Deferred Billing: The Buy Now, Pay Later Model for Subscriptions
Conventional subscriptions require customers to pay for services upfront. While this a great method for businesses to build stable revenue, it has a downside for customers. Customers have to entrust their payments with businesses without knowing about their services fully.
Deferred billing changes this. It enables customers to experience services firsthand before committing. So what exactly is deferred billing, and how does it differ from traditional billing? Let’s explore that in detail. Let’s also highlight the best practices of implementing this billing for subscription businesses.
What is Deferred Billing?
Deferred billing is a payment model in which customers are charged only after they utilize services for a specified period. This offers a great incentive for customers to onboard a service by trying it out immediately. They don’t have to pay any upfront fees which lowers the entry barrier for them.
Invoices are sent to the customers only after they are done utilizing the service for a pre-defined period. This pre-defined period can also be called deferment, trial or grace period. Grace periods allow customers relaxation as their payments are not hurried. They can take their time sorting out expenses first.
Moreover, customers can easily cancel subscription during the grace period if they wish to. This feature makes the deferred billing model stay true to what it promises: try before you buy. Grace period ends when the pre-scheduled billing date arrives. If customers don’t cancel before that, their payment is deducted automatically.
Example: Suppose a customer signs up for a PDF editing tool on May 1st. The company allows the customer to use the tool for free for 20 days. It sets their billing date to the 21st of May.
If the customer likes the tool, they can continue utilizing it beyond their 20-day trial period. If they are not satisfied with it, they can cancel for free before the 21st.
Deferred Billing Vs Traditional Subscription Billing
Typical subscription billing requires customers to pay first, and then access the services later. The customers’ first invoices are generated during their sign up for subscription. Only after they pay do they get to onboard the service. It doesn’t allow customers a flexibility in timing, as they have to pay immediately.
On the other hand, deferred billing is more similar to the buy now, pay later (BNPL) approach. Here, customers access the service first, and then pay later. Their invoices are generated when their grace periods expire.
During the grace period, customers can take their time to get familiar with the service, and weigh its value vs cost directly. They can also cancel before their billing date arrives, without paying any additional charges. This is not possible in regular subscriptions. Even if customers cancel mid-subscription cycle, they are not refunded the full amount.
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Deferred Billing Common Cases
- Free Trials
Free trials for subscriptions allow customers to try a product before they commit to it. Customers are given a limited time trial period which they can flexibly avail without incurring any charges. A billing date is set by the business and communicated to the customer beforehand.
If customers are satisfied with the service, they can continue till the billing date. Otherwise, they are easily cancel and opt out of subscription.
- Onboarding Periods
These periods are required if customer companies subscribe to a new software (such as accounting software) that needs to be set up or integrated. During onboarding, they familiarize themselves with the product, and train their employees, so that their future experience with the software goes smoothly.
Businesses implement deferred billing in this case, as they charge customers after their onboarding is complete. This gives customers a breathing room, as they get time to get used to the new software comfortably.
It also reflects the businesses’ confidence in their products. They delay billing because they are certain that the clients will find their product valuable, and pay for it timely. Moreover, once customers have taken their time onboarding, they are likely to grow accustomed to the product better, leading to higher commitment chances.
- Usage-Based Trials
In this type of trials, customers are not billed normally. They are only charged once they hit a pre-defined usage limit. For instance, a company offers free text paraphrasing trials, but only for 10 texts per user. If this usage limit is reached, the customers are asked to pay to proceed.
Thus, customer usage is actively taken into account. Their billing is deferred till they reach a specific usage level.
- Usage-Based Subscription Models (Hybrid Models)
In these models, customers aren’t charged fixed upfront costs. Instead, they are billed at the end of their subscription intervals, such as, at the end of each month. These charges are not fixed either, as they are based on the customers’ actual usage.
Usage can be measured based on different metrics, such as service time duration, number of storage units consumed, computing power exhausted, etc. Each usage metric is tied to its own unique cost. Usage metrics are tracked and recorded in real-time, and customers are billed accordingly.
Deferred billing in this scenario ensures that customers are not overcharged or undercharged. Instead, they are charged the exact amounts that align with their usage.
Types of Deferred Billing in Context of Subscriptions
There are three types of deferred billing that subscription businesses often employ:
- Fixed-Payment Deferred Billing
The free trial and onboarding period scenarios given above correspond to this deferred billing type. In this model, businesses defer payments only initially, and for a limited time. When the deferment period is over, customers are billed like in a regular subscription.
For example, a company offers a 30-day free trial for its designing tool. After that customers have to commit to its monthly subscription, and pay a fixed priced on a recurring basis.
- Percentage-Based Deferred Billing
This model is more relevant to subscriptions with long durations that require huge upfront payments. For instance, yearly plans. Companies offering such plans incentivize their customers by allowing them to pay only a small percentage of the total price upfront.
They can pay the rest after a flexible deferment period. For instance, customers might be allowed to pay 10% of their total upfront amount initially. Then they can be given a 60-day period to pay off the remaining 90%.
- Tiered-Payment Deferred Billing
In this model, customers are charged as in regular subscriptions, but their initial charges are discounted. For instance, a company charges $50 per month for its services. However, it gives discounts to new users to encourage them to get onboard.
New users can pay $20 per month for the first two months. Then $30 for the next two months, and then finally $50 for each month after that. This enables customers to get used to the pricing gradually, and budget for the original price better.
Benefits of Deferred Billing
These are some advantages offered by deferred billing:
Improved Customer Acquisition
Deferred billing lowers the entry barrier for customers by letting them bypass the upfront fees. This encourages more customers to try out a business’s services, as they know it’s for free. Customers interact with the services first hand, and evaluate their value themselves.
This is especially suited to those customers who hesitate to pay first due to concerns about service quality. Through deferred billing, businesses take these customers into confidence so that they pay without hesitation.
Customer Loyalty
Customers can flexibly utilize services during their free trials. This allows them time to get used to the service comfortably. Once they establish familiarity with the product or service, they are more likely to stay loyal to it. This increases chances of conversion as customers don’t need to look for alternatives once they get committed.
Better Cash Flow Management
Deferred billing facilitates revenue recognition because customers don’t pay upfront. They pay after usage, such as in usage-based subscription models. As soon as customer payment is collected after service delivery, it can be categorized as recognized revenue. In other words, businesses collect payments that they have already earned.
Moreover, by not accepting huge payment chunks upfront, businesses keep their cash flow stable. They don’t experience sudden rises or dips in their revenue. They also don’t have to manage cash immediately at the point of sale. Instead, they can expect it at a later date, and plan for it more effectively.
Best Practices for Deferred Billing
In order to implement effective deferred billing, businesses need to keep these practices in mind:
- Keep Communication Clear
Billing charges should never come as a surprise to customers. Customers should be transparently communicated the dates for the trial period, and for subsequent billing. If there are any extra charges involved in the service, they should be communicated beforehand too.
- Utilize Smart Dunning to Recover Payments
Customers might not pay timely after their free trial ends. This might be due to reasons out of their control, such as card expiry, or low funds. Or this might be because customers are unwilling to pay.
In either scenario, businesses can leverage advanced billing software like SubscriptionFlow to automate dunning. Dunning entails the billing system making automated payment retries to collect funds from the customer’s account.
It also entails businesses leveling up their customer communication to encourage customers to pay. Customers can be sent personalized dunning emails that guide them how to update or change their payment methods.
- Send Payment Reminders
It is a good practice to send customers payment reminders when their billing date is near. They can be informed, for instance, 3 days before the due date. These payment reminders ensure that customers proceed with billing willingly, and not because they forgot to opt out of the trial on time.
- Collect Payment Method Details at Sign-Up
Businesses must collect customers’ payment information when they sign up for the trials. This information is saved by the billing system. This ensures that even if customers refuse to pay at their billing date, the system can still charge their payment method automatically.
This practice ensures that businesses don’t lose revenue due to problem customers. Moreover, by doing this, businesses don’t have to chase customers for their payment information at the last minute.
How SubscriptionFlow Helps
SubscriptionFlow’s robust billing capabilities allow subscription businesses to bill with ease. We assist in seamless implementation of all types of deferred billing. Here’s how we do that:
- Billing Automation: SubscriptionFlow automates billing end-to-end. This includes invoice generation, payment processing, discount application, usage-based proration, refund management, and much more. We make sure your billing stays smooth and flawless.
- Intelligent Dunning: You don’t have to lose revenue because of stubborn payment failures. We carry out smart payment retries and minimize churn.
- Trial Management: We let you enable flexible trials, and support seamless trial to paid services conversion. We also track service usage in real-time, so you can offer attractive usage-based trials.
Book a demo with SubscriptionFlow today, and make the most out of your deferred billing strategy.
