Subscription Services
More and more customers prefer to enter into subscription-type agreements rather than one-time
up-front payments. This type of agreement has been the norm in utilities industries, such as water,
electricity, and gas. However, lately other industries with discrete products also are seeing the
advantages of being able to offer subscription-type conditions to their customers rather than onetime payments.
A subscription-based revenue or expense model offers both customer and provider greater
predictability of cash flow and most often a better balance between the expenses and the revenue
incurred. The ongoing model also provides a better customer relationship and allows for adjustments
of both the provided service and the subscription fee to reflect changes in either the customer
demands or the provider’s offerings.
In Microsoft Dynamics® AX, subscriptions are based on projects and through this relation, other
offerings, such as service agreements, can be tied to the subscription.
ESTABLISHING A SERVICE SUBSCRIPTION
A service subscription establishes the relationship between a service customer and a
service provider. The basic elements—such as subscription period, invoice frequency,
price, and sales currency—are all included in a service subscription.
Subscription groups
Subscription groups are created to define a set of standard invoicing and accrual periods.
The attachment of a service subscription to a subscription group ensures that the
subscriptions are financially handled consistently with other subscriptions in the same
group.
Subscription prices
Subscriptions can be based on standard prices or be individually priced. An index based
price change can be used to allow for regular adjustment of the subscription price. This
adds flexibility to the pricing model.
MANAGING SERVICE SUBSCRIPTIONS
Once a service subscription has been established, there are only some periodic activities
required to handle the subscription process.
Fee transactions
Subscription-based revenue is not based directly on tangible elements such as time, items
or expenses. Instead, fee transactions are generated to cover a predefined subscription
period with an agreed upon price. The ability to offer customers several payment models
is an important competitive factor.
Invoices
An invoice will typically cover a single subscription period with one or more subscription
fees but can be enhanced through the project relation to include several fees for several
subscriptions.
Accruals
If the invoice frequency is low, it can be a good idea to accrue the revenue in accordance
with financial reporting periods. Accruing the revenue will distribute the income evenly
over the accrual periods and allow for easier comparison between costs and revenue.
Accruing the revenue for a subscription can be done individually per financial period or
for several periods at a time.
"Revenue recognition"
Subscription services
14000
12000
10000
8000
$
Subscription fee
6000
Accruals
Incurred cost
4000
2000
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
Jan
0
Subscription period
Figure 1 Accrued revenue and periodic costs
Exception handling
Because subscriptions are tied to calendar periods rather than cost carrying items, it is
important to be able to handle exceptions from the rule. A customer can decide to enter
or leave a subscription outside of the normal invoicing periods. This can be handled
through adjustments and use of reduction days to ensure that the customer only pays for
the covered period. It is also possible to pause the subscription for a short or longer
period.
The project connection
Both service subscriptions and service agreements are based on projects for all
transaction handling. This represents an opportunity to offer service agreements with
clearly defined tasks as a subscription model, and thus allows for more flexibility in the
customer relationships.
SUMMARY
Service subscriptions represent an alternative revenue model to traditional fixed or timeand-materials–based invoicing. The straightforward approach includes setting up the
subscription and periodically generating fee transactions, creating invoices, and accruing
the income.
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