Subscription business model risks come from all angles and can present themselves unexpectedly. Anyone can cause immense damage to the bottom line of a SaaS company already running on a knife-edge, trying to keep operations running smoothly. However, when you know what these risks are, it is much easier to prepare for and actively tackle them. So, from high customer acquisition costs to customer retention, here are some of the most common.
Hidden Payment Gateway Transaction Fees
Payment processors handle transactions between your business bank accounts and the customers. Like a middleman, they also take a cut of the charges. However, depending on your business type, these fees can begin to become excessive, especially if it is classed as risky. That’s why you need specialist gateways such as adult payment processing services. As such, excessive fees can be kept to a minimum, reducing costs and helping increase your margins.
A Subscription Business Model has High CAC
Customer acquisition costs (CAC) are one of the largest expenses a business, especially in the SaaS sector, can have. In fact, the range of CAC in SaaS is between $200 and $1,000 per customer when lifetime value is factored in, but there are some ways to reduce costs:
- Try using tried and tested organic models such as SEO, social media, and co-marketing.
- Offer free trials and more exciting onboarding as part of a product-led growth strategy.
- Targeted content, optimized sales funnels, and data-driven AI can improve conversion.
Problems When Scaling the Business
Scaling is a major part of modern business, and SaaS companies are no different. However, there are some unique challenges when it comes to scaling a subscription-based service. For example, support teams can become overwhelmed with the sudden influx of new customers that require their expertise. As such, labor costs will increase, and there is a risk to operational efficiency. Scaling at volume also requires automated systems that add to the growing costs.
Wasted Licenses with SaaS Models
Companies that subscribe to SaaS services often buy licenses en masse because it suits them at the time, and multiple personnel can use the service. However, employees leave, and things change, leading to “seat creep” and wasted licenses. Yet while the licenses a customer has paid for remain active, there is the potential for them to drain the available resources of the SaaS provider, leading to months or even years of wasted resources that can be used elsewhere.
Companies that subscribe to SaaS services often buy licenses en masse because it suits them at the time, and multiple personnel can use the service. However, employees leave, and things change, leading to “seat creep” and wasted licenses. Yet while the licenses a customer has paid for remain active, there is the potential for them to drain the available resources of the SaaS provider, leading to months or even years of wasted resources that can be used elsewhere.
The Churn Rate of a Subscription Business Model
Your business can fail because of high involuntary churn rates (canceled subscriptions) of around 3% to 8% per month. However, B2B SaaS services see a lower churn rate of around 5%. You can use pre-made dashboard templates designed for specific profiles to save time and money, but there are also a few more handy tricks you can use to dramatically lower churn.
Your business can fail because of high involuntary churn rates (canceled subscriptions) of around 3% to 8% per month. However, B2B SaaS services see a lower churn rate of around 5%. You can use pre-made dashboard templates designed for specific profiles to save time and money, but there are also a few more handy tricks you can use to dramatically lower churn.
Onboarding and time to value
It is valuable to monitor customer usage and map out the exact time they realize the product's value, and then build onboarding systems around that “Aha” moment with minimal friction.
It is valuable to monitor customer usage and map out the exact time they realize the product's value, and then build onboarding systems around that “Aha” moment with minimal friction.
Proactive customer success
Monitor customer data to look for declining logins, especially if usage grinds to zero, and reach out as quickly as possible to re-establish engagement and help solve any problems they have.
Monitor customer data to look for declining logins, especially if usage grinds to zero, and reach out as quickly as possible to re-establish engagement and help solve any problems they have.
Feedback and engagement
Always solicit feedback by throwing the net to as many customers as possible, and encourage interaction with feedback loops and exit interviews, and include customers in feature reviews.
Reducing churn at a subscription-based business is not as challenging as you might think. In most cases, it takes some reevaluation and a few adjustments, many of which you may already be considering, such as better onboarding, reaching out to customers, and using feedback.
Always solicit feedback by throwing the net to as many customers as possible, and encourage interaction with feedback loops and exit interviews, and include customers in feature reviews.
Reducing churn at a subscription-based business is not as challenging as you might think. In most cases, it takes some reevaluation and a few adjustments, many of which you may already be considering, such as better onboarding, reaching out to customers, and using feedback.
Inventory and Stock Logistics Issues
If a SaaS company also provides physical products to use the service, such as Sky, Virgin Media, or Tiivo, there is an added logistical challenge. Physical boxes, for example, need to be stocked, managed, and shipped in line with customer demand. Companies like SKy get around some of the challenges by leasing used boxes and equipment, but that may not always be possible, and poor inventory forecasting leads to problems such as over- or understocked items.
If a SaaS company also provides physical products to use the service, such as Sky, Virgin Media, or Tiivo, there is an added logistical challenge. Physical boxes, for example, need to be stocked, managed, and shipped in line with customer demand. Companies like SKy get around some of the challenges by leasing used boxes and equipment, but that may not always be possible, and poor inventory forecasting leads to problems such as over- or understocked items.
Problems Integrating with New Tech
Most companies today rely on various pieces of technology, mostly software, for smoother operations. However, using multiple apps and tools that don’t integrate into IT systems can lead to disjointed technology stacks that delay or even hamper operations. As such, old issues such as manual data entry errors lead to higher IT costs and potentially lost revenue through lower quality service. However, custom dashboards and apps can solve some of these issues.
Most companies today rely on various pieces of technology, mostly software, for smoother operations. However, using multiple apps and tools that don’t integrate into IT systems can lead to disjointed technology stacks that delay or even hamper operations. As such, old issues such as manual data entry errors lead to higher IT costs and potentially lost revenue through lower quality service. However, custom dashboards and apps can solve some of these issues.
Subscription Business Model Customer Retention
Customer acquisition is important, but customer retention is critical. As such, the costs range from between 5% to 15% of revenue, but it is money well spent compared to CAC. If you need to keep valuable customers for your SaaS business, there are a few things you can try out:
Customer acquisition is important, but customer retention is critical. As such, the costs range from between 5% to 15% of revenue, but it is money well spent compared to CAC. If you need to keep valuable customers for your SaaS business, there are a few things you can try out:
- Always strive to provide exceptional customer support to provide ongoing value.
- Reward long-term customers with discounts and incentives to continue usage.
- Re-engage with inactive users with targeted content, free training, and regular check-ins.
Keeping Revenue Compliant
Compliance forms a major part of modern business, and the risks associated with non-compliance aren’t even worth thinking about. However, it can be something of a minefield for SaaS companies because tracking revenue through subscription-based models is technically challenging and usually requires specialist accounting software for SaaS revenue recognition. SaaS companies may also need to hire external auditors more often to avoid financial issues.
Compliance forms a major part of modern business, and the risks associated with non-compliance aren’t even worth thinking about. However, it can be something of a minefield for SaaS companies because tracking revenue through subscription-based models is technically challenging and usually requires specialist accounting software for SaaS revenue recognition. SaaS companies may also need to hire external auditors more often to avoid financial issues.
Summary
Hidden payment gateway charges can be one of the biggest subscription business model risks that can cause a lot of financial damage to the company. However, SaaS services also have a high churn rate as customers come and go based on their own needs, strengthening the need for solid customer retention methods. Of course, one of the biggest risks to any business is non-compliance, and SaaS services often have a harder time keeping revenue compliant.
Hidden payment gateway charges can be one of the biggest subscription business model risks that can cause a lot of financial damage to the company. However, SaaS services also have a high churn rate as customers come and go based on their own needs, strengthening the need for solid customer retention methods. Of course, one of the biggest risks to any business is non-compliance, and SaaS services often have a harder time keeping revenue compliant.
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