The top 4 challenges of the subscription model

You may have noticed an increasing number of companies offering their wares or services as subscriptions. The consistent revenue the model provides means businesses offering subscriptions will likely have more resources than peers providing one-time charges or purchases.

While there are benefits to traditional transactions, consumers are also likely to get swept up in the novelty of the subscription-based economy and favour businesses that provide a subscription option. As a result, your business may have to implement a form subscription model in order to stay competitive.

Doing so may be a challenge, but Avalara is here to help. In this article, we’ll list a few of the problems with the subscription business model and how you can overcome them, so you can reap the benefits of this highly popular business strategy.

 In the subscription-based economy, keeping your business up to date with tax obligations means ensuring you’re fully registered with all the relevant authorities, understanding your deadlines for tax returns, and knowing which rates apply to your sales. Failing to do so can lead to financial and legal noncompliance penalties. These tasks can be reasonably simple for small businesses, but become more complex the larger your business grows.

Specifically, you may need to seek support or find a digital solution if you’re trading internationally. The unique tax laws for different countries can add a layer of complexity to compliance. For example, the economic and physical presence nexus rules in the U.S. make it tough for businesses to understand in which states they owe taxes, and each of those states may also have different laws regarding the taxation of subscriptions.

Having an awareness of changing regulations is key, as is performing thorough research prior to any big initiatives (like adopting the subscription model).

If you don’t have a background in finance or tax law, consider outsourcing your research to a more knowledgeable partner. Avalara offers research services covering both U.S. and EU tax rules, so you can enter into new markets without worrying about unknown factors.

In a normal transaction, the responsibilities of the sales staff usually end immediately after the sale is completed. While they might act as a point of contact for an ongoing customer, they would usually forward any concerns to customer service personnel.

In the modern subscription model, a transaction isn’t singular, it’s recurring. As such, there needs to be a much greater emphasis on the relationship between customers and the business. The traditional responsibilities of sales staff may not be suitable for this new model, which could lead to complications like retraining and redeployment.

Subscription-based businesses need to create teams that look at building customer relationships, with specific regard to the renewal of a subscription. This team would be at the forefront of any upselling (or cross-selling) opportunities.

A good way to think about these teams is to combine the role of sales staff with customer service. If a customer has an issue with the subscription product, they’ll go back to a sales team member who can offer assistance – as well as keep an eye out for opportunities to upsell. For the customer, having the opportunity to access additional products and support helps them get more value from their subscription.

A lot of details are involved in the successful implementation of the subscription model, including financial data, payment plans, and customer information, like addresses and contact details.

One of the problems with the subscription business model is working out how to manage all this data. A successful model needs to have a solid business infrastructure, which means having access to both a robust tech stack and well-trained staff. Customer data needs to be stored and organised efficiently, but it should still be easy to access on both the business side and the customer side.

Automation can solve just about any problem a business might face when implementing the subscription model. By using digital solutions — like those offered by Chargebee — even smaller businesses can manage the data-handling requirements involved in the subscription model.

What’s more, Chargebee’s solutions can continue to support your business as you scale. So when you start noticing an increase in revenue because of your new strategy, and want to expand your business further, you don’t need to worry about finding a new subscription platform.

A huge benefit of the subscription model is that it creates a lasting relationship with customers, ensuring that each individual is a regular source of revenue for your business. However, this relationship also leads to one of the key problems with the subscription business model.

A customer is unlikely to continue paying for a product without eventually asking what’s next. For some customers, they’ll want additional reasons to stay subscribed every time they’re billed. As such, subscription-based businesses are under pressure to add value each renewal cycle, as customers will consider the product's value each time they pay.

It’s likely that a product purchased with a subscription will be regularly updated regardless of customer demand — for instance, a software tool will be improved on a regular basis to remove bugs and increase efficiency. For more novel products that are only recently being offered via subscription, innovation can be a little trickier.

One method is to use the subscription model for a product that needs to be replaced regularly. If your company sells something that has a limited-use component (men’s razor blades, for instance), you could offer the option to subscribe to regular deliveries of the product. 

Doing so helps your company avoid the need to add value as you can instead rely on consumer demand. There isn’t as much pressure to update your product, and so your focus can shift to ensuring customers stay supplied instead of product innovation.

Are you interested in implementing subscriptions, but are worried about the tax implications or business risks? Get in touch with the experts at Avalara. We can provide you with guidance on managing the new tax liabilities the subscription model creates, as well as helping automate your overall tax compliance process.

Click here to contact Avalara today.

If you’re looking for more subscription-specific information, download our free whitepaper: Expanding into the Subscription-Based Economy.