Subscription billing solutions come with both advantages and disadvantages. When designed well, subscription models offer convenience for both businesses and their customers. Customers get what they want on a regular basis for a set price and businesses have a predictable revenue stream. On the other hand, subscription pricing may be leaving money on the table for businesses by not charging based on how much of the service a customer uses. Known as consumption-based billing, this is becoming more common in conjunction with subscriptions. Enterprises need to consider all variables, including their billing capabilities, before moving forward with deploying simple subscriptions.
Key Advantages of Subscription Billing for Businesses
Subscription billing solutions can alleviate many challenges associated with running a business. As long as organizations have the right technology and capabilities, they can take full advantage of a subscription billing strategy.
Consistent cash flows
One benefit is that subscription billing solutions provide businesses with predictable and reliable cash flow. Calculating monthly revenue is as simple as multiplying the number of customers by how much each customer pays per month.
As long as customer churn is low, companies don’t have to worry about losing a big chunk of business from month-to-month. They can plan ahead and invest in new growth areas without worrying whether or not they will have the necessary capital. The exception to this would be if a company doesn’t invest in enhancing the product/service and customers churn or if customers dropped the product/service due to unforeseen circumstances (i.e., a global pandemic or bad PR event).
Higher collections and customer retention
Businesses don’t have to worry as much about chasing down outstanding invoices with subscription billing. As long as customers keep their payment methods up to date, companies can automatically collect the revenues they’re owed. Overall, this results in a higher percentage of total invoices paid, which is more difficult for organizations that rely on one-time payments. Subscription models also tend to retain customers longer as they grow more familiar and loyal to the platform they are using.
Billing and business model simplicity
One of the most valuable aspects of subscription billing is if companies can set their billing to run automatically. Essential billing tasks such as invoicing, collections, and dunning, can be executed with automated workflows to simplify billing management. With this type of billing solution, enterprises can focus less on administration and more on how to stay ahead of the competition. Subscribers essentially become repeat customers that don’t require as much attention.
Advantages of Subscription Billing Solutions for Customers
Subscription billing is also attractive to enterprise-level and individual customers. They can gain access to products and services that would otherwise be unaffordable without paying a large one-time fee or getting into rigid, long-term contracts.
In the same way that subscription-based models give businesses cash flow consistency, customers also enjoy predictable expenses. They know exactly when and how much they will get charged for the same set of services each billing cycle. Clients don’t have to worry about surprise invoices and can budget around their fixed subscription payments.
In the past, customers had to pay large upfront licensing fees for many services and products. Or, they had to own software outright, purchasing new versions every few years to obtain the latest functionality. With subscription billing, customers don’t have to shell out sky-high payments to access or own high-quality, sophisticated offerings. They can spread their costs out with smaller, bite-sized charges. Additionally, customers incur fewer penalties because they’re less likely to miss payments if signed up for automatic payments. Businesses can then charge automatically without needing approval.
Subscription billing is extremely convenient after the initial sign up. With auto-pay, customers don’t have to worry about writing checks, mailing payments, or calling in to give credit card numbers. Instead, they maintain access to products they value without having to do any additional work.
Key Disadvantages of Subscription Billing for Businesses
The disadvantages of subscription billing have become more evident in recent years as companies strive to evolve their pricing models. In the modern age, billing has become a differentiator, which means traditional subscription pricing may not be sufficient in every case. Even with the many benefits of subscription billing, there are downsides. Those who are considering implementing subscription-based business models should keep the following challenges in mind.
Customizing subscription packages can be difficult without the right billing solution. Many plug-and-play recurring billing systems aren’t designed to do much more than charge credit cards or bank accounts at fixed intervals. Those who want to refine their subscription offerings with add-on features or usage-based tiers need agile and flexible billing solutions. Finance teams must be able to make changes easily to pricing tiers, invoicing cycles, triggers, and more. In our fast-paced world, companies can’t afford long development times to overhaul subscription product packages.
As mentioned previously, subscription billing allows customers to pay for expensive offerings through smaller payments. Consequently, many customers overuse the service initially, getting the most “bang for their buck” at the very beginning of their memberships. Subscription models create risk for businesses in this way because leaders are betting that customers will stick with them long enough to pay for their individual “share” of development. If every customer drops services within a few months of starting, businesses may not recoup their R&D costs or achieve the ROI they envisioned.
Customer power of choice
Customers have a lot of power in the market today. They can shop between providers easily and find a plethora of information from third-party sources about the quality of different products. Should a disruptive competitor release a lower-priced, higher-quality product, customers without a contract can easily jump ship, as they are not tied to long-term contracts.
Disadvantages of Subscription Billing for Customers
The downside risks to customers are not as significant as they are to those businesses that implement subscription billing. It’s easy for clients to walk away from subscriptions that are no longer favorable to them. However, there are disadvantages for those who don’t stay on top of their subscriptions.
Higher total cost
Customers may end up paying more over the open-ended lifetime of a subscription than they would have otherwise with an upfront payment. As time goes on, they may perceive they get less value for each dollar they pay, because they don’t get anything new over time. For many, however, this is not a problem as upfront fees would otherwise deter them from signing up.
Because subscriptions can persist without any intervention from businesses or clients, customers may forget they have an active membership. Some people continue to pay for services they no longer use.
Today, businesses are innovating in many ways on the pricing side. Customers can often find flexible pricing in the market personalized to individual customers. Those who don’t conduct research may stick with an inferior subscription membership when next-gen usage models are growing increasingly popular.
The Ideal Subscription Billing Solution
Enterprises that have a sophisticated, cloud-based billing solution can deploy pricing tactics that achieve the best of all worlds, and easily transition from simple one-time and subscription-based pricing models to creative metered and usage-based plans. That allows them to implement complex subscription-based models that are tailored to individual customers, which can evolve as needed to respond to market disruption. Rather than lose subscribers to competitors, companies with flexible billing capabilities can deliver new product packages to market, automate essential workflows, and build fully integrated financial ecosystems. Additionally, they can generate insightful reports and dashboards about their subscription models that indicate how organizations should refine their offerings.
With BillingPlatform, businesses have everything they need to launch dynamic pricing for subscriptions, one-time charges, usage, tiered, overages, minimum commitments, and more without giving up on future innovation. Want to learn if subscription billing works for your organization? Start a free trial today.