Transitioning to subscription pricing

Getty Images

Note from the editor

There’s little doubt why subscription pricing models are so popular today, especially with software companies: they give companies the kind of sticky, predictable revenue that attracts investors, leads to higher valuations and makes debt easier to raise.

Of course, there’s a downside, too, at least compared to the traditional perpetual-license model. Companies must accept lower revenue per contract, in the short term, because customers pay for the product or service in increments rather than all at once. As a result, it might take a company three years to generate, say, $3 million in revenue from a contract that a perpetual-license company gets upfront.

But business leaders clearly consider slower revenue a small trade-off. After all, in that three-year period in which a company is generating less revenue, it can touch its customers each billing period with offers for upgrades, add-ons, or additional products or services that can increase each customer’s lifetime value.

What’s more, reaching those customers with additional sales opportunities is relatively cheap, since the relationship is already established and regular contact is already baked into the process. That means that lifetime value (LTV) can come at a relatively low customer acquisition cost (CAC). And as CFOs today widely recognize, high LTV at low CAC is a proven recipe for success.

Even so, there are issues a CFO must wrestle with. Take billing, for example. Subscription billing is complex, especially if you offer early-pay discounts or base fees on a consumption model. The more variations you offer, the more sophisticated the billing system you need. 

To help you see how CFOs respond to the advantages and challenges of subscription pricing, we’ve compiled a selection of pieces from CFO Dive. We hope you find the pieces useful, whether you’re transitioning away from a traditional model or trying to improve your existing operation.

Robert Freedman Editor

Move to subscription-based licensing a risk worth taking, CFO says

Software company 1E wrestled with poor revenue visibility and end-of-year volatility under its old perpetual licensing model.

• Published Sept. 1, 2021

Moving to subscription pricing? Prepare investors for a short-term revenue drop

Following a successful transition, subscription models tend to bring in more long-term revenue.

• Published Sept. 1, 2021

Assess product, back office before moving to recurring revenue model

Success with subscription pricing depends on whether you've laid the groundwork, executive says.

• Published Sept. 1, 2021

AllCloud CFO: ASC 606 a path to recurring revenue model

Finance chief Jody Cire found a way to smooth volatile revenue recognition at a previous company by switching to a ratable accounting method.

• Published Sept. 1, 2020

Building your own SaaS billing system not for the faint of heart

A system that grows as your services and pricing become more complex will be far costlier and take longer than you expect, a consultant says.

• Published Sept. 1, 2020

Trading platform equips SaaS companies to sell subscriptions to investors

L.A.-based start-up Pipe says it provides software firms with an alternative to equity and debt by treating annualized customer contracts as tradable assets.

• Published Sept. 1, 2020

The wave of transitions to subscription pricing

There’s little doubt why subscription pricing models are so popular today, especially with software companies: they give companies the kind of sticky, predictable revenue that attracts investors and leads to higher valuations. However subscription billing can be complex, and there are many nuances CFOs must tackle.

included in this trendline
  • Move to subscription-based licensing a risk worth taking, CFO says
  • Assess product, back office before moving to recurring revenue model
  • Building your own SaaS billing system not for the faint of heart
Our Trendlines go deep on the biggest trends. These special reports, produced by our team of award-winning journalists, help business leaders understand how their industries are changing.
Davide Savenije Editor-in-Chief at Industry Dive.