How subscription businesses can bolster cash flow and customer retention in tough economic times

In the current economic climate, characterised by slowing growth, the lingering effects of COVID-19 and tightened regulations, cash is more important than ever.

CFOs will be looking at cost, profit and risk reduction to improve their cash flow, and investors will increasingly favour companies that can demonstrate healthy cash reserves and the effectiveness of their customer acquisition and retention strategies.

Crucially, in today’s ever changing SaaS landscape, what will separate the leaders from the laggards is the ability to find the right balance between burn rate – how fast a company is spending its cash reserves to fund overhead – and growth rate. SaaS companies, now faced with a changing economy, now need to prioritise this shift, and sooner rather than later.

But that doesn’t mean hitting the brakes on new investments or expansion into different business models. In fact, contrary to the exaggerated rumours of its death, subscriptions could hold the answer.

Improving cash flow with subscriptions

Every year, around 50,000 UK businesses fail due to cash flow issues. This can be the result of unanticipated dips in demand, high overhead expenses, unexpected expenses and more.

However, subscription-based businesses boast several key advantages when it comes to cash flow. Subscription businesses not only benefit from lower customer acquisition cost and higher customer loyalty, their subscribers provide recurring revenue, making payments at fixed intervals and in pre-determined amounts.

During the pandemic, growth of the subscription market skyrocketed, and despite slower growth in 2022, the market is still forecast to grow to just over £1 billion by year end – a 72 percent increase from its value of £583 million in 2017. The challenge facing subscription businesses now is how to attract subscribers and keep them coming back for more.

Product-led growth and subscriptions for the win

Following a strategy of product-led growth means continually assessing where a business’s value proposition lies, and driving customer acquisition, retention, and expansion because of it. Adopting a subscription model alongside this methodology can further help retain customers and speed up time-to-cash.

In order to reduce customer attrition, businesses need to offer their product or service in such a way that its features, convenience and flexibility are compelling enough to keep people hooked for not just a week or a month, but for months or even years to come.

Businesses need to take a methodical approach, and continually adapt their subscription format to provide the most value and keep subscribers on-side. Usage-based billing, for example, can be an appealing option to try out, as subscribers don’t just pay a blanket monthly fee, but are charged a metred amount instead. The ultimate aim of this experimentation through product-led growth is to find an appealing proposition that pleases customers while bolstering cash flow.

How to optimise cash flow and minimise churn

Likewise, through intelligent subscription management, businesses can improve payment efficiency and cash flow. Payment failure is one of the most common causes of churn, occurring when a customer unintentionally drops a subscription because of a problem in the payment process, such as incorrect details, insufficient funds, expired cards or a lack of suitable payment formats on offer.

Technology tools can greatly reduce the number of these “cancellations by default”.  By automating accounts receivable (AR) workflows, businesses can ensure billing errors are minimised and further attempts at capturing payment are automatically being made after an initial payment has failed. What’s more, the insights gleaned from automated AR tools can help organisations proactively engage with customers on predicted payment failure to minimise involuntary churn and increase customer retention. This approach also has the added benefit of eliminating the need for copious amounts of manual work for the finance department, freeing up their time to tackle higher value tasks.

As Craig O’Neill, CEO, Versapay, notes, “To cushion the impacts of inflation, businesses will need to monitor their cash conversion cycles more closely than ever. And staying ahead of your competition means eliminating inefficiencies that leave money on the table”.

Finally, a well-thought out and pleasant cancellation experience is vital to a business’s overall retention strategy. Intelligent retention strategies like getting feedback on why a customer is cancelling, offering discounts and incentives to stay, or providing additional value can help businesses successfully continue the customer relationship, or at least encourage them to resubscribe in the future.

Cashflow – a competitive edge in 2023 and beyond

By prioritising product-led growth and optimising the subscription experience for customers, organisations can not only navigate the realities of these unprecedented times, but also keep their gaze on the future. When supported by the right tools, this approach can enable organisations to swiftly enter new markets and attract new customer segments, future-proofing their continued growth.

About the Author

Ash Lomberg is Senior Global Director, Strategic Growth at Chargebee. Chargebee is a recurring billing and subscription management tool that helps SaaS and SaaS-like businesses streamline Revenue Operations. Chargebee integrates with the leading payment gateways like Stripe, Braintree, PayPal etc. around the world to let you automate recurring payment collection along with invoicing, taxes, accounting, email notifications, SaaS Metrics and customer management.

Featured image: ©jamdesign