Let’s say you’re the proud owner of an ecommerce company selling gourmet coffee. Each month, you send your customers coffee from a different country—Jamaica one month, Costa Rica the next, and Ethiopia after that. You bill their credit cards or withdraw directly from their checking accounts.
Before you opened your subscription business, you had to do plenty of legwork first. One task was setting up a subscription billing system that would do most of the work automatically. With subscription billing, you can charge customers regularly for goods or services they want consistently—setting you up for regular incoming revenue. Here are the main subscription billing models and benefits to consider before you launch your business.
What is subscription billing?
Subscription billing is a method for charging customers on a regular schedule for goods or services, such as publications, mobile phones, gym memberships, and more.
Subscription billing typically is automated, driven by subscription management software that organizes and maintains a business’s subscription data. The data include personal information such as the type of subscription, billing and shipping address, form of payment, and the subscriber’s particular needs or preferences. These subscription billing solutions also help onboard new subscribers, update changes in their billing or shipping, and delete subscribers who cancel.
Benefits of subscription billing
Subscription billing can benefit businesses and customers in various ways, including:
Consistent revenue
Subscription billing produces consistent, recurring revenue because subscribers are charged on a set schedule, typically at the beginning or end of each month. Because payment is often made electronically with credit or debit cards, direct bank withdrawals, or a service such as PayPal, businesses receive payment with little or no delay.
Subscription billing also can increase revenue, as customers usually keep their subscriptions and make regular recurring payments, which is more lucrative than infrequent individual purchases.
Cross-selling
Because customers tend to stick with their plans, a subscription business offers opportunities to sell additional products or services. For example, a subscription coffee retailer might try to cross-sell a set of cups or upsell by enticing customers to move to a premium or artisanal coffee subscription from a standard coffee plan.
Time-saving and cost-efficiency
Subscription software makes it quicker and easier for your business to manage subscriber needs and preferences, and automation simplifies collecting payments. At the same time, subscribers can navigate and control their accounts online, changing subscription plans or payment methods. Meanwhile, automatic subscription renewal is seamless for your business and the customer.
Customer loyalty
The subscription billing process makes it clear to customers what they are being billed for, when goods or services are set for delivery, and when their payments are collected. This can increase customer loyalty and customer retention, reduce customer churn—lost subscriptions—and increase your average customer lifetime value, a key metric for subscription businesses.
Adaptability
Subscription billing is flexible, letting you adapt to shifts in your market and your business. You can make these changes by analyzing your subscription billing data. This will help you understand why you gained or lost subscribers, and how you might shift resources, or alter your billing model or pricing strategy.
Subscription billing models
The various subscription billing models include:
Fixed-rate
Subscribers to fixed-rate—also known as flat-rate—plans pay the same amount each billing cycle for the same product or service. Publications, music streaming, gyms, and many other types of businesses use fixed-rate subscription billing.
Usage-based
In contrast to fixed-rate subscriptions, usage-based subscription billing models charge customers according to how much of a product or service they use. Common examples are gas, electrical, and water utilities. Many providers of cloud-based computer services also offer usage-basedsubscription billing.
Hybrid
Hybrid billing, also known as overage billing, combines a fixed rate with a provision for extra charges if the subscriber’s usage exceeds a given threshold. Wireless-phone and internet-service companies often use hybrid subscription billing, charging customers for extra call minutes or data usage.
Volume-based
Companies that use this subscription billing model, also known as volume discounting, reduce prices for increased usage. For example, a subscription service offers a plan for $50 a month for an annual total of $600. But if the subscriber commits to a full year, it’s $500—a $100 discount.
Tiered
Subscription tiers or packages use pricing models based on the amount or quality of product or service provided. Service companies such as software as a service providers typically offer three tiers—basic, standard, and premium, for example—priced according to the services customers can access. Cable TV providers also often use price tiers for additional or special channels.
Freemium
As the name implies, this subscription billing model offers free access to a limited amount of content or features, with the goal of enticing users to become paid subscribers who receive more features. These free trials usually have no time limits. By contrast, limited-time promotions often offer free access to full services for a limited time before automatically converting to a paid subscription unless the user opts out.
What to consider when choosing a subscription billing app
- Subscription management
- Billing plans and payment types
- Accounting and reporting
- Integration
- Security and compliance
The right subscription billing software will make your business more efficient and responsive to your customers. Here are some key features to consider:
Subscription management
A good program lets you manage all aspects of subscriptions, from customer choices and preferences to your various subscription plans, pricing models, and billing cycles.
For example, does the software allow customer self-service to control their payment method and pause or cancel their subscriptions? Does it let you search or sort subscriber data for things like upgrades or downgrades, trial subscriptions, and conversions to full subscriptions?
A flexible subscription management system will easily adjust as your business and customer list changes.
Billing plans and payment types
Check if the subscription billing software can handle different types of recurring billing models besides fixed-rate, such as tiered pricing or hybrid.
Does it let you vary the billing period, shifting among weekly, quarterly, or annually based on customer preferences? What payment methods and providers does it support, such as credit and debit cards, bank transfers, and digital wallets including PayPal and Apple Pay? Does it track missed or failed payments, with automatic dunning, payment retries, notice to subscribers of rejected or failed payments, and the need for a different payment method?
Accounting and reporting
Look for subscription billing software that fits with your business’s accounting systems, particularly your revenue recognition practices, or when and how you record customer payments.
A smart billing program will automatically calculate sales tax due based on US state or Canadian provincial rates—or other regions if your business operates overseas, such as value-added tax in the EU.
Finally, the flow of recurring billing and collections into your business’s revenue report can help you analyze key performance indicators, such as monthly recurring revenue, annual recurring revenue, upgrades, and subscriber churn.
Integration
Aside from working with your accounting software, look for subscription billing systems that mesh with your business’s inventory management programs, help desk tools, and—most importantly—customer relationship management systems.
Security and compliance
Subscription billing software needs internal and external security safeguards. Internally, does the program define roles and user privileges that control which employees can access subscription billing data?
Externally, does the software comply with standards for safe storage of subscriber data such as credit card or bank account numbers?
Subscription billing FAQ
What is the difference between recurring and subscription billing?
Subscription billing is a type of recurring billing, though the former typically is more flexible. Subscription customers can choose plans with various features and prices, and they can change or cancel the plan at any time or on short notice. Payment is usually at the beginning of the billing cycle, whether it’s monthly, quarterly, or annually. Recurring billing is less flexible, with customers usually paying once a month and incurring penalties for late payments. Utilities typically use recurring billing.
How do subscription payments work?
Subscription payments typically are based on a preset billing schedule, and online payment methods include credit or debit cards, bank direct withdrawals, wire transfers, or digital wallets kept on file with the subscription business.
Can you sell subscriptions on Shopify?
Shopify has a full suite of services for businesses that want to sell products on a subscription model and use subscription billing.
