The use of a subscription-based sales model has steadily become the norm within multiple industries, with the subscriptions industry growing by more than 100% a year over the past five years, delivering $2.6B in sales in 2016, up from $57M in 2011, according to a study by McKinsey).
Traditionally subscriptions were used in industries such as publishing for a monthly magazine subscription. This transaction usually required the purchase of the full subscription in advance. Now, as buyers have more choice and flexibility than ever before, they’re able to pay per delivery of the product or service and most times can cancel the subscription anytime.
Breaking down recurring billing
Recurring billing is the payment side of subscriptions. Compared to a traditional bill you’d have to pay every month physically, recurring billing is a pre-approved charge that is automatically deducted, saving time and peace of mind for the customer.
Everything from Spotify to your gym membership uses recurring billing; in a software context for instance, the writing tool Ulysses allows users to sign up for a yearly or monthly billed subscription with the payment being taken from the customer at an agreed-upon time.
There are even more unusual ideas which have emerged in the subscription market because recurring billing has empowered an increasing number of product niches with the flexibility of subscriptions to consume new things in different ways like weekly meal prep ingredients, monthly treats for your dog, you can even get blood tests as a subscription!
Recurring billing management and solutions in eCommerce
Many companies offer subscription solutions; the priority features to look for are that it allows vendors to update customers’ payment information, manage discounts offered and oversee pricing changes made during the billing cycle. The subscriptions should also be able to be completed across multiple payment methods.
The payment infrastructure that makes all of this work is the real secret sauce, the back-end of subscriptions as a step-by-step process involves these steps:
- Purchase of the subscription by the customer
- Handling of the subscription request by the business’s web application
- A request by the web server of the purchase information concerning the pricing and the discount of the subscription
- Processing of the billing information by the subscription solution
- Creation of a secure card transaction by the payment gateway
- Authorization of the sale of the subscription by the merchant account, this finalizes the payment
Source: ChartMogul blog
Is recurring billing right for me?
Software businesses frequently adopt recurring billing because of the labor-saving method for the invoice process; people are billed at regular times, negating the need to send manual invoices by having the amount deducted automatically. There’s also the bonus of a reduction in late payments for the very same reason. This change significantly improves the overall customer trust and retention by simplifying your product as a hassle-free billing process.
Recurring billing also skirts around the feast and famine problem of a major version update sales spikes as it offers a sustainable cash flow for the business. This stability can ultimately help your business to expand further by retaining more consistent customers and improving cash flow.
The main issue in suitability is whether your product can support a subscription model, how much use do people get out of your product, is it on a regular basis or just as a one-off? The value they see in paying to have the product to hand will be the decider.
Now that we’ve defined recurring billing, you may want to delve deeper into whether its right for your business. For more information on how subscriptions are becoming a more significant part of software’s future and how you can make the move, check out our transitioning into subscriptions blog.
How to get started?
If you are a software or digital services provider, then you’re in the right place. Paddle is the best solution for addressing your subscription needs. We aid you in implementing the new model as well as educating you about the challenges you’d face post-subscriptions and how best to take advantage of the opportunities available from it.
However, if your business is selling physical product subscriptions, then you might want to have a look at other solutions such as Chargebee.