Subscription Billing: A Beginner's Guide
You know the drill: you decide to join a gym, move to a new cell phone provider, or get diapers delivered to your house every month. What’s the first thing that happens before you can use any of these products or services? As a new customer, you give your payment information and are automatically billed on a regular basis.
Businesses and customers both benefit from the subscription billing model. In most cases, the seller and the buyer agree on regular payment terms. That means no surprises for either party. Sellers have a reliable source of income, and buyers have a fixed line item in their monthly budget.
Have you ever wondered how your business might implement a subscription billing strategy? Many sellers don’t seem to have an obvious fit at first glance.
With a little creativity, you can likely find products in your catalog that would lend themselves to subscription-based model. Here are some key questions to think about when considering subscription billing:
So what is subscription billing?
You’ll hear the terms subscription and recurring billing used interchangeably across the web. According to Investopedia, a financial education website, recurring or subscription billing occurs “When a merchant automatically charges a cardholder for specified goods or services on a prearranged schedule.”
The definition makes it sound pretty straightforward, and it is - but subscription services do require time to reflect on the right sales and management strategies for your business and your customers.
Subscription billing services have been around for quite some time. Some recognizable services before the rise of e-commerce were magazine and newspaper subscriptions, insurance plans, and even doorstep milk delivery by the milkman.
Pre-internet subscription services were usually marketed and billed to customers via the postal service, although many used the tried-and-true method of knocking on doors. E-commerce has brought about a higher level of sophistication and speed of doing business, and higher customer expectations.
What are some key components to having a subscription billing relationship with your customers?
Prospective customers need a way to initiate the transaction, including what items or services they would like to regularly purchase, frequency of purchase, and payment terms. The process can be as simple as logging into an Amazon Prime account, searching for paper towels, and adding the paper towels to the Subscribe & Save cart with a certain frequency. It can also be as complex as the process employed by StitchFix, a personal styling service for women.
Customers begin by creating a StitchFix online profile and providing information upfront about their preferences, including detailed information in a style profile and Pinterest board, and later with feedback notes for purchases. The key is to tailor the transaction to request just the right amount of information from customers.
Sellers must have a system in place for charging recurring payments to customers. This may seem like the easiest part of the puzzle. If subscription services have been around long before computers, how hard can it be to have a subscription billing system in place? Setting up an online store and receiving online payments can be done without much effort, as many Etsy shop owners can attest.
However, recurring billing is not a standard feature in online payment systems. Sellers can choose to either build their own solution in-house, which requires development and support from software engineers, or pay for one of the many services that manages recurring payments.
Prospective customers and sellers both require the ability to easily make changes to the customer’s subscription, or to cancel it entirely.Change or cancel functionality may be left out of the bigger picture when building out a subscription billing service, but it can leave a lasting impression.
We’ve all heard stories of friends and family trying to cancel gym memberships or cable service after a move, enduring long wait times on the phone and repeated calls instead of updating their account via an easy online interface. Making the change and cancellation process clear-cut is key, as the final interaction with a business stays with the customer for quite some time.
What are the main advantages to subscription billing?
Now that you know a bit about the key components of subscription billing, it might seem like a lot of effort and expense to set it up with little return. That couldn’t be further from the truth! Subscription billing provides major bottom-line benefits to both merchants and customers, including:
- Fixed cash flow - What could be better for a merchant’s bottom line than knowing exactly how much cash is coming in each month?
- Higher percentage of paid invoices - With automatic payment processing, there’s no need to track down customer payments. Merchants have the customer’s permission to charge a set amount each month instead of having to revisit payments at each billing cycle.
- Smaller processing charges - Lose the postage, paper and check processing fees in favor of online payments.
- Increased repeat customers - Subscription billing means businesses automatically have a pool of repeat customers - a huge advantage when considering the cost of customer acquisition.
- Predictable spending - The same is true for customers: knowing how much money leaves their bank account each month allows for easier planning and less fluctuation.
- Reduced penalty fees - Many of us have endured the frustration of receiving a bill (either mailed or emailed), forgetting to pay it, and paying a late fee. When bills are paid automatically, there are no late fees to incur.
- Increased convenience - Customers gain convenience in every part of the subscription billing experience. Not only do they get regular access to a product or service, they don’t even have to think about the payment process. Gone are days of logging into a website to pay the bill.
- Diminished environmental impact - The lack of stamps, envelopes, checks and mail service all decrease the environmental consequences of the transaction.
Now you know both sides of the equation: subscription billing requires time and effort, and it is mutually beneficial to both merchants and customers. Next, let’s discuss how to determine if subscription billing is a fit for any given business.
What types of products and services are a good fit for subscription billing?
Take some time to think about your products and services and whether or not they may be a fit for subscription billing. Here are a few questions to ask to get you started.
Do you sell products that are repeatedly and quickly consumed by customers?Typical examples are consumables such as food, toiletries, and cleaning supplies.
Do you sell services that customers need constant access to? These types of services could be anything from online access to Weight Watchers weight loss tools to lawn services to unlimited Pilates classes at a specific studio for $99 per month.
Would a maintenance plan or service plan be an applicable add-on to any of the products or services in your catalog? Let’s say your products are not a fit for subscription billing. Could you create an add-on that would bring in predictable revenue and create value for your customer? Consider home warranty plans, service plans for electronics, and furniture protection plans.
Could you repackage your products in gift or subscription boxes? Some products may be good candidates for regular gift deliveries. Think about wine-of-the-month clubs and try to draw parallels within your product catalog.
Is some part of your product catalog a fit for subscription billing? Businesses may continue to sell some items in non-recurring transactions and others in recurring transactions.
After answering these questions, chances are some portion of your products or services would be a fit for subscription billing.
How does Invoiced support subscription billing?
If you’re an Invoiced customer with some products in mind for subscription billing, you’re in luck! You already have access to subscription billing within the Invoiced toolset. Forget investing in a lengthy development process to build recurring payments or an evaluation of the many recurring payments providers on the market. The tools are available to get started today.
Invoiced subscription billing allows you to bill customers automatically or manually using any of the online payment methods we support (credit/debit card, ACH, bitcoin via Stripe, and Paypal). The Invoiced toolset is capable of creating subscription plans, add-ons, invoices, and pro-rated invoices for those customers who purchase mid-cycle.
Customers are notified of subscription creation via email where they can access a customer workflow to set their preferences, including their preferred method of payment.
Subscription billing has been around for centuries and it isn’t going anywhere. With the rise of e-commerce, it is easier than ever to creating recurring relationships with customers that provide mutual benefit.
Merchants can get really creative about how to create subscription services, selling anything from Japanese candy to apocalypse preparation. All of these subscriptions and their individual customer preferences can be managed with one tool - Invoiced.