The subscription model: is it right for your start-up and what are the legal issues?

Running a subscription model for your product can be a savvy way to secure Annual Recurring Revenue (ARR). Not only is that good for continued profitability, but it’s also one of the main metrics that investors look at when they’re deciding whether or not to help fund your business. Potential investors like to see a strong ARR as a measure of continued sustainable growth.

Thinking longer term, your ARR can determine how much you can sell your business when you’re looking to move on.

 

In this blog, we look at the legal issues you need to consider if you’re operating your business with a subscription model. What foundations do you need in place now? And how can you set yourself up for success in the future?

 

Draft clear Terms & Conditions

It’s the bread and butter of any business, but it’s all too easy to overlook. You need watertight Terms & Conditions as the foundation of your business.

 

Drafting clear, comprehensive terms and conditions (T&Cs) for your subscription service is critical. These T&Cs should outline subscription details, payment terms, cancellation and refund policies, and any other conditions of service.

 

The key thing about T&Cs is that they must be fair. When it comes to subscription models, you must set out clearly how the subscription will be renewed, and you must give notice in lots of time.

 

You should also set out your subscribers’ right to cancel the contract once it has been renewed without paying a cancellation fee.

 

Tell your subscribers what their rights are

Under UK law businesses offering subscription contracts to consumers need to:

 

• • provide certain pre-contract information, prominently and clearly presented to the consumers before they enter the contract. This information includes details of the price, automatic renewals, and cancellation methods and rights.

 

• • Reminder consumers that a free or discounted trial period is coming to an end.

 

• • Send reminders when the contract is shortly due to renew, with information on how they can exit the contract if they want to.

 

• • Allow consumers to leave the contract through one single communication.

 

• • Extend consumers’ existing early cancellation rights to all subscription contracts. Early cancellation rights apply to updated products.

 

• • Give consumers a new cancellation right after a free or reduced price trial, and after auto-renewal if the renewal term is a year or more.

 

Data Protection

As a subscription business, you’ll be collecting vast amounts of customer data, and you need to have systems in place to safeguard this data.

 

First you need to communicate your data practices to your subscribers. You’ll need a well-drafted privacy policy to send to them. This should set out what data is collected, how it’s used, and the rights of each of your subscribers in relation to their data. As with any other business, you may need to get explicit consent for marketing communications.

 

You may want to appoint a Data Protection Officer (DPO) to make sure your business is compliant, and remains compliant. We offer this service at SME Comply, so if you’d like more information about instructing us as an external DPO for your business, please get in touch.

 

Think about price increases

You are allowed to include price increases in your subscription model. In fact, you probably should, because the value of your contracts will erode with inflation if you don’t.

 

Sometimes businesses neglect to put price increases into their multi-year contracts. You need a clause in those contracts that allows for year-on-year price increases, not just at renewal. It’s legal to do this, so long as the clause is clear and fair.

 

Longer term: your exit strategy

The reason your ARR is so important is that subscription model businesses are usually valued in terms of a multiple of the ARR. (i.e. 3 x ARR, or 5 x ARR).

 

If your business shows a good level of ARR, you’re more likely to achieve a higher multiple it when it comes to valuation. When you’re getting ready to sell your business, you need to make sure that your ARR is in good health, and that all your contracts and practices are legally compliant.

 

If you’d like any help with drafting contracts or auditing your business for compliance, please contact us at SME Comply. We’re experts in legal compliance and data protection.