The fish model - Why the transition to recurring billing costs and how you can minimize that cost.
When a CFO hears about recurring billing as a business model, the first thing he or she should think of is "The Fish Model".
If you are a traditional business (“Current state / Status quo) then you have costs (Cost) and you have earnings (Revenue).
Hopefully the cost is below earnings when you put it in a coordinate system. Often as two parallel lines. (Current status).
If you want to switch to a recurring billing model (“End state / vision), the following happens:
- Your costs will increase due to demands for increased technical capability and your revenue will decrease as they are now spread out over a longer period of time.
Do you remember when you paid DKK 15,000 for a license for Adobe Photoshop? Today you pay approx. 200 DKK./month - it goes without saying that in terms of accounting, there is some income which is thus distributed over a longer period. And when you go from one model to another, it will create a huge dive in earnings.
Swallow the Fish - is there anyone who says... (and it does not have to be like watching a Youtube video of people trying their hand at the Swedish "delicacy" sour flow for the first time). If you (top management and owner) are not set on increased costs and reduced revenue and have the financial buffer to address this - then stop.
But if you have seen the "light", and your colleagues in the top management and owners are on the journey, then there are a few tricks where you can make the fish more edible. Make it flat so it gets a herring shape.
Minimize the decline in earnings.
Instead of changing the ENTIRE company at once, start with just 1 product group, for example. It could be the launch of a new product or a new service. Or a new customer group. It does not have to be a big bang implementation.
- Select e.g. one new market. Market penetration can be easier when offering a service at a lower fixed monthly price than a high one-time investment.
- Select one of your existing products.
- Select a new segment for your service.
The opportunities to minimize the decline in earnings are many and the list above is far from adequate.
Reduce the increase in costs.
Costs for managing subscriptions and recurring billing will increase. It's complex stuff. The demand for technology is big. The requirement of you having control over your customers' data and possibly payment card data is high.
Roughly speaking, there are two approaches to how to handle the technique. A) do it yourself and B) use standard software and standard components.
- Select a default platform
- Start simple - be prepared for complexity
Either way, you will experience an increase in costs due to increased complexity. BUT, model A) of embarking on building a solution yourself and hiring developers to handle that task is a heavy solution and requires deep pockets. In addition, we (Upodi) often experience that business-critical decisions about price structures, dynamic prices, new settlement models are difficult to test, because the task of adapting lies with IT and becomes an IT project more than a business project.
My recommendation is (not surprisingly) to use a standard platform, model B, such as Upodi. It will give you a faster access to the market and it will give you a much greater freedom of maneuver in relation to implementing new pricing models and making different attempts. And you know that data is in control.
Upodi is a standard platform that helps companies keep track of subscriptions and recurring billing.
If you want a dialogue about how you can get started with recurring billing and at the same time make "The Fish" more edible, let us have a chat and try to find out how we can best help you.