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What Is Subscription Billing?
October 5, 2022

What Is Subscription Billing?

Subscription billing is one of the quickest ways eCommerce companies can skyrocket their revenues.

It’s also a fantastic way to lock in predictable revenue, so you can focus your marketing budget on other important efforts.

And yet many eCommerce companies still don’t have a subscription process in place to enjoy all the benefits of recurring billing.

If that sounds familiar, start your journey toward passive profits today by understanding what subscription billing is, what kinds of software it takes, and all the rewards it brings.

What Is Subscription Billing? A Simple Definition

Let’s start with the very basics: how does subscription billing work? 

Subscription billing allows companies to collect automated payments from customers at preset intervals. This provides a highly predictable income stream that's all but guaranteed. 

For customers, subscription billing allows them to easily sign up for a service. They can automate their subscription payments with an "auto-pay" option.

This captures the customer's payment information. It also allows vendors to automatically bill subscription charges to their accounts.

Instead of having to remember to make a monthly payment, customers can strike this task off their to-do list. They can also rest easy knowing there won't be any interruption to their service or any risk of missed payment penalties. 

Subscription arrangements allow businesses to maintain consistent, predictable cash flows. This is great for the financial lifeblood of businesses, and consistent cash flow can help them fulfill customer needs. With automated online payments, subscription billing can also reduce the amount of time and resources businesses spend on billing cycle management.

It's no wonder the subscription economy has grown 437% over the last decade. 

With subscription billing, businesses can also customize their invoicing frequency.

Most subscription billing models utilize either annual, quarterly, or monthly billing. Merchants and businesses can also choose to offer more than one subscription billing frequency.

For instance, a lot of businesses allow customers to select between monthly or annual subscription payments. Annual subscriptions often have a built-in discount. This incentivizes customers to commit to a year-long subscription.

If a customer has the cash flow to pay upfront for a year, a discounted yearly subscription can save them money.

Thanks to all these advantages, subscription billing is taking off in a big way for both B2C and B2B organizations. 

Here are some of the most utilized pricing schemes that B2C and B2B businesses implement. 

Subscription vs. Recurring Billing

A lot of people assume that recurring billing and subscription billing is the same thing.

And for the most part, they aren't wrong. 

However, there are some differences between these two billing models.

Subscription billing is almost exactly the same as recurring billing, but it gives customers more flexibility. 

A regular recurring billing model requires all customers to sign up for exactly the same thing. There's only one option, and customers can't choose between different billing cycles. They also can't take advantage of discounts on things like annual vs monthly subscriptions. 

With a subscription service, customers get to select between different plans at different price points. In many cases, they can also pick between shorter subscriptions or gain a discount by paying upfront for the whole year. 

Audible is one of the many companies leveraging subscription billing.

 

Currently, Audible offers its customers two different pricing tiers. If a customer wants to change their subscription plan, they can do so at any time. 

What Is Subscription Billing Software?

If a business wants to implement a subscription model, it needs to deploy subscription billing software.

Subscription billing software manages the recurring billing process. It generates invoices for subscription plans and billing frequencies. A good subscription billing solution will also manage standard and special offers, as well as discounts and packages. 

This cuts down on human error and ensures almost total accuracy in the billing process.

Subscription service software can also give you valuable analytics. For instance, sales departments can use it to identify top-selling services and products.  

Subscription billing software is available as a stand-alone product. It's also often included as part of more extensive subscription management software tools. 

6 Requirements for Subscription Billing

Subscription billing can be a highly-effective model, especially for service-based businesses. However, for a subscription model to work, it has to offer value to the customer and allow them flexibility. It also has to be streamlined and able to autogenerate workflows. 

Here are six other requirements you need to meet if you want to offer subscription billing to your customers (and keep them happy in the process).

1. Offer Options

According to statistics, the subscription model industry has grown nearly 5x faster than the S&P 500. Naturally, phenomenal growth rates also mean increased competition. 

Subscription billing might be hugely popular with consumers, but this doesn't mean you shouldn't make your pricing model as competitive as possible. 

One way you can make your subscription offering competitive is to offer customers feature choices. Any business that wants to implement subscription billing should look into tiered packages. With this model, you can give customers choices on what offerings are available in which tiers. 

These kinds of options also allow customers increased flexibility in their subscriptions. They open up the door for potential upsells and gives customers more value for money, too, without any downsides to the seller.

Customers get to pick and choose what features they want to whichever degree you choose. Businesses can profit from more attractive, tailored offerings – all without needing to manually manage customer accounts and feature access.

Survey results reveal that good value for money is the most important conversion trigger for subscription leads. Offering feature choices is one of the easiest ways to give customers the best value for money, without having to cut margins. 

However, you also need to ensure that your subscription billing software is equipped to deal with feature choices. Your billing software must be able to either deny or grant access to specific features without manual intervention. 

2. Charge on a Recurring Basis

Your subscription billing model needs to be able to seamlessly implement recurring charges. It must invoice and bill the customer at the correct frequency and stop charges if the subscription is canceled. 

Your billing solution also needs to have secure access to payment processing platforms. Ideally, these should be able to accept a wide variety of payments, including credit card payments, wire transfers, etc.

3. Manage Customers at an Individual Level

Personalization is another critical element in most subscription models. 

28% of people say personalized experiences were the primary reason for them continuing a subscription. 

To successfully offer a personalized experience, you have to be able to manage subscriber accounts at an individual level. Your billing software needs to be able to store customer information around things like:

  • Purchase history
  •  Average purchase price
  • Billing cycles
  • Up-sells
  • Add-ons. 

This allows you to target customers with offers and promotions that are tailored to their needs and purchase history. 

4. Deliver Self-Service Capabilities

Another critical feature of any good subscription model is self-service capabilities. This streamlines the customer experience and saves businesses time through automation. 

Customers need to be able to initiate subscription billing without having to engage with your staff. They should also be able to independently manage their accounts and carry out actions like:

  • Upgrading
  • Downgrading
  • Canceling subscriptions

It's also critical that these self-service capabilities function seamlessly.

Reports show that consumers spend $133 more per month than they realize, so it’s not surprising that many people act with a certain amount of urgency when they decide to end their subscriptions. Often, they need to do it to protect their personal finances.

So, when they do go to stop a subscription, the process must work. The last thing you want is for your subscription billing software to erroneously charge the customer after cancellation. You can expect that experience will show up in a negative customer review – something no competitive company can afford.

5. Automate Billing Workflows

You also need to choose a software solution that can automate workflows.

Software for subscription billing should be able to automate invoicing and revenue recognition. It should also automate dunning on individual customer accounts. 

Automating manual processes can dramatically increase billing efficiency by cutting down on human error and driving up billing accuracy.  

6. Analyze Billing Performance

The subscription billing solution you choose has to be able to generate billing performance data. To optimize subscriptions, finance teams need to have access to real-time billing productivity data. 

Analyzing billing productivity can allow you to you refine your model. By tweaking subscriptions, you can maximize customer lifetime value

To make this happen, you need a billing solution with comprehensive analytics functions and report generation capabilities. 

The 4 Types of Subscription Billing Models

One of the keys to success when it comes to subscription billing is offering the right pricing model. The best pricing model to implement will ultimately depend on your specific offering and your target customers.

Here are 4 of the most common types of subscription billing models. 

1. Flat Rate

Flat rate pricing is the most basic subscription billing model.

In exchange for a flat, recurring rate, customers get access to a set range of features. Over time, the company may roll out new features or products to maintain customer engagement and stay competitive. 

The flat rate pricing model is ultra-easy for customers to understand. It's also simple for businesses to manage. 

Flat rate pricing is ideal for subscriptions that are "one-size-fits" all. 

2. Tiered

If your offering isn't a one-size-fits-all solution, you can also look into implementing tiered pricing.

Tiered pricing usually gives customers the option between 2-3 different packages.

These packages typically come with ascending levels of features, functionality, and customer support. Depending on your product or service, you can offer as many different tiers as you want. 

Ultimately, the idea behind tiered pricing is to offer different combinations of products or services. Depending on the user's needs, they can then select the tier most suited to their requirements and budget. 

Tiered pricing gives users enhanced flexibility and choice. It can also be a great opportunity for upsells. 

Most businesses with tiered subscription pricing use the lower levels to prove their value proposition. The lower value tiers help to bring in new customers and demonstrate the core capability of the subscription. Over time, you can then encourage users to upgrade to higher packages. 

3. Priced-Per-User

Priced-per-user is another popular subscription billing model. It works particularly well for B2B applications where customer accounts need to cater for multiple users.

A lot of price-per-user billing models are hybridized with tiered pricing.

For instance, Hootsuite, a popular social media management tool, offers multiple pricing tiers.

These pricing tiers include ascending levels of feature availability, as well as scaling numbers of allowed users. 

Their entry-level subscription plan allows 1 user and 10 social media accounts. Their business plan allows for 5 users and 35 social media accounts. 

Another way you can blend tiered and priced-per-user billing is by charging different amounts per user at different tiers. Instead of limiting the number of users at each tier, you can allow customers to pick how many users they'd like, regardless of tier level. 

The Salesforce subscription plan is a good example of this.

In their Small Business Solutions Essentials tier, Salesforce charges $25 per user per month. For their Service Professional tier, they charge $75 per user per month. 

Under this model, customers can gain ultimate flexibility over user numbers and capabilities. 

4. Per Unit Pricing

Another popular subscription billing configuration is per-unit-pricing.

With this one, customers are billed for the units of a product or service that they "consume."

For instance, Clearbit, a marketing data company, bases its subscription billing on API requests. They currently charge users $99 a month for 1,000 API requests. For $199, users get 2,500 API requests.

Ahrefs offers a flat-rate model for their main tiers.

But users who may want to “consume” past their pricing plan have the option to increase their credits for a fee.

Like pay-per-user models, this pricing strategy is particularly effective for B2B solutions.

By encouraging customers to up their consumption, you can steadily grow your revenue. If your solution helps drive growth for B2B customers, there's a high chance they'll increase consumption as their needs climb. 

A lot of B2B subscription services help customers grow their businesses. When B2B customers find a subscription tool that assists their growth, they're usually more than happy to scale up their packages when necessary. 

5. Hybrid

As we mentioned above, it's not uncommon for businesses to combine more than one subscription billing method into a hybrid model. Hybrid subscription billing methods allow customers increased flexibility, which can make packages more attractive.

Hybrid models can also make it easier for you to forecast subscription revenue. 

Two of the most commonly used hybrid subscription billing models are:

  • Tiered and per-user pricing
  • Tiered and price-per-user

The Ahrefs plan we covered above is actually a great example of this.

These kinds of hybrid subscription billing models give businesses the ultimate degree of flexibility over how they want to structure their pricing. It also allows companies to offer more competitive fee structures. 

The 3 Biggest Benefits of Subscription Billing

As we said above, the subscription economy is booming. 

Reports show that 70% of businesses think subscription models hold the key to growth and expansion. 

If you analyze the pros and cons of subscription billing, none of this is surprising. Here are the top three advantages that make subscription models such a powerful driver of growth. 

1. Predictable, Ongoing Revenue

The biggest, most obvious benefit of subscription billing is that, once a customer signs up for the service, you know how much they’ll be spending with you next month (or whenever their next payment is due).

Being able to predict this kind of spending – especially across a large number of customers – makes it much easier to forecast what kinds of overhead and other business initiatives you’ll be able to afford.

Of course, it can also offer a priceless amount of peace of mind. While you may have some subscriber churn, once you have a feel for what amount to expect, you’re left with the total revenue you can reliably expect to bring in through your subscription service.

And that will definitely make it easier to sleep at night.

2. Customer Retention

No matter how fantastic a service may be, hitting "buy now" and giving up hard-earned money isn't easy. The conversion stage for any business is often the highest friction point

If you add friction to the payment process, this gives customers more time to second guess their initial purchase decision. When customers have to jump through hoops or go out of their way to pay you, churn rates go up and your conversions tank. 

Even if there's nothing "hard" about your payments system, streamlining checkout and payments even further is always a good idea. Subscription billing eliminates friction entirely from recurring payments. 

Instead of having to remember to pay you and take time out of their day to do so, customers can enjoy your service without having to even think about the billing process until it's time to renew their subscription.

Subscription billing can also drive down upfront costs. Cheaper upfront costs remove friction from the initial buying decision. The more customers have to pay for something, the harder they have to consider their purchase.

Before subscription billing became such a big thing, companies often had to charge high, once-off fees to cover upfront development costs. Now, companies can reduce this price-based friction point. By charging a subscription fee, you can pass on lower prices to customers and increase conversions.

Microsoft is a good example of this. Before they implemented their subscription plans, customers had to cough up a sizable sum for an Office 365 suite.

Now, users can access the 365 apps for under $10 per month. 

3. More Time to Focus On Other Priorities

One of the most valuable benefits of subscription billing is it keeps you connected with your customers. The automated nature of subscription models frees up time and resources which you can divert to core operations. Instead of squandering time on payments management, you focus on service optimization and delivery.

4 Subscription Models to Encourage Signups

While subscription models are excellent for reducing friction, this doesn't mean you should sit back and assume signups will roll in. There are multiple ways you can tweak your model to encourage sign-ups. 

1. Trial Periods

Free trials are one of the most popular sign-up incentives subscription businesses use to attract new customers. Free trials allow new users to test drive subscriptions at zero cost for a certain time period. Once the free trial period is up, their account automatically converts to a paid subscription. 

Free trial periods can be highly effective as they allow customers to try the full service without any risk. Should they decide the subscription isn't for them, they can cancel it before the trial period is up without losing any money.

2. Limited Services for Free

Another common method subscription services use to attract customers is offering a certain set of features for free. Often, users can access these features without charge for an unlimited period. However, once users start utilizing the service, they may find that paying for some of the premium features is worthwhile. 

Like free trial periods, having a free tier in your subscription model allows users to try out your service at no risk. They can explore its features and functionality until they're ready to move to a higher tier. 

3. Pay-as-You-Go

For certain industries and types of subscriptions, pay-as-you-go billing can also incentivize signups. With pay-as-you-go, users are automatically billed recurringly. However, what they pay depends on their level of usage. 

4. Overage Fees

With overage fees, customers pay a set fee for limited or basic feature usage. If they use more than what's offered at the base price, they'll be charged more. This extra charge will automatically reflect on their bill. 

This strategy works best for business models that cater mostly to light users. With an overage model, you can structure your pricing to favor light usage. At the same time, overage charges will still allow you to generate additional revenue from heavy users that might cost you more to support. 

Take note, overages fees aren't a standard feature in software for subscription billing. They typically require advanced billing software capabilities. 

More and More Companies Have Adopted Subscription Billing

By now, hopefully, you have a better idea of how subscription billing works and what it could mean for your company’s bottom line.

As you can see from the graph above, some of the world’s most successful companies have already adopted this popular business model to grow their revenues even more.

But they’re definitely not alone.

Companies of all sizes have leveraged the power of subscription billing.

In fact, many of today’s most popular brands literally got their start by offering subscription services.

Powerhouse subscription companies that helped popularize the business model include big names like:

  • Blue Apron
  • Dollar Shave Club
  • Trunk Club
  • Netflix
  • HelloFresh
  • Birchbox

And more are springing up every day.

Subscription services are even finding new users in old industries like:

  • Airlines
  • Automobiles
  • Gaming
  • Health and wellness
  • Home fitness
  • Home maintenance
  • Education

If anything, subscription services have become commonplace in more industries than those that haven’t. So, if your industry doesn’t currently feature a number of subscription offers, rest assured that it’s only a matter of time.

Subscription Billing Software vs. Building Your Own Subscription Platform

Are you considering building your own software for subscription billing?

It’s definitely not the most popular approach, but many companies have tried.

If this is something you’re thinking about for your business, you might want to reconsider. 

Leveraging existing subscription billing apps is usually going to be much easier and a lot cheaper. 

Here’s why building your own subscription platform is generally a bad idea.

Your Platform Will Need Constant Additions and Upgrades

One of the main reasons why it's not advisable to build your own subscription billing software is that it'll need constant upgrades.

And every time your needs change – which it will, especially if you're growing rapidly – you'll have to make modifications to your billing system.

These could include things like:

  • Catering to extra subscriptions
  • Supporting more payment methods
  • Making changes to plan pricing
  • Modifying billing cycles
  • Enabling upsells and downsells

If you entrust your subscription billing service to a proven software solution, the manufacturer takes care of ongoing updates and makes these kinds of common upgrades as easy as clicking a few buttons.

Building Software Is Time Consuming

Building any type of software solution from the ground up takes a lot of time. Billing subscription systems are relatively complex to code and require extensive testing, too. 

Choosing to build a subscription payment system could stall your offering for months. While you're building and testing, you're leaving money on the table. You'll also be compromising agility and scalability. 

Building Subscription Software Costs a Lot More Than Buying

Building a subscription payment system from scratch will not only take an incredible amount of time, but it will also require a lot of capital. Paying for all this development upfront is expensive and diverts capital away from core operations that can move the needle. 

Instead of developing and marketing your product or services, you'll be left plowing money into things like debugging, testing, backups, and ongoing maintenance. 

Security Risks

If you choose to build rather than buy a subscription payment system, all security risks will fall directly on your shoulders. 

Instead of leaving security to the pros, you'll have to dedicate resources to continual upgrading of firewalls and patches. You'll also have to keep up with changing security regulations.

Prebuilt subscription payment tools allow you to be 100% compliant and secure, minus the hassle and headache. 

Use Subscription Billing Software to Supercharge Your Company’s Revenue

For the vast majority of eCommerce companies, adding some type of subscription billing option for customers is a complete no-brainer.

As you’ve seen by now, it doesn’t just mean more revenue.

It means less overhead, too.

Plus, it’ll free you up to focus on other aspects of your business that have a high potential for greater profits.

And best of all, it’s never been easier.

If you’re ready to supercharge your online business with the power of subscription billing, wait no longer. Add our subscription platform to your site for immediate (and free) results.

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