How are subscription businesses faring in the midst of the current turmoil? With revenue less dependent on new sales, to some extent they're more insulated from the slowdown that's hit many sectors. It takes less effort to put off buying a product than it does to cancel a subscription. On the other hand, it's often more complex for these businesses to quickly adapt to new patterns of consumption. I took the opportunity to ask Lubor Ptacek, VP of Product Marketing at subscription platform Zuora, how its 1,000+ customers have been responding, at the same time as catching up on today's launch of its revenue recognition (revrec) product, Zuora Revenue.
While some sectors, most notably travel and live sports streaming, have suffered a big downturn, businesses delivering collaboration software, entertainment or online training have seen a marked rise in subscriptions. They've needed the agility to meet that rise in demand for at-home services with new subscription deals, says Ptacek:
They've scrambled to make it really easy for people to join. Either free offerings, or low commitment, or an extensive free trial period, [such as] a three month trial period.
In sectors facing a slowdown, companies have been adding ways to put subscriptions on pause rather than see their customers cancel, he adds.
In the travel world, nobody's travelling. So businesses needed to give people flexibility to skip a couple of billing periods [or] suspend the subscription.
Managing subscriptions is complicated
It's when businesses start making these mid-flight changes that they start to discover how complex it is to manage subscriptions. In a product-based business, each sale is a single transaction that is easy to link back to the original order. In a subscription business, each sale is delivered over time as a series of transactions. Making a change in the middle of a contract means recalculating those transactions and thus how the revenue is recognized. This requires close linkage from quoting and order management all the way through to billing and revrec — but it's something that traditional billing and accounting systems aren't set up to cope with.
The stakes for getting all of this right have been raised since the introduction of the new ASC 606 and IFRS 15 accounting rules for revrec. For many companies, this means finance staff spend days working through spreadsheets trying to close their books at the end of a quarter, risking stringent penalties if they are later found to have got it wrong.
Today's launch of Zuora Revenue provides an alternative that offers real-time calculation of revrec for subscription businesses. It is also the latest release of RevPro, the revrec automaton tool developed by Leeyo Software, which Zuora acquired two-and-half years ago and has since been working to integrate into its subscription management platform. Now that work is complete, Zuora can begin selling the revrec product to existing customers of its billing product, as well as selling its billing product to RevPro customers.
Why automation matters
Being able to calculate revrec in parallel with billing rather than dealing with it later on has three main advantages, according to Zuora. One of the most important in the current market is the ability to rapidly adjust existing subscriptions or launch new offerings, says Ptacek:
Some of our customers are looking into ways to quickly launch new types of subscription offerings. They not only need to be able to implement that, but they need to be able to quickly assess the impact of those offerings on their revenue. That's where this really helps their agility and gives them much more flexibility to give their customers what they want.
This is a feature that's been praised by early adopter Unity Technologies, a Zuora Billing customer that has integrated the revrec product. Felipe Lopez, Unity's Director of Revenue Accounting, says:
We can deliver real-time reporting to key stakeholders at any time with the click of a button, something that wasn't previously possible until we completed our month-end close.
Reducing the time that finance teams take to close the books at the end of the quarter is also important. This frees up time that can be spent more productively elsewhere, especially useful in times of uncertainty. Early indications suggest that these time savings can be significant, says Ptacek:
Anecdotally what we've heard is that you go from literally weeks that it takes to close books after quarter end to just a couple days, because you've been doing it all along throughout the process.
The final factor is compliance, which matters a lot to those responsible for an organization's financial reporting, Ptacek points out:
It gives you the visibility, the accuracy. It gives you the ability to deal with the volume and complexity. And I just want to emphasise the compliance as an important part of it.
Revenue recognition and revenue publishing is something that is regulated, especially for publicly traded companies. People have gone to jail for not doing it right. It does matter.
The uncertainty and unpredictability of market conditions right now mean that businesses need to keep a day-to-day watch on revenue and margins, and have to be ready to move fast to adjust their offerings.
This is immensely complicated in any business, but when customers are subscribing for a mix of products and services delivered over time, automation is fundamental to its successful operation at scale. Quite a few of Zuora's customers are probably breathing a sigh of relief that the company has finally completed its project of integrating RevPro into its broader subscription business platform — many will feel it's come not a moment too soon.