Handling cancellations in a subscription business requires a solid understanding of subscription billing and its recurring nature. Unlike in a product-based business, in a subscription business, you are not just cancelling a single invoice, but changing an entire revenue stream. Problems can arise if you operate in this environment without a well thought-out policy and disciplined execution. You may displease customers by issuing erroneous invoices. Customers may continue to have access to cancelled services. Or you may record unintended credits to customers
Your cancellation policy need to handle the following two use cases:
For each of the above use cases, define a process that addresses the following areas when canceling a subscription:
Key Question: When a customer cancels a subscription, do you provide a refund?
When a customer cancels a subscription, most companies does not provide a refund to the customer. The cancellation takes place at the end of the current invoice period, and the customer continues to be able to access the system until the cancellation becomes effective. Taking this approach has the benefit of avoiding a reduction in cash flow and simplifies accounting for revenue.
When the need to provide a refund arises, be sure to cancel the customer’s subscription immediately and revoke the access to the system. This also has revenue implications as you need to reduce your revenue for any undelivered services.
Both options within this section assume that the customer has no outstanding balance when canceling. If the customer has an outstanding balance, use the approach described under the Company Initiated Cancellations section.
To process a cancellation without providing a refund, take the following actions:
Example: A customer paid for the period of March 1 – March 31, then called on March 15 to cancel. The effective date on the cancellation should be March 31, and the customer will have access to the system until the end of March 31.
To process a cancellation and provide a refund, take the following actions:
Example: A customer paid $100 for service for the period of April 1 – April 30. The customer called on April 16 to cancel.
Key Question: When a customer does not pay, do you write off the full amount of the invoice? Or do you collect on the portion representing services rendered?
Company-initiated cancellations are typically triggered by non-payment of subscription fees. Once you have deemed an invoice to be uncollectible, perform the following steps to cancel the subscription:
Use this option when your company has a short collections period prior to write-off, such as in most B2C companies.
In this option, the subscription is retroactively cancelled to the start of the current invoice period. This approach is the most common and simplest to implement. However, following this approach results in a full write-off of the existing invoice. This also introduces a variance between the true subscription term and the recorded subscription term in Zuora for the cancelled customers. For most B2C businesses, this variance is very small and is deemed immaterial, making this the more scalable and thus preferred approach.
To process a cancellation at the start of the current invoice period, take the following actions:
Use this option when your company has a long collections period prior to write-off, such as in most B2B companies. There is a need to differentiate between services delivered but unpaid and services not delivered. This option is a 2-step process.
In this option, the subscription is cancelled using the date of the write-off. This approach is more complex to implement, but provides an option to partially write-off an invoice. Additionally, the subscription terms will reflect the true subscription terms.
For companies with relatively small numbers of large invoices, each invoice is managed individually, and collection times are often long. These companies may not wish to write off the entirety of an invoice as the value of delivered but unpaid services may be significant enough to warrant further collection efforts.
Once you have completed the above steps, the original invoice will still have an unpaid balance equal to the value of the service already delivered to the customer.
Example: A customer purchases 1-year of service for the period of Jan 1 – Dec 31 for $365,000. By April 16, this invoice is still unpaid and the decision is made to cancel service for this customer.
Writing off the remaining balance on the invoice is the second step in the process. This can be done immediately following step 1 or at some later date once all collection efforts have been exhausted.
Take the following action to complete the cancellation process: