Switching From One-time Sales to Subscription Pricing
Subscription pricing has become an extremely popular revenue model these days. It seems like any product or service such as wine, tea, cosmetics, or HVAC maintenance can be purchased via a subscription. One-time sales seem to be a thing of the past.
You can’t blame businesses for jumping on the subscription pricing bandwagon. Why go through all of the effort to acquire a customer and then say goodbye. It can be much easier to keep a customer than to be constantly prospecting for new customers.
How do I switch to subscription pricing?
This is a hard one. Whether subscription or one-time, pricing is both art and science. There is not one correct way to create your pricing structure. Obviously, your customer will want to pay a lower annual fee than the cost of purchasing the product or service as a one-time sale.
And this is where your business can run into trouble. If you are an existing business switching from one-time sales to subscription sales, your cash flow will experience an immediate and potentially severe impact.
Why is cash flow impacted?
Say, for example, you were selling a service for $1,200. You receive $1,200 immediately at the time of sale. Now, you offer this same service as a subscription for $600 per year. Your cash inflow is now $600 less and it will now take two years to collect $1,200. You cash flow timing has changed.
In the chart below, year 1 follows the one-time sales model. You receive $1,200 at the time of sale. In year 2, you switch to subscription pricing and take a cash hit and your cash flow is cut in half. In year 3, you are back to status quo and in year 4 you are now benefiting from a pricing model change. This example assumes no churn.
Of course, if you keep this customer, you will earn more cash over the long run (depending on churn) than a one-time sale.
Be prepared to take a cash hit when switching to a subscription model. The degree of impact will depend on your new pricing and cost structure, but I recommend modeling the financial changes to your business before making the switch.
Cash flow is king to a small business, so you must prepare your business for the timing change.
Also, you are now in the world of subscription economics. Basic financial statements will tell you the whole story. You will want to track traditional subscription or SaaS metrics such as average revenue per account (ARPA), customer acquisition costs (CAC), and average cost of service (ACS) to name a few.