The subscription economy has surged in recent years, significantly impacting the way businesses operate. According to Gartner, by 2023, 75% of organizations selling direct to consumers will offer subscription services. With this shift comes the pressing need for businesses to manage recurring revenue efficiently and effectively.
Recurring revenue models, despite their potential advantages, can also introduce complexities related to subscription management, customer retention, revenue recognition, and data analysis. Recurring revenue software provides an integrated and streamlined solution to these challenges. Below, we’ll walk through this indispensable tool for businesses that deal with recurring revenue in any form. We’ll cover the features of recurring revenue software, the advantages it provides, and how to select the most suitable solution for your business.
What’s in this article?
- What is a recurring revenue model?
- Recurring revenue management: Key considerations for businesses
- What is recurring revenue software?
- How does recurring revenue software work?
- Recurring revenue software benefits
- How to choose recurring revenue software
- Stripe’s recurring revenue management solution
What is a recurring revenue model?
A recurring revenue model is a business model that focuses on securing consistent, recurring income streams over time. Usually, this model is associated with businesses that sell subscription-based products or services, where customers pay on a regular basis (monthly, quarterly, annually, etc.) for continuous access to the product or service.
The significant advantage of this model is predictable and sustainable revenue. By providing a steady flow of income, a recurring revenue model makes it easier for businesses to forecast future revenue, manage cash flows, and budget resources.
There are several types of recurring revenue models, including:
Subscription-based model: Businesses charge customers a recurring fee to access a product or service. Examples include Netflix, Spotify, and software-as-a-service (SaaS) companies like Salesforce.
Membership model: This is similar to the subscription model and is often found in clubs, gyms, and associations where members pay a recurring fee for access to facilities or services.
Retainer model: This model is typically used in professional services such as law or consulting, in which clients pay a set amount each month for access to a specific set of services or a certain number of hours.
Recurring services model: This includes ongoing services such as landscaping, cleaning services, and pest control, for which customers pay on a repeating basis.
Consumables model: While this model depends on consumer usage and is therefore not a pure form of recurring revenue, businesses that sell consumables (e.g., printer ink or coffee capsules) can also enjoy a type of recurring revenue because customers repurchase these items regularly. Some companies pair these purchases with a subscription model for convenience.
While recurring revenue models provide businesses with a more predictable and steady income, they also require a special focus on customer retention and satisfaction to minimize churn (the rate at which customers cancel their subscriptions).
Recurring revenue management: Key considerations for businesses
Managing a recurring revenue model effectively is a complicated task that requires a comprehensive, thoughtful approach. Rather than choose a single “recurring revenue strategy,” businesses can and should use multiple interlocking strategies for a variety of interdependent areas ranging from customer retention to financial reporting. Here are a few key components of managing recurring revenue, their roles in business growth, and how they help establish predictable recurring revenue streams:
Subscription management
Subscription management is one of the most common recurring revenue management options. This involves setting up a system for customers to subscribe to your product or service and pay a certain amount on a regular basis. Companies must manage the subscription life cycle, including acquisition, onboarding, billing, renewal, and churn. This includes managing upgrades, downgrades, and cancellations. Automation software can assist with many of these tasks, but it’s important to have a robust customer service system in place to handle queries and issues. Monitoring and analyzing customer usage data can also provide insights into how to improve your offerings and reduce churn.Billing and invoicing
Accurate and timely billing is important in a recurring revenue model. This requires a reliable system for creating and sending invoices, processing payments, and handling late or failed payments. Automated billing software can make this process more efficient and reduce the risk of errors. The software should be able to handle a variety of payment methods and currencies, especially for businesses with an international customer base.Pricing strategy
Pricing strategy is an important part of recurring revenue management. Businesses should assess their pricing continually and adjust accordingly to ensure prices reflect the value they provide. This might involve tiered pricing levels, volume discounts, or dynamic pricing based on usage. To maintain customer trust, make sure to communicate any pricing changes clearly.Customer retention
Since recurring revenue models rely on keeping the same customers over time, customer retention strategies are important. Aside from exceptional customer service, this might involve customer loyalty programs or strategies to add value, such as personalized content or user communities. Soliciting customer feedback regularly—and acting on that feedback—can also improve retention.Revenue recognition
Revenue recognition can be complex for recurring revenue models, particularly for longer-term contracts in which services are provided over time. Businesses need to ensure they comply with accounting standards such as ASC 606 for revenue from customer contracts. This often requires specialized expertise or accounting software.Contract and compliance management
Businesses with a recurring revenue model often need to manage multiple customer contracts, each with its own terms and renewal dates. This requires a robust contract management system and a deep understanding of any legal and compliance issues related to subscriptions. This aspect of recurring revenue can be particularly challenging for businesses that operate in multiple jurisdictions or in industries with specific regulations.Analyzing and optimizing performance
Businesses should analyze their recurring revenue performance regularly, examining metrics such as monthly recurring revenue (MRR), churn rate, customer lifetime value (LTV), and customer acquisition cost (CAC). This can highlight areas for improvement and inform strategic decisions.
What is recurring revenue software?
Recurring revenue software, also known as subscription management software or billing software, is a type of software solution designed to automate and manage the billing and invoicing processes for businesses that operate on a recurring revenue model. This includes subscription-based businesses, memberships, retainer services, and any other business in which customers make regular, ongoing payments for goods or services.
Typically, recurring revenue software includes features such as:
Subscription management
This feature helps businesses manage and track all aspects of their subscription life cycle, from the initial sign-up to renewals and cancellations.Billing and invoicing
The software can create and send invoices automatically, manage different pricing tiers and options, handle tax calculations, and process different payment methods and currencies.Dunning management
This refers to the process of managing failed or late payments. The software can send automatic reminders, retry failed payment methods, and even handle customer communication related to payment issues.Reporting and analytics
These tools provide insights into important metrics such as MRR, churn rate, LTV, and more. This data can help businesses make informed decisions about their strategies.Revenue recognition
For businesses with complex accounting needs, certain types of recurring revenue software include features to automate revenue recognition, ensuring compliance with accounting standards.Integration capabilities
Recurring revenue software can often integrate with other business tools, such as customer relationship management (CRM) software, accounting software, or customer service platforms.
The goal of recurring revenue software is to streamline and automate these processes, reducing manual effort, minimizing errors, improving the customer experience, and providing valuable insights into the business’s performance.
How does recurring revenue software work?
Recurring revenue software, also known as subscription management or billing software, automates and streamlines various aspects of a recurring revenue model, from billing and invoicing to customer management. Here is a general overview of how recurring revenue software works:
Subscription management
The software enables businesses to set up and manage different subscription plans. This includes creating different pricing tiers, billing cycles (monthly, quarterly, annually, etc.), and payment methods. It also allows businesses to handle discounts, promotions, and free trials.Customer onboarding
When a customer subscribes to the business’s service, they enter their information (contact details, the plan they selected, payment method, etc.) into the system either manually or through a self-service portal. Typically, the software integrates with payment gateways to securely store and process payment information.Billing and invoicing
Once the customer’s subscription is active, the software automatically generates invoices based on the billing cycle and sends them to the customer. The software also manages any changes to the subscription, such as upgrades, downgrades, or cancellations.Payment processing
The software processes payments automatically, using the customer’s chosen payment method. If a payment fails, the software can implement dunning management, which involves sending reminders to the customer and retrying the payment at specified intervals.Revenue recognition
For businesses that need to comply with specific accounting standards, the software can calculate and record recognized revenue over the lifespan of a subscription.Reporting and analytics
Recurring revenue software provides reports and insights on key business metrics, including churn rate, MRR, and LTV.Integration with other systems
Most types of recurring revenue software can integrate with other business systems such as CRM software, accounting software, and email marketing tools. This streamlines operations and provides businesses with a more unified view of each customer.
Recurring revenue software benefits
Recurring revenue software provides numerous benefits to businesses that operate on a subscription or recurring revenue model. It streamlines many processes, reduces errors, improves customer service, and provides valuable insights into a business’s performance. Here are some of those benefits in more detail:
Efficiency and automation
Businesses like SaaS companies, media services, or membership clubs can significantly reduce their administrative workload by automating recurring billing processes. For instance, a SaaS company, such as a cloud storage provider, can set up billing cycles, send invoices automatically, and process payments without manual intervention—saving the business significant time and resources.Flexible subscription management
Recurring revenue software allows businesses to offer a wide variety of subscription options to meet diverse customer needs. A fitness app, for instance, could offer different pricing tiers (basic, premium, family plan), payment frequencies (monthly, annually), and payment methods in order to attract a wider customer base.Reduced errors
With automation, the likelihood of billing errors significantly decreases. A utility company, for instance, can ensure accurate monthly billing based on usage, without the risk of manual data entry errors.More predictable cash flow
By ensuring timely and accurate billing, businesses can maintain a steady cash flow. For instance, a digital magazine can secure a predictable stream of income from monthly subscriber fees, helping stabilize its financial planning.Dunning management
If a payment fails, recurring revenue software can automatically retry the payment and send reminders to customers. This helps businesses like video streaming services retain customers, when they might otherwise lose subscribers due to payment issues.Insightful reporting
Recurring revenue software provides key metrics that help businesses make informed decisions. A music streaming service, for instance, could use churn rate and customer lifetime value data to identify trends, understand customer behavior, and devise effective retention strategies.Elevated customer experience
By automating billing and providing multiple payment and subscription options, businesses can improve their customer experience. For instance, a meal kit delivery service could allow customers to easily upgrade, downgrade, or pause their subscriptions, increasing customer satisfaction and retention.Regulatory compliance
Businesses with complex accounting needs, such as telecom services or long-term rental companies, can use recurring revenue software to automatically recognize revenue in compliance with accounting standards such as ASC 606 or IFRS 15.Integration with other systems
Most recurring revenue software can integrate with CRM, accounting software, and other business tools. An e-learning platform, for instance, could sync its recurring revenue software with its CRM to gain a unified view of customer behavior and payment history, enabling personalized marketing and better customer service.
How to choose recurring revenue software
For businesses that want to manage their subscriptions and recurring revenue models effectively, choosing the right recurring revenue software is important. Here’s a process that businesses can follow to select the right software for their needs and goals:
Identify your business needs: Start by defining your specific needs based on your business model, type of subscriptions, customer base, and existing systems. For example, a global SaaS company may require multicurrency support, integrations with their CRM, and robust reporting features, while a small local gym may need a simpler solution with strong customer communication features.
Establish your budget: Determine how much you’re willing to invest in recurring revenue software. Consider both immediate costs and potential long-term savings from increased efficiency.
Research available options: Start researching different software options on the market. Look at their features, pricing models, scalability, and integration capabilities. Reviews and case studies can provide valuable insights.
Evaluate features: Make a list of key features you require. These might include subscription management, billing and invoicing, dunning management, revenue recognition, reporting and analytics, and the ability to integrate with other systems you use. Match these features with what each software option offers.
Consider user experience: The software should be easy to use for both your team and your customers. Look for intuitive user interfaces, easy setup processes, and clear, comprehensive reporting.
Check for scalability: As your business grows, your software needs may change. The software you choose should be able to scale with your business, supporting more complex subscriptions, a larger customer base, and more advanced reporting as needed.
Assess customer support: Good customer support is necessary. Check if the software provider offers reliable and timely support, either in the form of email support, live chat, phone support, or a comprehensive knowledge base.
Request a demo or trial: Many providers offer free demos or trials. Use these to test the software in a real-world scenario and see how well the software meets your needs.
Compare options: Once you’ve evaluated a few options, compare their features, ease of use, scalability, support, and cost. Prioritize according to your business needs and goals.
Make a decision: Based on your comparison, choose the software that best fits your requirements and budget. Then plan for implementation, training, and a transition period.
It’s important not to jump ahead and simply choose whichever recurring revenue software option seems easiest or cheapest or happens to catch your attention first. The best recurring revenue software for your business will depend on your unique needs, goals, and budget. What works for one company might not work for another, so it’s worth taking your time to identify the right solution for you.
Stripe’s recurring revenue management solution
Stripe Billing is designed to simplify the process of managing subscriptions and recurring payments. Its flexibility and scalability make it an ideal choice for businesses at different stages and sizes, regardless of industry or market. Here’s a rundown of the key features that make Stripe Billing a comprehensive solution for recurring revenue management:
Subscription management
Stripe Billing allows businesses to create and manage various types of subscriptions, including one-time payments, fixed recurring payments, and usage-based billing. It supports multiple billing cycles and can handle changes to subscriptions such as upgrades, downgrades, and cancellations.Payment processing
Stripe Billing supports a wide range of payment methods, including all major credit and debit cards, as well as digital wallets. It also supports payments in over 135 currencies, making it a smart option for businesses operating in international markets.Dunning management
If a payment fails, Stripe Billing automatically retries the payment and can send personalized emails to customers that prompt them to update their payment information, helping reduce involuntary churn.Smart retry logic
Stripe uses machine learning to determine the optimal time to retry failed payments, based on billions of data points from businesses around the world. This can further reduce payment failures and increase revenue.Invoicing
Stripe Billing includes a customizable invoicing system, which automatically generates and sends invoices to customers. It can handle taxes, discounts, and prorations, and also provides hosted invoice pages.Reporting and analytics
Stripe provides detailed reports and analytics, which can help businesses gain insights into their revenue, churn, and other key metrics. It can also forecast future revenue based on historical data.Integration and APIs
Stripe provides robust APIs, making it highly customizable and capable of integrating with different types of business tools and systems.
To learn more about Stripe Billing, go here to get started.