintaining a healthy cash flow through a subscription model. With an American Express® Business Gold Card, you have up to 54 days to clear your balance¹, allowing extra time to pay suppliers and further increasing your cash flow efficiency.
- The maximum payment period on purchases is 54 calendar days on Gold & Platinum Business Charge Cards and 42 calendar days on the Basic Business Charge Card, it is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due.