What is subscription billing?

Subscription billing is rapidly transforming the SaaS business outlook. It is a payment model that enables businesses to charge customers repeatedly at predefined time intervals. These recurring intervals for payment collection can be weekly, annually, monthly, biannually, and more. Customers are charged at the beginning of a billing cycle and at the same time each month until they opt for subscription cancellation.

The main purpose of subscription billing revolves around

• Who needs to be billed?
• What products/services they need to be billed for?
• How much should the bill be?
• When should the bill be invoiced?
• What should be the payment collection method?
• How does the subscription data need to be reported for analytical viewing?

In a recurring billing only, recurring payments are catered as a part of a subscription-based model. However, in subscription billing, there are other billing processes along with recurring billing and more flexibility of payments such as free trials, downgrades, upgrades, renewals, and more. The whole purpose of this billing is to prevent businesses from sending out invoices in advance to regularly pay for subscriptions. By upfront charging of customers, businesses can enjoy smooth business operations and take notice of other areas of business that require attention.

What are the types of subscription billing?

The type of subscription billing you wish to implement depends on the type of your business. It relies on what services you offer, who your target customers are, etc. Given are some billing types along with critical features:

Fixed (Standard Fixed Pricing)

In this model, customers are liable for payment of the same amount for the same service. For instance, a web series subscription might charge $15 per month, a software subscription might cost $20 per year, or a gym membership might cost $25 per month.

Variable (usage-based pricing)

This model relies on charging customers on the basis of their use of a service. Such as a cloud computing service charging $0.5 per hour of usage, a pay-as-you-go phone plan charging $0.4 per minute, or a data storage service charging $0.01 per GB of storage.

Tiered (volume-based pricing)

In this model, different levels of service are offered at varying prices with discounted rates for larger volumes. For instance:

• A software subscription with plans like Basic (5 users, $10/month), Premium (10 users, $20/month), and Enterprise (20 users, $50/month).
• A web hosting service with plans like Starter (1 website, $5/month), Business (5 websites, $20/month), and Enterprise (10 websites, $50/month).

Value-Based (Outcome-Based Pricing)

This model sets prices based on the value delivered to the customer. For example:

• A digital marketing agency charging clients based on the number of leads generated.
• A health and wellness service charging clients based on the weight lost or fitness goals achieved.

Freemium (Free + Premium)

This model offers a basic service for free and charges for premium features or upgrades. For instance:

• A music streaming service offering a free version with limited features and a premium version with additional features for $9.99/month.
• A project management tool offering a free version for small teams and a premium version for larger teams at $20/user/month.

(Real-Time Pricing)

This model changes prices dynamically in relation to demand, supply, or other factors in the market. For instance:

• A ride-hailing company that varies prices according to demand during rush hours.
• An accommodation reservation website pricing according to availability and demand for the rooms.

How does subscription billing work?

There are numerous steps in a subscription billing cycle. Initially, the customer opts for a suitable pricing plan as per the requirement. As the next step, they choose a preferable method, such as a debit/credit card. Then, they agree for their payment details to be kept on record with the help of the merchant’s billing software.

As soon as a fresh billing cycle begins, the payment service provider of the business can charge the approved amount to the customer. Once this is approved, the money goes into the merchant’s account. The customer will be notified about a successful payment.

If by any chance the payment fails, the customer will be notified in this regard. In this way the customer’s account will be charged on the set schedule until they cancel or pause the chosen plan.

What are some business benefits of subscription billing?

Opting for a subscription billing model leverages a broad range of benefits, making it a popular choice among modern businesses. The advantages of subscription billing include:

Improved Retention Rate

When customers are communicated with about what they are paying for, it instills a sense of clarity and credibility in the brand. They know where their money is going and what services they are using. Moreover, this type of billing keeps them aware of when they are next to be billed, setting a sense of expectation and loyalty with the brand. Subscripting billing has the power to reduce churn rate and maximize retention rate of customers. The data and trends offered by subscription billing allow a clear view of any pain points of the subscription cycle.

Improved Customer Journey

The effortlessness by which customers are auto-charged without having to manually do the task makes them carefree. This makes for increased customer satisfaction as they are reliant on your business to deduct payments when they are due.

Agility in sync with market conditions

Subscription billing offers flexibility and offers micro-level insights necessary for any changes or strategic planning of business operations. The option of modification of tiers, incentivization of customers, and overage user rates and thresholds can all be managed. Whether you are expanding or exploring new services/products for your customers, this billing approach can go hand in hand with your unique business needs.

Revenue predictability

In case of cancelled or failed payments, you cannot fully track the revenues on your subscriptions. However, a subscription billing approach can help with revenue forecasting and more refined knowledge of what is coming in each month. Interestingly, if you use subscription billing for many years, you can make seasonal forecasts based on gathered data trends.

Time Savior

Subscription billing saves up time for customers and businesses by automating payment collection and streamlining tasks. Customers do not have to manually enter bank details each month to begin a subscription billing cycle or renew their plans. All of this can be accommodated via subscription billing.

Less failed payments

By using stored payment methods and notifying to-be-expired cards to customers beforehand, subscription billing reduces failed payments. When customers are continually billed each billing cycle, their services remain uninterrupted due to failed payments etc.

What is churn rate?

Churn rate can be defined as the rate of customer churn in which customers stop using a service or renew their subscriptions. It is commonly indicated as the percentage of subscribers who have discontinued their subscriptions within a given time span. Any business that wishes to grow must have a growth rate (number of new customers) more than the churn rate.

Churn rate defines the rate at which a company loses its customers, and an elevated churn negatively impacts revenues, thereby slowing down company progress. The churn rate not only refers to when consumers change providers but also includes when consumers cut off service but do not change. This measurement is most effective in subscriber-type businesses where the subscription fees drive the majority of the revenues.

What is churn rate vs. growth rate?

Churn rate indicates lost customers of a service, whereas growth rate indicates new customers. Any business can compare both rates to see if they witness growth or loss in a specific time span.

Calculating Churn Rate

Churn rate can be calculated using the following formula:

Churn Rate = (Number of customers lost during the period / Total number of customers at the beginning of the period) x 100

Growth Rate

Growth rate, on the other hand, refers to the percentage of new customers acquired over a specific period. It indicates the expansion of the customer base, which can lead to increased revenue and business growth.

Calculating Growth Rate

The growth rate can be calculated using the following formula:

Growth Rate = (Number of new customers acquired during the period / Total number of customers at the beginning of the period) x 100

What is the net growth rate?

It takes into consideration both churn and growth rate. It shows the overall changes in the customer base over a specific time period. Net Growth Rate can be calculated as:

Net Growth Rate = Growth Rate – Churn Rate

Net growth rate is crucial for modern-day businesses as it helps to evaluate customer retention and acquisition strategies, helps to forecast revenue growth, and helps in navigating any room for improvement. A negative net growth rate shows a need for improved customer retention, while low NGR may offer insights about increasing acquisition strategies.

What is a subscription billing software?

A subscription billing software eases complicated processes such as subscription bill generation, customer invoicing, tax calculations, and discounts and handles multiple payment methods. It benefits businesses by simplifying and predicting how much revenue and payments will flow into the business account each billing cycle. It enables businesses to gain insights about their business performance and strategies.

It also allows improved customer retention, lower acquisition costs, opportunities to upsell or cross sell and simplifies the entire business model. Moreover, the error-free payment collection, tax calculations, and other features allow for zero chances of failed or missed payments, thus streamlining business operations for a thriving business. Moreover, through emails and reminders, businesses can pre-plan their dues and do not struggle with manual data entry for payment through recorded data in the software.

What are some incentives you can offer to subscribers?

Although there are many ways to keep your subscribers hooked on your services, here are a few that can offer beneficial outcomes.

Introductory promos

With special pricing for new sign-ups or memberships, you can gauge a number of customers. For instance, a gym offers a promotion in which sign-up fees are waived or free trainers are allocated to new members for a limited time.

Discounts

Coupons and vouchers are popular tools to entice your customers. They can be applied on checkouts to enhance buyer experience.

Free trials

It is another common strategy for subscription-based businesses. For certain free trials, customers are required to enter payment card details so that they can be auto-charged for the next billing cycle after the free trial ends.

How to opt for the right billing software?

The most reliable billing platforms are those that are easily implemented and integrated into your office systems within the company tech stack. Premier subscription billing platforms give the stakeholders tools to configure by themselves, allowing them to build business agility and enable high-end data analytics in anticipating and maintaining performance for subscription services. When you are choosing a subscription billing software, you must ensure it aligns with the billing model you are willing to offer your customers.

Your billing software must also allow for hassle-free payment collection through the availability of credit/debit cards, UPI, e-wallets, auto-debits, etc. It must also allow for late payment reminders and help with quote creation, delivery challans, etc.

Moreover, it must support multiple currencies and languages as well as automatically calculate taxes based on region. Another important feature to look for in your billing software is a data security option to avoid data breaches and leakage of sensitive subscriber data. By choosing appropriate business billing software, you can make your business operations seamless.

What is proration?

It is the adjustment of a product or service price according to the amount and quantity consumed in a specified billing period. It is an equitable practice that charges customers for the actual use of a product/service instead of totally billing them when they haven’t enjoyed full service throughout the period. Proration is primarily used in subscription-based businesses, utility products, leases, and other situations where billing has to account for partial utilization of a service.

According to subscription-based companies, proration is the time when a customer begins or terminates a service in the middle of a billing cycle. For example, when a customer signs up for a service on the 20th of the month, they will be charged for only that portion of the month and not for the entire month cycle. Similarly, if they discontinue use of a service by cancelling it on the 20th of a month, they are only charged for the days for which they had used a service.

What is Dunning?

Dunning is all about asking customers for the amount they owe to the company. This is usually the case when a customer does not have sufficient funds for making a payment via their bank account, thus resulting in a declined payment.

Dunning is not a well-liked concept among customers and businesses alike, as it is considered persuasive and threatening on the customers part and a difficult process for businesses. It can be said that dunning is a way of recovering lost revenue by notifying customers about it. This can be done by sending reminders about pending payments from declined cards, alerting customers through email, implementing smart retries for failed transactions, and sending requests for permission to collect the latest credit card details from customers.

What is a payment gateway?

It is a digital service designed to act as an intermediary in e-financial transactions.  It allows businesses to accept and process payments through credit cards, debit cards, and varying payment methods through apps and websites. It is a bridge between the merchant and the bank, thereby allowing uninterrupted transactions online and in stores. Some examples of payment gateways are PayPal, Stripe, Square, and BrainTree.
Payment gateways have a critical role in the facilitation of online transactions, offering an easy and secure experience for customers. Among the benefits are:

• Security of transactions through protection of customer data
• Reduced risk of fraudulent transactions
• Increased conversion with multi-payment options and declined cart abandonment rate.

What is revenue recognition?

It is a generally accepted accounting concept that identifies conditions in which revenue is recognized. It is a process of recognizing income as it is earned and matching revenue to expenses related to those sales. This allows accurate financial records and transparency of business transactions. Revenue recognition assists with appropriate business decisions and allows investors a complete picture of business financial standing.

The revenue operations team has a crucial role to play here as they ensure that revenue recognition matches the regulatory standards. Moreover, revenue recognition must adhere to Generally Accepted Accounting Principles (GAAP). Based on regulations, revenue must be recognized when it is realized and earned. Here, realizability means a company can collect a payment sometime in the future and not necessarily when payment collection is due.

What is a trial period?

A trial period is a designated period in which customers can access features of a product or service without paying for it. This allows users a risk-free chance to enjoy the functionalities and benefits of a service, thereby helping them to decide whether they must subscribe to a service paid plan or not.

Some features of a trial period are

Duration and terms: A subscription trial period has a limited timeframe ranging from a few days to a month.

Access to advanced features: Free trial users are given temporary access to advanced features, allowing them to make informed decisions about a service.

Registration: In most cases, free trials come with registration and payment detail requirements. It allows the business to deduct payment if the user opts for a paid plan in the long run.