While not a new term, subscription billing is a charging method that enables merchants to bill customers automatically on a fixed schedule for a specific product or service. This payment method has roots that date back to the 17th century when English book publishers and periodicals pioneered subscription billing by collecting ‘sponsorships’ from readers. Fast-forward to the 20th century, we saw an uptick in subscription billing services when businesses began offering newspapers, books-of-the-month, and even milk on a subscription basis. As we make our way through the 21st century, subscriptions have become a way of life – think consumables and retail, digital entertainment, maintenance and repair, as-a-service offerings, transportation and travel, etc. The increasing pervasiveness of subscriptions can, in large part, be attributed to today’s efficient and effective subscription billing software.
Subscription Billing Described
Tightly integrated with subscription management, subscription billing software provides companies the ability to automatically collect payments at set intervals – providing a near-guaranteed income. From the customer’s perspective, all they need to do is sign up for ‘auto-pay’ which captures their payment information and obtains approval for vendors to charge their accounts.
Under subscription arrangements, businesses can charge however they need to maintain consistent cash flows and fulfill customer needs. Depending on the type of service or product offered, they can invoice annually, quarterly, or monthly. Finally, most subscription billing occurs via automatic online payments, making billing cycle management an easy process.
For both Business-to-Consumer (B2C) and Business-to-Business (B2B) models, subscription billing pricing is flourishing. Let’s look at the most common pricing schemes used by B2C and B2B organizations.
B2C Subscription Pricing
In a typical B2C subscription model, the customer initiates a relationship by making an initial payment for a product or service, understanding that they will be automatically billed at regular intervals going forward. After the first payment is processed, the business provides access to the platform, sends the specific products, or performs the services that are included at the selected price tier.
Most B2C businesses deploy one of two subscription pricing models:
Since this recurring pricing model is for a fixed set of features, it is easy for customers to understand and for companies to manage. Over time, businesses typically add new features or additional products to keep consumers engaged. To increase revenue, companies simply need to raise the price of the recurring subscription.
With tiered pricing, businesses generally offer two or three packages or combinations of products and services that target different user levels and needs. As packages increase in price, customers gain access to additional products/services, functionality, or features, and/or better customer support. Businesses that deploy the tiered subscription pricing model aim to prove their value proposition through lower-priced offerings. Then, they encourage customers to upgrade to higher-value packages to drive additional revenue.
B2B Subscription Pricing
On the B2B or enterprise side, companies offer subscription memberships for marketing automation tools, cloud computing platforms, software such as accounting and customer relationship management (CRM), creative design services, and much more.
In addition to the B2C pricing models highlighted above, B2B organizations also leverage the following pricing schemes:
Per-user recurring pricing
Companies pay depending on the number of employees provided with product or platform access. For example, the social media management site, Hootsuite, offers four different pricing tiers that differ on several fronts, including the number of users allowed. For example, the Professional tier allows for one user while the Business tier allows for up to 10 users.
Rather than set user limits, Salesforce takes a more straightforward approach. Depending on the functionality provided, the company charges different amounts per user. For example, the Essentials product tier for the Small Business Solutions platform is priced at $25 per user, per month. The Service Professional tier, on the other hand, costs $75 per user, per month and provides users with a complete customer service solution. Like B2C tiered pricing, B2B businesses drive additional revenue by convincing customers to upgrade from lower-priced tiers to higher-priced tiers.
A commonly used pricing scheme, customers pay each month based on how much they ‘consume’. For example, the marketing data firm, Clearbit, charges $99 per month for 1,000 API requests or $199 per month for 2,500 API requests. Mailchimp offers different tiers that begin at certain price points and increase based on the number of contact emails sent. The company’s Premium tier starts at $299 per month for 10,000 contacts and increases $100 per month for each additional 10,000 contacts. B2B businesses drive additional revenue under the tiered model by encouraging enterprise customers to increase their consumption, which is easy to achieve when the advantages of doing so are clearly stated.
Subscription billing software allowed a new generation of business models to thrive. Before subscriptions became pervasive, companies charged higher fees to justify upfront development costs, which hindered growth in many areas. Now, businesses can pass on lower prices to customers and attract a larger target market.
Subscription pricing models don’t end with the list above. There are also variations on traditional models that forward-thinking companies are implementing.
Freemium to Subscription
This subscription billing software model offers free access to a limited set of features. In most cases, customers can use these features indefinitely at no charge. If they want to upgrade for access to more features, functionality, etc., they can do so at any time.
Businesses use the freemium model to prove the value of their service or platform to a large base of potential customers. Users can explore features and capabilities risk-free until they are ready for a paid membership.
In many cases, B2B companies offer free trials for tiers offered, giving potential customers the opportunity to test services for a limited time. It’s also common to see companies offer enterprise-level tiers without predefined pricing. Organizations like Dropbox ask potential heavy users to contact them to discuss usage requirements to better determine specific subscription pricing.
Limited Promotion to Subscription
Many companies allow users to test their services for a limited time, at no cost, before they automatically roll over into a paid subscription. The promotion-to-subscription approach is similar to the freemium strategy in that it provides a way for businesses to prove their value to customers before they sign up for a paying subscription.
The overage variation of the subscription billing model means that companies charge a consistent base fee for limited feature access. Customers incur extra charges for using more than is allocated at the base fee price.
Overage models are valuable for companies whose business models would otherwise favor light users. The overage model enables them to capture additional revenue for heavy users that cost more to support.
Not typically a standard feature of traditional subscription billing software, this model requires advanced billing engine capabilities to calculate the amount of usage over the set amount. Within SaaS businesses, this type of pricing is dependent upon a mediation engine.
Also referred to as usage or consumption-based pricing, organizations with advanced subscription billing software capabilities can also deploy pay-as-you-go subscription pricing. Under this arrangement, customers are charged regularly, but the specific amount they pay depends on service or product usage.
Benefits of Subscription Billing Software
For both businesses and consumers alike, subscription billing software offers many benefits, including the simplicity and predictability of knowing receivable amounts and the total cost of each billing period. From the business’ perspective, they receive a predictable and consistent cash flow, higher collections and customer retention, and billing and business model simplicity.
From the customer’s perspective – whether a business or consumer – they benefit from predictable expenses, cost-effective access since automatic payments reduce missed payment penalties, access to high-quality offerings at an affordable price, and auto pay convenience.
The benefits highlighted above, as well as others, is one of the primary reasons subscription billing models continue to flourish. Today, companies in every industry and market are implementing subscription business models to attract customers and retain them over the long run. However, does this mean that all organizations can successfully implement subscription billing?
Subscription Billing: Key Requirements
There are several key requirements and capabilities organizations must have to successfully implement subscription billing. When requirements aren’t met, businesses will find themselves unable to take full advantage of this business model without incurring increased complexity within their billing operations. Subscription billing may be right for you if you are able to:
1) Provide feature choices
Given the ever-increasing competitiveness subscription-based businesses encounter, you need the ability to offer feature choices to remain competitive. Ideally, you need the ability to offer choices around what services or products are available with different subscription plans. Additionally, when the customer selects a specific subscription plan, your subscription billing software needs to automatically grant or deny access to features depending on the plan chosen.
2) Charge on a recurring basis
Once the subscription plan is selected, you need the ability to follow through with recurring charges. Your subscription billing software needs the capabilities to invoice and bill customers according to the agreed-upon billing schedule. In addition, the subscription billing software solution must have secure access to payment processing platforms that can accept a wide range of digital payments, from credit cards to wire transfers.
3) Manage customers at an individual level
In order to provide customers with the experiences they expect, you need the ability to manage subscribers on an individual level. One that is based on their preferences and history with the product or service. The subscription billing software needs to be able to store information about your customers, including the products they subscribe to, price, payment types, billing cycle, add-ons, and more.
4) Deliver self-service capabilities
Customers must have the ability to initiate subscription billing on their own for a particular product or service. In practice, this means that potential users should have the ability to browse features, input payment information, and begin a subscription without needing to engage with or require assistance from your staff. Additionally, customers need the ability to manage their accounts independently, including having the ability to easily upgrade/downgrade subscription plans.
5) Automate billing workflows
To fully reap the benefits of subscription billing, the software should be able to automate workflows, including invoicing, revenue recognition, and dunning – based on individual user accounts. By converting manual processes into automated workflows, you’ll be able to improve billing accuracy and increase billing efficiency across the board.
6) Analyze billing performance
Finally, subscription billing performance data needs to be available for business intelligence. Finance teams must be able to analyze real-time billing productivity and generate reports to understand the effectiveness of the subscriptions offered. With sophisticated reporting capabilities, organizations can refine their models over time and maximize the lifetime value of their customers.
Can your billing software solution provide the above functionality? If not, you may have a subscription billing software gap.
Take Advantage of the Best Subscription Billing Software
BillingPlatform is a cloud-based billing software solution that enables companies to deploy and manage complex subscription models at scale. Our agile and customizable platform can adapt to any business model, any pricing scheme, any service – and easily adapt as market needs advance.
With us, you get an agile platform architecture that enables you to extend BillingPlatform’s custom data model to build a fully integrated financial ecosystem for any subscription service. Our sophisticated workflow engine enables finance teams to completely automate billing tasks and create triggers, autoresponders, and outbound communications that are fully executable without the need for human intervention. Additionally, our highly configurable rules engine can automate upgrades, downgrades, and early terminations, which are essential for well-designed and profitable subscription models.
When you choose BillingPlatform as your partner for subscription billing software, you get everything needed to deploy and manage multiple subscription pricing models simultaneously to easily define custom billing cadences, invoicing cycles, and pricing models. Are you ready to join a growing number of businesses in capturing the benefits and profitability subscription billing software offers? Get started today.