Managing Revenue for Multi-Month Subscriptions

Multi-month subscriptions are a great way to increase your average revenue per transaction, but have big implications for cash flow.

Multi-Month Revenue for Subscription Boxes

We’ve all heard the saying “Cash is King”. And it’s true: Cash is the lifeblood of a business.

From being able to make payroll to paying supplier invoices to paying recurring bills like utilities and rent, the necessity of having adequate cash on hand is crucial for a business to be able to operate smoothly. Should cash not be managed properly, a business may have to turn to costly loans or defer paying bills.

For your subscription business, this lesson is most pronounced when dealing with multi-month subscriptions. You’ve probably seen these offered (or maybe you offer them yourself):

Multi Month Subscriptions

Checkout Example: BoxyCharm

It’s pretty simple. With multi-month commitments, you receive cash up-front from a subscriber for the promise of future deliveries.

The implications can be a bit more complex. These future deliveries are now a liability of the business, and will require a certain amount of cash each month to fulfill these liabilities.

Let’s look at an example:

A Single Cohort Example: Selling 100 6 Month Subscriptions

Note: for this example, we’ll ignore credit card transaction and processing fees, and potential discounts with extended subscriptions.

Using the numbers from the How to Price Your Subscription Box 60-Second Sesh, let’s start with a basic example of a company that sells monthly subscriptions with a Cost of Goods Sold (COGS) of $20.95, and a monthly sales price of $38.95 per box.

Without discounts, 6-month subscriptions sell at $233.70

$38.95 * 6 = $233.70

Let’s say this is your business, and you sell 100 6-month subscriptions.

This would produce a cash INFLOW of $23,370

$38.95 * 6 * 100 = $23,370

The immediate cash OUTFLOW associated with these new subscribers would be the fulfillment of the FIRST month of their six-month subscription, totaling $2,095

$20.95 (COGS) * 100 subscribers = $2,095.

This leaves $21,275 as a net cash inflow from these 100 new subscribers after fulfilling the first month’s box.

Tom and Jean celebrate selling 100 subscriptions, thinking they’ve made $21,275

Before you celebrate, you have to realize this isn’t all profit. Your business has not earned the majority of this cash inflow.

Remember, there are still five months worth of orders that must be fulfilled.

In fact, the future cash outflows required to fulfill the subscriptions of these 100 new customers is $10,475

$20.95 * 5 months * 100 boxes = $10,475  

In other words, over the next five months these 100 subscribers will require a cash outflow of $10,475 ($2,095/month) in order to fulfill the obligations resulting from their subscription purchases.

With this, you can see the actual net cash inflow from these subscriptions after Month 1 is $10,800: 

$21,275 – $10,475 = $10,800

Here, $10,800 is the actual remaining contribution margin generated by these customers. After COGS for the life of the subscriptions are deducted, this is the true gross margin of these sales. 

Contribution margin is the amount of proceeds available from a sale after COGS are deducted, ie: the amount left over to cover fixed costs, administrative costs, and ultimately what will be left over as profits.

Extended Subscriptions Create a Fulfillment Liability

In the example above, it may be tempting to use the $21,275 cash inflow for other business uses, such as additional customer acquisition & marketing opportunities, salaries, or something else.

But the future five-months of these sales are a liability of the company, and this liability requires the use of cash to eliminate.

Let’s assume the remaining cash inflow of $21,275 is used for business purposes other than fulfillment.

This leaves $0 cash to cover the remaining five months of shipments to these customers. How will your business to pay for those products, boxes, and shipping? The cash required to fulfill these shipments ($10,475) will have to come from somewhere.

Couldn’t I just sell another 100 subscriptions? 

This is where the rabbit hole starts.

It may be tempting to use the cash inflows of the next 100 subscribers to fulfill this liability. However, this reduces the amount available for the fulfillment of this second cohort. This cash will then need to come from somewhere else, just like with the first cohort.

You can see that this type of cash flow pattern continues to leave an unfunded liability that could spiral out of control. A greater and greater number of future shipments will go unfunded. 

A Simple but Important Lesson: Realize Revenue at the Right Time

Your business must be cognizant of your future fulfillment obligations and disciplined in your use of cash — it’s will invariably impact the stability of your business. 

A pattern of relying too heavily on the upfront cash received by new subscribers to fund the fulfillment liabilities of existing subscribers will lead to cash flow problems down the road. Hands down. 

Questions? Start a conversation below.

This guide was collaborated on with Rylan Wirkkala, CPA. Find him in the Resources section.

How useful did you find this article?

1 Star2 Stars3 Stars4 Stars5 Stars (No Ratings Yet)

About Jesse Richardson

Jesse Richardson is an author, educator and co-founder of several successful subscription businesses. He focuses on building engaging communities and has been described as "insanely customer centric." Find him in the Subscription School group or at his blog.

4 Responses

  1. Raymond Hopkins

    How do you recommend accruing for people who do not understand it. Given a subscriber can cancel and need to be reimbursed.

    So, how do you suggest setting it aside? Should we break it down by 6 months and as months pass reinvest that?

  2. John

    I’ve recently heard that Cratejoy no longer offers custom websites for new people who sign up. Such as no website designer? Can you comment on this?

Leave a Reply