As more people start using subscription-based services like Spotify, FreshBooks, and Dropbox, more business owners are considering changing to a subscription-based payment model. The benefits seem clear: predictable, recurring revenue that you don’t have to re-sell every month.
However, there are a few things to keep in mind regarding the management of subscription-based payment models, as a recent article in Venturebeat.com has pointed out. Here’s what you need to think through before you make the switch.
- Plan for all the contingencies. Do you have an automated system in place for when a customer upgrades or downgrades in the middle of a billing cycle? What happens when a customer’s credit card on file fails to bill? How will you charge for past usage that hasn’t yet been paid for when the customer finally updates the payment method?
- Realize that there are gray areas when it comes to Generally Accepted Accounting Principles. Are subscriptions a software or a service? How your particular subscription is categorized will make a difference in how your accounting period is determined, affecting when revenues and expenses are recognized.
- Consider the tax implications. In the U.S., sales tax often applies to subscription-based products, and the rate can be 10% or higher. If your subscription is cloud-delivered, most states will treat it as a taxable software, not as a service. Different jurisdictions apply different definitions to “software”, however, so your individual tax situation may change. In South Carolina, software adn software subscriptions are subject to sales tax. Additionally, each year there are thousands of changes to tax rules that apply to subscription-based products. If you’re selling in different states, the tax rules you have to keep track of are amplified. Selling internationally further complicates things.
- Plan for PCI regulation compliance. When you retain online payment information, such as credit card numbers, you’re subject to PCI regulations. You can outsource the compliance if you’re selling in the U.S., but that’s another expense to keep in mind.
- Be sure you can track and manage effectively. As you experiment with prices, features, and other elements, you’ll need to be able to track what’s working and what’s not, in order to predict profitability.
The subscription-based payment model can be a good choice for some businesses, as long as these issues are taken into account. If you’re trying to determine if this model would be a good choice for you, I’d be happy to help you. Just give me a call at 864-836-3136.