.. a kind request to a business I help advice on their transition to a subscription and service based business. They deal in consumer insurance which is not tech related.
The response I got was a stare. The company spend several years in moving customers from quarterly invoicing and annual invoicing to a long term (2-3 year) billing model. The company needed the upfront cash flow; and they got a benefit.
Let me explain why I believe they made a big mistake.
The drawback of the upfront cash flow is a direct impact to the business. Revenue capture is 80-90% – all good. But customer renewals <60%. Why? Very often I get this response, and companies spend millions to analyze excel, call customers, drive rebates to recapture, change their product and review the scope. All of this is a reactive, inside-out and none optimized way to understand how customer behave.
I asked the business to offer 0% discount if customers were to move to a monthly manually billing, 2% discount if customers moved to an automated billing (using Upodi) and 4% uplift if customers want to pay annually.
The core reason is behavior. When you push customers to an annual/long term billing cycle, and dealing with non-tech companies, the real only touch points you have with your customers is the time of renewal or additional purchase. If you sell 1-2-3 year agreements, you basically have to over deliver on your product innovation to keep ahead of any competitor and this creates a huge churn. You then employ people to call customers yearly, or have customer success managers. But reality this is an increased cost, and yes – you end up discount anyhow.. P&L is effected by increase cost of operations, and product value decline year over year.
When you move customers to a monthly billing, you have a strict KPI to measure if a customer is about to churn. In addition you can automate your business workflows, capture changes and impact – keep the legal binding on a 12, 24 or 36 month contract – but autobill every month. Using a creditcard, no longer do you have to wait for money (revenue capture increases) but you claim. AND you get the opportunity to embed cross and up sell campaigns into the monthly invoice.
Let me stress this may not work in all scenarios. And the company I worked with had the benefit of a huge cash reserve. You might need to loan money for operations to withstand the billing incurrance, yet consider wisely how you operate.