Do you know how to manage the costs of developing in-house subscriptions?
Are you reselling and purchasing subscriptions? These questions are extremely important to determine your subscription cost of sale and ultimately your profits.
Whether you are in SaaS subscription or running other subscription models, it is common to deal with subscriptions you need to acquire before you can sell yours. Dealing with 3rd party subscriptions means you would need to track your purchase obligations either directly related to your sold subscription, or as part of your own supplier subscription expenses. Managing in-house subscription research and development is a different ballgame. Using internal project costing to capture all related costs, both direct and indirect, is key to understanding your profitability. Yes, selling drives the revenue and ARR stream, but without strong cost control you might end up with very low profitability.
The importance of process understanding is to find process activities you can automate and streamline.
Safeguarding your profitability:
Let’s investigate the details that your subscription business runs on to establish profits in light of two core aspects, cost structure and efficiency.
#1 — Understanding your cost structure
In most cases, costing your subscription offering and aligning the financial dimensions per cost driver is a key starting point. The main process elements consist of subscription procurement and internal cost for research and development to provide the subscription. Each financial dimension requires cost control. Key cost control drivers often capture expenses related to:
- 3rd party software or services procurement
- Internal R&D projects
- Customer success or support delivery
- Maintenance and updates
- Hosting or other services
- Hardware and/or equipment
- Subcontracted services
- Sales commissions
Once you establish the business capability to capture and report costs using the financial dimensions that are explained above, you then need to determine your subscription product structure. Each subscription offering needs to be defined as a dimension as well, so that you, next to assigning cost to the above cost elements, assign costs to a subscription product. This can be done as direct cost via e.g. purchase orders, or indirectly, using for example allocation of costs.
With the above financial costing structure, you can rely on a clear understanding of costs and their origin as well as how they are assigned to the costs of a subscription item.
#2 — Streamline your processes
To ensure you are not losing out on profits, you must review your processes and ensure they run simply and smoothly. A great way of recording your processes is mapping the customer journey to your internal touchpoints. See an example below:
The importance of process understanding is to find process activities you can automate and streamline. Let’s review a few examples:
- Customer orders your subscription resulting in a first cycle invoice. In this case, it is most streamlined if your salespeople creates the quotation first and upon signing the agreement click on won, resulting in an active subscription and automatically invoicing the customer for the first term.
- When a subscription needs to be renewed, your automation should create all subscription renewals for the upcoming week and you just approve the process of sending a renewal invoice, or even better, fully automate the process of sending out renewal invoices.
- You need to order 3rd party subscriptions to accommodate your sold subscription. Automation should create a purchase order for you, so that you can send them to the supplier automatically.
- You want to index subscriptions with 3%, offsetting inflation for example. Automation should run a process that uplifts the prices with that index automatically.
- Provide customers with a self-service portal, so they can order or ask questions themselves.
Although automation requires initial CAPEX investment, and perhaps OPEX expenses as well, ROI is proven, helping you to reduce your costs and increasing profitability.