So far, in this eight-part series titled "8 Reasons Subscribers Are Better Than Customers," we've seen how subscribers boost the value of your company, increase the lifetime value of a customer, smooth out demand, and provide free market research. Today, we look at how the subscription business model helps you get paid on time.
In a traditional business, customers buy and then you must often wait 30, 60 or 90 days to get paid. The more you sell, the more cash you deplete. In a subscription business, you carve up one big purchase into many smaller transactions that can often be processed on a credit card, meaning you get paid the day you're supposed to--automatically.
Stuart Hunt & Associates is an Edmonton-based company that safely disposes of radioactive waste. Part of its business comes from doing large cleanup jobs for massive nuclear plants and mining operations. The cash flow cycle of these large projects is horrendous. Stuart Hunt & Associates gets a purchase order from a large mining company, which allows it to start work on a project. Once it completes the job, it sends an invoice and must typically wait 120 days to get paid. In the meantime, the company still has to make payroll and keep the lights on, etc., causing cash flow stress for the owner.
The other part of the business comes from servicing the radioactive sources in small, everyday devices that are used by all kinds of organizations. You know that little wand the airport security guy assaults you with when you forget to take your belt off as you go through the X-ray machine? That has a small radioactive source inside, and to make sure it is not leaking radioactivity into unsuspecting travelers, it needs to be tested by a company like Stuart Hunt & Associates once each year.
Stuart Hunt & Associates tests thousands of radioactive devices per year. Until recently, it would send a small invoice--usually around $100--for each job. Some customers would pay on time, but most would require a follow-up phone call at the 30-day mark. Some would need a second nudge at 60 days, and each year Stuart Hunt & Associates would have to write off a few deadbeats who never paid. Given the volume of small jobs, this $6-million-per-year company employed two full-time bookkeepers, one of whom spent most of her time just collecting receivables.
Then Sean Hunt, the current president and son of founder Stuart Hunt, had an idea: Why don't we charge small customers on a recurring subscription model that bills a credit card once a year? All customers need to have their radioactive sources checked annually, so by offering a subscription service reminding customers to send in their devices, Stuart Hunt & Associates was actually simplifying the lives of its customers and getting paid much faster. Now customers are charged annually before their devices are checked, improving the company's cash flow and eliminating the need to chase deadbeats for $100.
In a traditional business, you buy the raw materials, make your widget, sell it, and then collect your money. It can take months--even years--between buying the stuff you need to make your product and actually getting paid. In the subscription business, the old model is reversed.
Now your customer subscribes and pays automatically and sometimes --such as in the case of a service like Amazon Prime-- for a full year of service in advance.
This article is adapted from the new book The Automatic Customer by John Warrillow. The book is published by Portfolio, an imprint of Penguin Random House, and is available wherever books are sold. Copyright John Warrillow, 2015.