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Knowledge Center > Subscription Management > Subscriptions > Handling Cancellations in a Subscription Business

Handling Cancellations in a Subscription Business

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

Handling Subscription Cancellations

Your cancellation policy need to handle the following two use cases:

  • Customer-initiated cancellation that occurs when a customer chooses to discontinue service.
  • Company-initiated cancellation that occurs when you choose to revoke customer's access. For example, if a customer fails to pay an invoice, you may choose to cancel the subscription of the customer.

For each of the above use cases, define a process that addresses the following areas when canceling a subscription:

  • Invoicing
  • Revenue Accounting

Customer Initiated Cancellations

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.

Option 1 (Recommended): Refund is not provided when a customer cancels

To process a cancellation without providing a refund, take the following actions:

  1. In the Zuora application, create a subscription cancellation amendment that is effective on the last day of the current invoice period.
  2. Revoke the customer’s access to the subscribed product or service on the effective date of the cancellation.

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.

Option 2: Refund is provided for undelivered services

To process a cancellation and provide a refund, take the following actions:

  1. In the Zuora application, create a subscription cancellation amendment that is effective on the day the customer cancelled.
  2. Revoke the customer’s access to the subscribed product or service, effective immediately.
  3. In the next bill run, Zuora creates a negative prorated invoice that reflects the undelivered portion of service. 
    This negative invoice is used to offset any undelivered revenue from the initial invoice.
  4. Transfer the negative invoice to the credit balance.
    This increases the balance of this invoice to $0.
  5. Refund the credit balance to the customer.
    • If a customer is still paying for other uncancelled services from your business, you may choose to hold the credit balance to offset a future invoice.

Example: A customer paid $100 for service for the period of April 1 – April 30. The customer called on April 16 to cancel.

  • The effective date of the cancellation should be April 16.
  • The customer’s access to the system is revoked immediately.
  • The negative invoice created will be for -$50 for the period April 16 – April 30.
  • Net revenue for this series of invoices will be $50 for the period April 1 – April 15.
    • Initial invoice = $100 for the period April 1 – April 30
    • Negative cancellation invoice = -$50 for the period of April 16 – April 30.

Company Initiated Cancellations

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:

  1. Revoke the customer’s access to the system.
  2. Write off the invoices.
  3. Record the revenue impact of the cancellation.

Option 1: Cancel the subscription at the start of the current invoice period

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:

  1. In the Zuora application, create a subscription cancellation amendment, effective at the start of the current invoice period.
  2. Revoke the customer’s access to the subscribed product/service immediately.
  3. The Zuora application creates a negative invoice in the next bill run.
    This negative invoice is used to offset all revenue from the original invoice.
  4. Transfer the negative invoice to credit balance.
    This increases the balance of this invoice to $0.
  5. Apply the credit balance to the outstanding invoice. This reduces the balance of the original invoice to $0.
    This step can be automated using payment runs for accounts using an electronic payment method.

Option 2: Cancel the subscription on the date of the write-off

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.

Step 1: Perform the cancellation
  1. In the Zuora application, create a subscription cancellation amendment, effective on the day of the write-off.
  2. Revoke the customer’s access to the subscribed product / service immediately.
  3. In the next bill run, The Zuora application creates a negative invoice that reflects the undelivered portion of service.
    This negative invoice is used to offset any undelivered revenue in the initial invoice
  4. Transfer the negative invoice to credit balance.
    This increases the balance of this invoice to $0.
  5. Apply the credit balance to the outstanding invoice.
    This step can be automated using payment runs.

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.

  • The effective date of the cancellation should be April 16.
  • The customer’s access to the system is revoked immediately.
  • The negative invoice created will be for -$260,000 for the period April 16 – Dec 31.
  • After transferring this amount to credit balance and applying it to the original invoice, the original invoice will have a $105,000 balance remaining to represent the service delivered for the period Jan 1 - April 15.

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.

Step 2: Write off the remaining balance

Take the following action to complete the cancellation process:

  • Create an invoice item adjustment for each line of the invoice to reduce the balance on the invoice to zero. The effective date on the adjustments should be today.
Last modified
12:18, 1 Aug 2016

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