What is a Subscription-based Revenue Model?
A subscription-based revenue model is one where customers pay a recurring fee for a product or service. Generally customers will pay for the product for a particular time period - often weekly, monthly or yearly - with the option to renew the subscription at the end of the period.
The model allows the business to control a steady stream of income by managing a relatively small number of drivers, whilst offering customers the flexibility to only pay for a product which continues to provide value.
For this reason, a Subscription-based Revenue model is often seen as a very effective revenue model for growing a business. When valuing a business, subscription based businesses often get valued at up to 10x their Annual Recurring Revenue value, compared to 3-5x for traditional one-off sales revenue models.
What are the benefits of Revenue Planning?
Creating a Revenue plan (often called a Revenue Forecast) allows you to use sensible assumptions and solid data to predict as accurately as possible the future performance of your business. It can be a ‘crystal ball’ for your business, which can help you in so many ways, such as:
Strategic decision making
Considering different strategies for your business? A robust revenue plan lets you predict the outcomes of different scenarios which can help you make the most effective decision for your business.
- Got a solid user base, but not hitting your revenue targets - what happens if you increase your price next year?
- Acquiring lots of new customers but struggling to retain your existing ones - what happens if you target retention and reduce churn by 2%?
Cashflow
As a business, managing your cash is one of your top priorities. Being able to predict the amount of Revenue coming into the business in the future is key to controlling your cashflow, and managing your business expenses accordingly.
Budgeting
Knowing expected future revenues helps you to set appropriate budgets for future periods before you even get going. This helps you stay on top of your business and gives you a baseline to compare your actual performance against as time goes on.
Investor relations
Investors are always interested in expected future performance of the business. Revenue projections and forecasts are up at the top of the list of things they will have plenty of questions about. Creating a revenue plan with robust and understandable assumptions will go a long way in convincing investors that your business is one worth investing in.
When should you be modelling Subscription Revenue?
Revenue modelling is a continuous process - it should never be a one-off activity! Whilst often a detailed plan is built out ahead of a financial period (like the start of the financial year), it is important to check on your assumptions and adjust the values to maintain an accurate picture of the future.
Circumstances can change, your assumptions may have been wrong or you’ve changed the way your business works slightly. There’s tons of things that can impact your Revenue and your model. By constantly checking, updating or creating new models you can ensure your business can adapt quickly to change, make data-driven decisions and stay ahead.
How will you model with this block?
Modelling with the Subscription Revenue Planning block is straightforward with Blox. You can create a plan in 5 minutes by following the simple guided steps:
- Select your planning timescales
- Input some assumption values for key drivers for your Recurring Revenue. Including:
- Current customer numbers
- Subscription Prices
- Customer growth and churn assumptions - View your plan through an interactive analysis dashboard and adjust your drivers to see the outcomes
- Save your model and share it with others!
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