Recurring Revenue: How a Subscription Model Could Benefit Your Professional Services Business

Businesses in all sectors have been actively looking for ways to move from purely ad hoc pricing to a subscription model. Developing recurring revenue-streams has significant benefits for professional services businesses too. So here is a guide to subscription-based business models.

Professional services and subscription models in numbers

In April (2022) we surveyed 300 c-suite executives in the UK to ask about their progress toward digital transformation. Here are some of the key findings from that survey.

Almost two-thirds (61.67%) of businesses had altered their pricing model in the previous 12 months. Of these, almost two-thirds (64.86%) had introduced a subscription pricing model. Over half (57%) of businesses planned to change their pricing and payment model (again) in the next 12 months. Of these almost three quarters (70.76%) are considering implementing a subscription model.

At present, online payment via a business’ website is the most popular way to accept payments. Almost half (49%) of respondents supported it. Invoice (47%) and in-person contactless payment (44.33%) followed close behind. Virtual terminals and in-person cash payments were supported by about a third of merchants (38.67% and 35.67% respectively. By contrast, fewer than a fifth (16.67%) took payments through social media.

Over three-quarters of respondents (79%) said that they were planning on adding new payment acceptance types in the next 12 months. The most popular option was invoicing (27.33%). Interestingly, over a quarter (25.33%) of respondents said that they were planning to take payments through social media.

What is a subscription-based business model?

A subscription-based business model is a business model in which you charge a pre-agreed amount on a pre-agreed billing cycle for a pre-agreed service.

Subscription-based business models are typically used for services rather than goods, although the service may be for the provision of goods; for example, businesses that sell consumables now frequently offer subscriptions for a regular delivery of those consumables.

In fact, the origins of the subscription-based business model are believed to date back to the invention of the disposable razor. Manufacturers realised that they could create recurring revenue by selling razors with blades that were designed to be replaced instead of sharpened. This set businesses down the path of subscription-based business models.

Which of the following is an example of a subscription-based business model?

Subscription-based business models are often confused with other related business models. See if you can spot which of the following is an example of a subscription-based business model.

A) A merchant sells high-value services. They allow you to spread the cost of these services over 3–12 months interest-free.

B) A merchant sells digital products alongside their service offering. They keep your details on file to make checkout quicker and easier.

C) A merchant provides regular services to you. To save time, they bill you through a repeating invoice.

D) A merchant has an agreement with you that they provide a certain level of services on a recurring basis for an agreed fee. This fee is billed automatically.

The only correct answer is D. A is an example of instalment payments. B is an example of card-on-file payments.

C may look like an example of a subscription-based business model but it’s not, because the merchant is providing the services on an ad-hoc basis. It just so happens that your behaviour is predictable enough for the merchant to set up a repeating invoice to charge them.

In example D, there is a specific agreement that the merchant provides a certain level of services on a recurring basis for a consistent fee. That makes it a subscription-based service.

What is an example of a subscription model in professional services?

The modern professional services sector tends to be highly dependent on software. This software used to be sold as a one-time purchase. Now, however, the companies behind the software increasingly sell it on a subscription basis.

That means instead of buying software to run locally for as long as they want, professional service companies buy access to software for as long as they need it. This gives the software developers a recurring revenue stream, and gives you more predictable expenses and more flexibility in how you operate.

How do subscription models make money?

Subscription models make money in exactly the same way as any other business model. They make a customer’s life better in some way. This means either addressing a pain point or making a good situation even better. Subscription models do not necessarily make more money than ad-hoc pricing models, but they do generate recurring revenue.

Why should professional services implement subscription billing?

Subscription billing has become popular because it benefits customers and businesses alike. The customer gets frictionless access to a service they need. You get frictionless revenue. In the case of professional services, offering subscription billing may also please regulators, which have a duty to ensure that customers are billed fairly.

How does subscription billing in professional services benefit me?

The most obvious way subscription billing in professional services benefits you is by making it easier for you to manage your cash flow. This is often a good enough reason to implement it.

There is a more subtle benefit. Professional service businesses often deal with key areas of a customer’s life or a business’s operations. With a purely ad-hoc billing model, they may minimise their contact with a professional services company to minimise their costs, which is understandable. It also makes sense to encourage them to self-serve as much as possible.

However, there is also a case for encouraging them to have regular check-ins with you. This makes it possible to catch issues at an early stage, allowing them to be dealt with before they become serious problems.

How does subscription billing in professional services benefit business operations?

Similarly, the most obvious way billing in professional services benefits business operations is by creating predictable, recurring revenue. This is a good reason to use it.

There is a secondary key benefit. Offering subscription billing encourages a customer to check in regularly instead of leaving everything to the last minute. For example, in accountancy, subscription billing encourages a customer to take care of taxes as they go along. This helps to keep an accountancy firm’s workload consistent throughout the year rather than being heavily weighted towards tax-filing time.

Another benefit of subscription billing is that it helps to strengthen your relationship with your customer. This goes back to the fact that it leads to continuous service delivery and therefore an ongoing relationship. You can leverage this to win more business either directly or through referrals.

Subscription billing can also help you to win more business by expanding into new verticals. For example, much as a customer might love their pet, they might not bring it in for regular checkups due to the relatively high one-off cost. They might, however, subscribe to a pet-care plan that includes 6-monthly checkups.

How does subscription billing in professional services please regulators?

There are two reasons why offering subscription billing can help to please regulators. The first is that regulators often have a duty to ensure that service users are being billed fairly and transparently. Moving to a subscription model can help with both of these. The customer is told, in advance, exactly what they will pay and when in return for what service.

The second is that using subscription billing helps to reduce the sorts of issues that result in complaints to regulators. As service is provided on an ongoing basis, there is less scope for issues to slip between the cracks and end up being overlooked. This protects both you and the customer.

How can I tell which professional services suit a subscription payment model?

As a rule of thumb, modern professional services businesses can offer subscription billing as standard. In other words, instead of asking yourself which professional services suit a subscription payment model, ask yourself if there are any that don’t.

Once you’ve excluded any services that clearly don’t fit with a subscription payment model, work out both subscription and ad hoc prices for each service. Take the time to do this thoroughly because it can have a significant commercial impact. Here are some tips to help.

Decide between default pricing and customised pricing

If you’re an established business, you know what your customers have been spending. Analyse this data and see if there are patterns to allow you to offer standardised subscription packages with default pricing. If there aren’t, advertise the fact that you offer subscription-based rates. Even when there are, offer custom pricing as well.

Base your subscription pricing on your standard rates

Resist the temptation to reduce your standard rates for people who sign up for subscription pricing. This can devalue your service. Only lower your prices if it’s justified by the overall effect of customers moving to subscription-based pricing. For example, if you make significant cost savings, it may be reasonable to pass on some of them.

Make the terms of your subscription very clear

This is vital, particularly for professional service businesses as these are usually regulated. Make it explicitly clear what service you provide, when and how, as well as the price. Also, state clearly what the client’s responsibilities are. For example, if you require clients to use certain software, explain this clearly. If you need them to complete certain actions before you can perform your service, state that clearly. As always, put everything in writing.

Assess how your subscription pricing fits with your ad-hoc pricing

Very few businesses can run exclusively on subscription pricing. Most businesses need to offer a combination of subscription pricing and ad-hoc pricing. When this happens, make sure that both pricing formats work together.

Typically, a customer uses subscription pricing for their core needs. They should only pay ad-hoc prices for occasional needs, upsells, cross-sells and add-ons.

How do I implement a subscription payment model?

It’s quite straightforward to implement a subscription payment model. All you need is a system for automating payment collection. Square provides free subscription management software. There is also the Square Subscriptions API, enabling you to build your own payment applications that easily integrate subscription functionality.

If your business is still based on cheques or bank transfers, get set up to accept alternatives such as payment cards and digital wallets. This is much easier than it used to be. For example, you can now use Virtual Terminal for online and phone payments. There is also Square Reader and POS hardware for real-world payments.