As more and more businesses move platforms from traditional brick-and-mortar shops and move to online stores, that pivot creates a whole host of opportunities. If a company is flexible, it could in turn see significant offerings. The key is to offer a subscription model to help expand your brand and loyalty. But to set up a subscription model requires that you understand the proper accounting requirements along the way.
A traditional sale is a binary option that you offer and then are purchased goods by another person or company. Still, with online offerings, an opportunity for many types of businesses exists to create a subscription-type service that allows a revenue stream ahead of the service being offered.
Developing a revenue stream that allows you to collect payments before offering a service is known as unearned revenue. Unearned revenue can be an effective form of revenue for your business, but it’s important to understand that it is heavily regulated due to the nature of the source. The trick is to recognize the various ways you can access this revenue stream for your company’s growth in a compliant manner. Examples of unearned revenue could vary from prepaid insurance, airline tickets, advanced rent payments, and subscription services, whether in media or software.
Transforming How You Handle Transactions
The key to maximizing your profit margin with an unearned revenue source is establishing a transparent collection system and what you plan to offer in return. Under SEC and the Financial Accounting Services Board (FASB) regulations for Generally Accepted Accounting Principles (GAAP), there must be transparent accounting and recording of prepaid revenue for services yet to be rendered. Some of these regulations must include:
- Collection Probability: Listing the probability of collection for fees helps with proper financial accounting and allows for doubtful accounting possibilities. In other words, by having a projection of the total projected unearned income versus accounts that may default or neglect to pay, you can account more accurately for all income financially.
- A Predetermined Price: For proper accounting to occur, the price for any unearned income must be fixed and not fluctuate.
- Evidence Of An Agreement For Price: The evidence of an arrangement could be a simple subscription service agreement that binds the customer to purchase the service offered.
- Completed Delivery: To be compliant with regulations, there must be clear evidence of completed delivery of the service when it was scheduled.
Simple accounting of this unearned revenue would show the total amount paid and depreciates every month. One standard example of this type of service is a gym membership. Most gyms know that for every person that signs up for a membership, most will never see their attendance last through the duration of the contract.
For accounting purposes, the contract has been fulfilled as the length of the arrangement plays out regardless of how much the customer utilizes the gym services. A better example of this yet is an annual streaming service membership. To the customer, the service is paid once a year. The service has yet to be offered, and the total amount would show on the provider’s books. As each month passes, the total amount of the service would depreciate until the end of the agreement concludes.
Applying These Principles in a Real-World Setting
Now that you understand the basic accounting requirements let’s discuss examples of business models that illustrate this opportunity better. One idea is to offer a prepaid service such as HVAC or printer maintenance. A business pays a subscription price with agreed-upon service and maintenance options post-purchase an HVAC system or industrial printer. When a subscriber may need updates, maintenance, or repairs for the AC or a printer repair may be required, it is included in the service contract.
Another example of unearned revenue opportunities is exemplified by insurance. In a traditional model, a customer pays for the insurance services that are only necessary to be paid out if, or when, an issue occurs. Even better still is the Software As A Service (SaaS) opportunity. For instance, Microsoft charges a membership fee to their Windows suite of products and services.
Customers can pay for an entire year upfront or pay for those services a la carte on a month-to-month option. For both services, the accounting is the same. The total purchase price is listed as a debt that diminishes during the agreement until the whole service time has been completed.
For more traditional businesses, such as restaurants, the subscription model can be tricky but profitable. For the provider, offering a membership service such as a loyalty program is an excellent way to build brand loyalty while improving the company’s profit lines. A loyalty program works when a restaurant offers a service such as exclusive discounts or other offerings for a membership subscription. An excellent example of loyalty programs in restaurants has been used by breweries.
For breweries, one way they maximize their profit through subscription services is with a “mug club.” In this example, the restaurant offers a subscription with benefits for a cost. Those benefits could be discounts, exclusive “members only” offerings, or a cash-back type incentive, and those offerings are included in a yearly or one-time fee.
These systems work to enhance the image of the business providing loyalty programs (the perception of getting “cash back” to spend on the business offerings or exclusive “member’s only” deals can be very attractive); to creating brand ambassadors, and adding needed revenue either one-time or yearly recurring, a membership program can be a massive benefit for your company.
Keeping an Open Mind About Subscriptions
Whether you’re in a traditional business providing goods or service-based industry, considering a subscription and membership program opens the door to even more revenue streams. Once you decide on the services you plan to offer, you must understand the necessary accounting to avoid the SEC, FASB, or even the IRS issues. A subscription model, of which there are many to select from, can boost your revenue streams, enhance your brand, and build better customer relationships for your business.
