Leverage your subscription payment system to accurately calculate core metrics like MRR and churn.
What’s the one thing Rent the Runway, your gym membership, and monthly utilities all have in common? Scheduled payments, aka recurring billing. Scheduled payments have become a core form of revenue collection.
Of course, recurring payments vary depending on the business. Rent the Runway is definitely structured different than your monthly gas bill. As the subscription universe continues to expand, you can expect to see even more subscription payment plans.
So, let’s get a little background on what subscription payments are, the benefits, and picking a subscription billing service that’s best for your company.
What are subscription payments?
Subscription payments, also called recurring payments, are automatic payments on a schedule. Particularly, subscription services tend to charge on a monthly or annual schedule, until a customer withdraws permission or cancels the subscription.
6 benefits of subscription payments
Success in the SaaS universe means engaging in long-term relationships with your customers. The subscription model is the best way to achieve this.
There are numerous benefits to the subscription payment system:
Operating a one-time payment model requires constantly attracting new customers in order to earn revenue. One-time payments also increase the difficulty of calculating how much revenue you’ll earn each month.
Subscription payments, on the other hand, offer you predictable income—customers make payments on a regular basis. The payment amount and date of payment is usually decided at the time of sale, so you’re able to predict your revenue each month easily.
Convenience of automation
Automatic payments are convenient because, well, they’re automatic. Meaning, you don’t have to think about them. Having a subscription payment and billing system in place allows you to automate your recurring payments and produce invoices for each individual transaction.
Subscription payments open the door for more upselling and cross-selling opportunities, therefore expanding your revenue. Since you now have continuous contact with your customers, you develop a strong bond of trust, making it easier to market add-ons. Additionally, once customers budget the subscription monthly fees, they’ll see the add-ons as more affordable.
Essentially, subscription payments allow more time for customer relationship building. Subscription billing collates data, while also making changes to customer accounts and reports. You can focus on building your brand while the billing system focuses on the nitty gritty: invoices, communication, and personalized billing experiences.
Less CAC recovery time
Customer acquisition costs, or CAC, umbrella the total cost of sales and marketing efforts required to acquire a customer. Utilizing a subscription payment system will result in less CAC recovery time. Of course, the length of time customers remain subscribed will vary. Keeping customers interested in your product is up to you; however, the subscription model is changing the script on retention and managing ongoing relationships.
The subscription model can maximize profits in more ways than one. You can collect foreign currency through subscription billing, expanding your customer base and therefore bringing in more revenue opportunities.
Some billing servicess offer the ability to send coupons and discounts to customers. Offering coupons on occasion may entice customers to stay, improving your retention and customer loyalty.
Finally, a seamless billing experience will make customers happy, increasing lifetime value, or LTV.
How a subscription payments and billing system works
Setting up a subscription billing system doesn’t have to be difficult. The first step is understanding the different systems and components:
A special type of bank account where funds from a debit or credit card purchase are deposited (processing and security not included)
Connect with credit card companies, making it easy to accept online payments. The provider handles all aspects of electronic payments—security, processing, and depositing the funds.
Subscription management (or recurring billing):
Work on top of payment gateways and ensure the right accounts are charged correctly each month.
Provide an in-depth look at your customers and sales.
Works to prevent the impact of failed payments by double-checking customers always have updated credit cards on file. Some systems proactively ask customers to update, while others follow up after a transaction fails.
Automate legally mandated accounting processes and confirm you’re only booking revenue for products or services you’ve delivered.
Options for subscription billing tooling
There are two main routes businesses can choose between when it comes to tooling and infrastructure to enable subscription payments and billing tooling:
Merchants of record
A popular option, especially for SaaS businesses, is to partner with a Merchant of record (MOR) billing platform – a secure and reliable way to process and manage subscription payments. These platforms provide a turnkey solution, allowing businesses to quickly and easily set up recurring payments and handle billing and customer data. MOR platforms can help businesses automate billing processes and improve customer experience by allowing them to set up flexible payment options, provide discounts, and more. Additionally, MOR solutions provide a layer of security and protection for both customers and businesses, handling sales tax liabilities and chargebacks and helping to reduce fraudulent activity. Popular merchants of record include Paddle Billing and FastSpring.
Building a piecemeal infrastructure
For maximum control, you can invest in building your own subscription billing infrastructure. This approach requires a fair amount of work upfront and that you have the engineering resource to manage continuously, but allows you to customize the solution to best fit your needs. You'll need to source the necessary components, such as a payment gateway, a payment processor, and a customer relationship management system to manage customer data. Additionally, you'll need to ensure that all of the components are securely integrated with one another. Popular solutions typically used when building your own infrastructure include Stripe, Chargify, and Avalara.
How to choose a subscription billing service
Not every subscription billing service will be a perfect match, so consider these points in your decision-making process:
What’s the size and ambition of your company? Later-stage companies will need to support more complex billing models than smaller and early-stage companies.
Are you planning to expand across borders? This calls for localization capabilities and comes with a lot of admin, like sales tax compliance. You can build product and finance teams to handle all this, or offload it.
Customer size and type
Consider the volume of customers you have and if you intend on scaling in the future. You also have to consider the type of customers you have—are they willing to pay higher prices for custom plans?
Do you want to offer flexible pricing to your customers (i.e., discounts and upgrades in your plans)?