Don't Let Monthly Fees Erode Your Profits
I just cancelled two membership services. Big news, huh?
Not really. The move will save me about $160 month, not quite $2000 a year. That's a significant savings, but it won't make or break my business.
What if I had ten times that number of subscription services? It's easy to rack up twenty or so services averaging $14.99 a month, and that's $2878 a year. Pretty soon the numbers get big. Very big.
Subscriptions Spell Profit
For the past several years, providers of SaaS (Software as a Service) and Cloud services have been celebrating what my colleague Robbie Kellman Baxter dubbed "The Membership Economy," with good reason.
Converting users to monthly subscriptions, especially when billed annually, is an excellent way to create recurring revenue streams. (You can't even use it in your business!)
Monthly fees are predictable and consistent. Churn is generally manageable. Simply bill the credit card on file and cash flows in.
The problem is, many of us "set it and forget it," paying for services we no longer use. The annual subscription renewal date comes and goes, and we think, "it's only $120, I'll let it go," or "maybe I'll cancel next year."
Sellers bank on this, benefiting from additional income that amounts to pure profit.
Who can blame them?
Bleeding from the Bottom Line
The problem for solopreneurs is that what's good for your vendors may be bad for your bottom line. Sure, there's simplicity in the model. It's easy to sign up and frequently "you can cancel any time."
There's a much lower decision threshold for a subscription that costs $15-20 a month than a purchase of $2500 or even $200. These low monthly fees hover under the radar, unnoticed, until you start wondering why your profit vanished.
The Free Trial the Wasn't
Subscriptions services are so common, you may have signed up for things you forgot about about. Core services like Salesforce and Quickbooks don't escape notice. Are you also paying for cloud backup, stock photography, and social media tools? How much do they cost?
Frequently these services start with a "free trail" that requires a credit card. You may not be charged until the trial ends. Forget to terminate an unused service and you can pay a lot for something you don't need or want.
The Cost of Convenience
These days, just about anything your business needs can be purchased with a subscription. Legal services, bookkeeping, tech support, PR. We can and do embrace the subscription model for its convenience and accessibility.
It's a wonderful way to amortize costs over time, removing big hits that used to happen when you needed to upgrade to the latest software version or renew a long-term contract. It's easy to budget, especially for small businesses on a cash accounting model.
Unfortunately, problems develop as the cost of everything adds up. When unnecessary subscriptions roll on from month to month or year to year, vendors are profiting from their customers' laziness or inattention.
Break the Subscription Cycle
If you want a healthy bottom line, break the spell. Track every subscription. Know what it's for, what it costs and when it renews. Can a service truly be cancelled any time, or only when the annual renewal date rolls around?
Instead of waiting for your annual budget cycle (if you have one), the membership model demands regular oversight. Employ monthly or quarterly diligence: look at what's renewing in the next 2-3 months and decide if those are services you still need.
If you want to maintain a subscription, be sure you're getting the best price. Have prices come down since you first signed up? Does a newer competitor offer more favorable terms? Can you negotiate a better rate or find a discount on a site line RetailMeNot?
It takes work to monitor and manage the proliferation of subscriptions, but it's necessary for a financially sound business. To make it easier, use this 8-point checklist to evaluate your subscriptions:
8 Questions Smart Subscribers Ask:
- Do I still use this service on a regular basis? For something you only access occasionally, a pay-per-use option might be better.
- Am I using similar services that could be consolidated? For example, do you need Dropbox, Box and Google Drive? Standardizing and save.
- Is there an option for an outright purchase that would be more cost-effective? You'll may add maintenance, support and upgrade costs, so do the math carefully.
- What's the going rate? If I want to keep this, am I getting the best price available now or paying a higher fee although costs came down?
- Is the list price real? Have I applied discount codes, coupons or other savings (such as those available through associations)?
- Is it negotiable? Can I negotiate terms instead of paying published prices?
- Do I have the right number of licenses? Some services require a license for every user, others charge per concurrent login. Don't pay for more than you need.
- What's the ROI? The most important question of all: does this service return value to your business in terms of revenue generation, productivity, strategic insight, security or cost savings?
A version of this post originally appeared on JoeyFerguson.com