Trapdoor In The Sun

Alan Shanahan, Technician & Consultant

1 Comment

The Subscription Continuum

A New Opportunity, A New Industry

One of the new phrases you will have heard lately is the “Subscription Economy”. If you haven’t, where have you been? You’re kidding, of course you have. Certainly, one of the main proponents of the whole movement is the California-based Zuora; their cloud-based subscription billing system is leading the way in the industry and they’ve landed some prestigious and lucrative accounts in their short lifetime.

What they have also succeeded in doing is placing a spotlight on the area of subscription management; they’ve pointed a finger at the inadequacies of competitive products and helped to pull a new industry along in its wake. From a heritage, they’ve designed a product that manages all the nuances of selling your product, allowing your customers to add more products; to downgrade or upgrade their subscription to, say, the Platinum or Bronze edition; or to cancel their subscription whether still in or out of contract; and for them to be invoiced correctly, according to your pricing and billing rules, and all the complexities that go with charging for partial months (or proration, as it is termed by Zuora).

Two industry verticals that seem like a ready fit for this type of product are Telecoms and Media (of course, there are many more); typically, their products are sold on a continual basis; often, there is a regular product “delivery”, coupled with a regular payment. The shifting patterns of product offerings and industry change mean that businesses operating in these circles need to be able to move rapidly when launching new products; and it’s not unusual for many different versions of a product to be made available through the various sales channels.

The Reality Of Accounting

But this flexibility brings new challenges. Many CFOs today come from a static environment where accounting practices and rules have not changed, literally, in decades. OK, they’re using accounting software to carry out bookkeeping exercises and to generate management and statutory accounts. The tools have changed but the rules and methods have not. But, what we tend to see quite often with our customers, is that a certain perspective on accounting systems accompanies this. And when we analyse the requirements of our customers, what they want can be boiled down to something simple: the porting of their old systems to new systems. Sadly, this brings baggage with it: significant cost, long project timescales and ultimately a huge amount of customisation (often tying the customer to a fixed version of the packaged software underpinning their new system). What is lost is considerable:

  1. system agility
  2. the ability to take advantage of new software releases
  3. the ability to move forward with a small software maintenance footprint

In short, you may end up with a stifled product feature set due to excessive customisation

How can we address these problems? When you move house, you don’t take along all of your accumulated tat and clutter; you use the opportunity to dump the stuff you don’t need. Therefore, what businesses need when implementing new systems is a sort of “mental skip”. Thought processes and indeed business processes often need to be realigned to take advantage of the new technologies on offer; otherwise, what’s the point? How you handle such change is the subject of another discussion in its own right, and I’m not going there today. But the point remains.

An Example

I would like to look at specifics now: let’s say your business sends invoices to its customers regularly, but sometimes it has to issue credit notes; sending the wrong product, or it arrives late, or is damaged; someone cancelling due to poor service delivery; there are many reasons why you might issue a credit (with an accompanying refund in some cases). In business jargon, there are many use cases. Under a traditional accounting system you would initiate the issuance of the credit (and possible refund) through your standard process: there would be some validation, probably an approval process, then you would need to create the transaction in the accounting system, along with the necessary paperwork and reversal of any fulfilment aspects of the supply.

The Finance department would usually have ownership of the financial aspect of the transaction; and this impinges greatly on the process, regardless of the solution. I don’t mean that as a negative, it’s the necessary reality. They usually have audit and control responsibility and they rightly take that very seriously.

But then they start to impose the “old” process conditions on the “new” system; for example, only a full credit will be acceptable, and a new invoice will be issued to cover the “delta” i.e. what the customer actually bought vs. what was returned/refunded. Perhaps they need a 1:1 match between the credit and the original invoice.

The problem with this is that, in a Zuora landscape (or, more precisely, a subscription landscape), it doesn’t work. Not without customisation. Zuora works on the basic premise that you start with version 1 of the sale (or subscription, really). Any change after that will give you version 2, version 3, ad infinitum. It uses its own mechanism, known as an Amendment, to manage changes.

Why Does This Problem Occur?

Now that we have a specific example, we can start to look at why this is the case. I have some theories, and I think they’re correct. I’ve seen it with several customers.

  1. People use the word “subscription” but haven’t thought about what the word really means
  2. In a new systems environment, new tools, metrics and controls will apply
  3. We cannot lose sight of the fact that the accountant’s view of the system (and his requirements) are still valid and important; but when we port old systems to new systems blindly, ultimately it is the solution that is flawed. It just doesn’t match the reality of subscription management.

I will address the three points above in turn.

1. What Is A Subscription?

It’s an interesting question, and one that I think has an easy answer:
“A Subscription is a sale where there is a recurring element to the provision of (and, usually, the payment for) goods or services.”

Contrast this with transaction-based selling, where you sell once, the customer pays once, and the process is complete. And ask yourself the question: are you thinking Subscription but practicing Transaction? Is there a finite start and end date associated with the deals you are labelling as Subscriptions? If so, I would dare to venture that this is not a true Subscription. Perhaps you have to go through a defined renewal process to re-engage with the client, and to effectively re-sell to them.

2. What New Tools, Metrics and Controls Will Apply?

The answer to this is a little more complex. But once you have gotten your head around the first question and resolved it internally, it starts to become clearer. And your business may have to adapt to a better, more efficient way of carrying out the business of selling so that it can take advantage of new tools and build new measurement metrics. The controls will follow once the process is optimal.

The new metrics are touched upon in this blog.

Old numbers, metrics and measures still apply but a subscription business needs these new metrics to plan ahead successfully.

Read Denis Pombriant’s blog post which also makes reference to new metrics vs. the ERP mindset.

3. What Is The Preferred Solution?

There are several components that go to make up the preferred solution. But they will always have the following characteristics:

  • Little or no customisation
  • A good product fit
  • An optimal business process

All of the above are ideals, and are usually hard to achieve fully. But we should always strive towards them. They are laudable aims for any new systems implementation project; they usually yield faster returns, better adoption and enhanced product trust. There’s a bigger discussion to be had around topics such as process mapping, business process re-engineering, change management and operational culture, but I cannot do them justice here.

The Nub, Gist And Central Point

By now, you may be inwardly urging me to make my point. And rightly so. It is this:
In a subscription-based Zuora systems landscape, you can make best use of their product by re-thinking how you sell and account for sales. Rather than a collection of discrete transactions, I will coin this phrase: the Subscription Continuum. Your business interacts with your customers on a regular basis and your transactions are regular also. But there’s another point to consider: the customer may be engaged in several subscription “streams” with you; if they are buying several products from you, they may have several subscriptions running in parallel. They all form part of a continuum of transactions, in fact real subscriptions. This mindset change may appear trivial, but it is huge.

More to this point, let’s take the case where a customer has purchased several subscriptions from you. Assume that Product A, Service B and Product C were bought at different times and their monthly payments may or may not have been aligned to the same date every month, depending on your business practices. You don’t really want to issue three invoices per month to the same customer, do you? Perhaps you do, but you have that flexibility too. Maybe the customer upgrades from Service B Basic to Service B Gold, so he has to pay a little extra every month, but for his first month he upgraded mid-month, so you need to calculate a pro-rated additional amount to charge.

What I’m trying to demonstrate here is the level of complexity possible in the subscription world. And I’ve only really touched on the possibilities. You don’t really want to get into the position of having to re-engineer your software to cope with these possibilities. It’s a complex calculation when you get into the intricate workings of a Rating and Billing Engine (RBE) such as Zuora. The keys are

  1. education (in how Zuora works out of the box)
  2. simplicity (in your product offerings, payment options, pricing)
  3. flexibility (re-thinking how you manage your sales accounting)

You don’t have to re-invent the wheel.