Subscription billing models are becoming popular for businesses of all types regardless of size or customer base. If you are considering adopting this format, it is important to gain a full understanding of its definition, types, challenges, best practices, and other intricacies before taking the plunge. The following guide will provide you with everything you need to know.

What is subscription billing?

In the past, consumers generally expected to pay for their items upfront in a one-time, straightforward, transactional process. This allowed for little flexibility, requiring that the consumer have access to all of their funds in order to make the single payment. Additionally, it left the business with fewer opportunities to engage with the customer on an ongoing basis.

By contrast, subscription billing involves mutually agreeing to receive goods or services over months or years, paying regularly at a predetermined time and for a set duration. As you will see, successful subscription billing leads to advantages for buyers and sellers alike that have propelled this model to its current high level of popularity.

Types of subscription billing models.

Not all subscription-based plans are alike. There are eight major recurring billing models being used in today’s marketplace.

• Usage-based pricing (UBP). Also known as consumption-based pricing, this model lets customers pay for a product or service according to how much they are using it. This model has been particularly popular in the Software as a Service (SaaS) sector. Often, the seller allows the customer to begin using the product at a relatively low cost, with no restrictions on how many users who have access to the software. As technologies such as automation and artificial intelligence gain increasing prominence, the need for large teams of users will decrease. Therefore, this model of charging based on usage not users will become increasingly necessary and cost-effective while allowing for better customer retention.
• Tiered pricing model. In this familiar scheme, a company determines its models based on pricing tiers. Frequently used to sell licenses, services, features, and products, it lends itself to attracting a variety of customer bases. In order for it to be effective, a business must strive for personalization by separating customers into segments and personas to determine who will pay which price. Tiers need to be understandable and distinct from each other when it comes to features and cost so that teams can discover which is best for their business.
• Per-user model. Also known as per-seat billing, this model enables a company to pay according to how many users are taking advantage of a service or piece of software during a given billing cycle. As a client’s business expands, their costs increase in an understandable fashion, making budgeting predictable and implementation easy across an organization. The ways that you can charge per-user include with an introductory free tier, per user and per device.
• Feature-based pricing model. As the name suggests, this model allows you to charge based on the characteristics of a product or service to which your customers have access. Generally, it is paired with a tiered pricing strategy that allows you to price your offerings according to how many features the customer wants to tap into. Commonly implemented types of this model include basic feature pricing, feature-based tiers, value-based per-feature pricing, and bundling features.
• Freemium pricing model. Coined in 2006, this term comes from combining the words “free” and “premium.” The model involves providing basic services to customers at no cost and then charging for auxiliary or advanced features. A common example of this strategy can be seen in the video game industry, which often offers users the chance to play freeware games and access a certain amount of the basic content without paying. As the customer becomes increasingly invested in the product, they are more likely to be willing to pay for upgrades and extensions.
• Flat-rate pricing model. Perhaps the most recognized of the subscription model types, this refers to the practice of charging an upfront, single, fixed price at regular intervals for a product or service. Freelancers, contractors, and even law firms find this billing strategy useful for giving customers a streamlined, easily understandable, and predictable way to resolve their bills. Ways to use this type of billing to your advantage include charging for basic services, for memberships, with targeted discounts, and at a fixed rate per product.
• Bundling model. Recurring revenue bundles let you combine multiple products or subscription services into one package. This model also gives you a way to collaborate with partners to sell each other’s products to your mutual advantage. For this method to succeed, you need to have a precise understanding of your customer personas and their needs as well as an excellent handle on your products and inventory. Different types include organic bundling (customer can only get specific products or services), mixed (products can either be bundled or purchased individually), aggregator (optimal choice of products, including modifying locked-in items), limited-time or rotating bundles, and partnerships in which you can combine your products with another retailer’s.
• Hybrid pricing model. This umbrella term refers to being able to mix and match from the above model types to provide a subscription service that aligns with your business needs and the preferences of your customers.

Benefits of subscription billing.

Of course, the first advantage that instantly comes to mind in terms of subscription billing is that you will be able to count on a steady stream of income regardless of which model you choose to implement. However, there are a number of other subscription benefits as well that include the following.

• Automates tedious processes. Once you have implemented subscription billing, you no longer need to manually handle things like retrying failed payments and sending invoices. As a result, the likelihood for human errors drops precipitously, and you have more time to handle other tasks in your business that require the human touch.
• Streamlines the checkout process for your customers. Did you know that at least 20% of buyers leave their shopping carts due to an overly complicated checkout experience? Subscription billing platforms allow you to simplify the purchasing process because they integrate with payment gateways that promote data security as well as an efficient buying process.
• Fewer late payments. Thanks to your recurring billing software that keeps track of, follows up on and collects delinquent payments, you will need to spend a lot less time chasing them yourself.
• Accurate revenue forecasting. Subscription models let you take advantage of monthly recurring revenue (MRR). In other words, because payment amounts are pre-set, you will know well in advance how much each customer will be paying on any given month and throughout the customer life cycle. Consequently, budgeting and cash flow management will become much more accurate and easier to forecast.
• Customizes promotions and offers. Your billing software also includes capabilities that let you tweak the extras and discounts you furnish in addition to those that are already set. You can also delight a customer with supplemental products and services that can be added to an already-existing subscription that are in line with that particular person’s preferences, allowing you to leverage individual consumer behaviors to your advantage.
• Provides a secure environment. Payment processing security is a must with these models since you are asking people to trust you with their sensitive payment details. High-quality subscription billing platforms come equipped with the PCI compliance and other security features that will be essential to inspire trust and keep buyers’ data safe throughout every step of the payment and beyond.
• Leads to customer retention. These models have retention built into their core because they provide people with the goods and services they want with minimal fuss while also allowing for a personalized relationship with the company that can grow and change over time.

Potential risks and challenges with subscription billing.

Along with the upsides of recurring billing also come some potential disadvantages. These include the following.

• Potential for high churn rates. In this context, churn refers to customer cancellations. However, there are effective churn management strategies that can keep these defections low, including focusing on personalization, communicating with buyers on a regular basis, soliciting and listening to feedback, and addressing concerns as soon as they arise.
• Boredom with the same product or service. While it is important to give people what they want, it is equally vital to keep your offerings fresh and innovative. Effective subscription-based services balance both.
• Customer reluctance to make a commitment. People can sometimes hesitate to lock themselves into an ongoing agreement. Counter this attitude by demonstrating the value of your product or service.
• Reduced desire for trendy products over time. In this case, effective subscription management for faddish products requires you to be one step ahead so that you are always there to provide the next big thing.

Best practices for successful subscription billing.

If you want your subscription services to flourish, it is crucial that you implement the following strategies.

• Track and update customer information. Each buyer’s details need to be safeguarded and updated on a regular basis to ensure that information remains accurate and that you can get in touch if any problems arise with a payment. Never lose sight of each customer’s contact details and shopping history to ensure that you can be proactive at all times. This makes for easy subscription renewals and allows for valuable chargeback prevention.
• Be transparent about your pricing and billing policies. There should be no surprises in your subscription program. Providing double and even triple layers of communication about costs, policy updates, bills, and other expectations is much better than not furnishing people with enough information.
• Provide subscription flexibility. Give buyers control over their subscriptions by allowing them to modify, upgrade, or even downgrade their plan at any time. This helps to enrich your relationship with the buyer and reduces the chance that they will cancel.
• Make cancellation easy. People should not encounter problems if they want to stop their subscription. Additionally, you should give them easy ways to pause and resume their plans. This flexibility reduces cancellations and makes billing disputes resolution go more smoothly.
• Automate processes. Use a subscription billing solution to automate and streamline subscriptions, track payment histories, send reminders of billing dates, and thereby reduce late payments.
• Reduce customer churn with auto-renewals. When people don’t need to go through the trouble of re-establishing their subscription, retention increases. Remember, subscriber acquisition costs much more than subscriber retention.
• Keep customer data secure and protected. Never store customers’ personal or payment information on your servers. Instead, transfer these details to a secure third-party payment processor who will store the information off-site and ensure that it remains as safe as possible from hackers.

FAQs for subscription billing.

1. Are recurring billing and subscription management software the same? No. Recurring billing software only is responsible for sending out regular invoices for predetermined amounts. By contrast, subscription management software lets you control every aspect of the journey, including bringing customers into the platform, modifying subscription types, setting up and tweaking recurring billing schedules, and gaining insights into your customers and the popularity of your program.
2. Do I need software that handles all subscription billing models? If your needs are simple and you only are marketing one product at a flat rate, you might be able to get by with a basic solution. However, remember that it will not be able to be scalable if your business grows.
3. What is the best method to accept recurring transactions? Ideally, you should invest in recurring billing software with a built-in payment gateway that sends the invoice and takes customer payments automatically. This often also allows you to save money when your gateway and subscription processing software is bundled.
4. Will automated services interfere with my existing software? No. Automation is designed to complement and integrate with what you already have with the ultimate goal of streamlining and enhancing your subscription billing program.

Are there any industries where subscription billing is particularly prevalent?

Certain sectors particularly lend themselves to subscription billing. These include SaaS, streaming services, and online marketplaces. However, virtually any company can capitalize on this model with a bit of creativity and marketing ingenuity.

How can businesses address subscription billing-related disputes and chargebacks?

When a customer disputes a subscription bill with their credit card company, this is known as a chargeback. To cut down on the frequency of these stressful and costly funds reversals, the following tips are helpful.

• Communicate clearly about all aspects of the subscription.
• Promptly answer questions and address concerns.
• Allow for easy unsubscribing or downgrading.
• Prevent fraud with strong authentication measures.
• Make it easy and efficient to get refunds.
• If chargebacks happen, respond right away. 
• Keep thorough records of interactions with customers as well as payment transactions.

What are the most common payment methods for subscription billing?

Partnering with a payment service provider can enable you to take advantage of all the numerous ways for customers to pay for your subscription programs. This third-party company acts as an intermediary between you and your customer’s bank or financial institution. With their assistance, you can easily and securely take subscription payments from the following commonly used sources.

• Credit and debit cards.
• Gift/loyalty cards.
• Online banking.
• E-wallets.

Best of all, collaborating with these companies offers merchant accounts and payment gateways, ensuring that payments go through safely and efficiently. They take on the burden of PCI compliance, simplifying the process for you as a merchant and maximizing cardholder data security.