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Subscription Billing Model

Subscription Billing Model

The Subscription Billing Model: Do the Benefits Outweigh the Liabilities?

Consumers and merchants don’t always see eye-to-eye. One thing most parties will agree on, though: they love the subscription billing model.

This billing method offers advantages for both merchants and customers. For buyers, they get indefinite access to the products or services they enjoy most, and often for less than the cost of a one-time purchase. For merchants, they get return business, built-in payments, and locked-in clientele.

On the surface, subscription billing models are a dynamic and lucrative approach to eCommerce. Beware, though: these benefits come hand-in-hand with additional liabilities.

What is a Subscription Billing Model?

Subscription Billing Model

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A subscription billing model is a sales strategy allowing a merchant to bill customers on a recurring basis in exchange for indefinite use of a product or service. This is in contrast to one-time billing, as in a typical purchase.

Subscription billing models are big business in eCommerce.

Forbes found that subscription billing ballooned over 100% each year between 2013 and 2018. By 2019, around 70% of US shoppers had initiated at least one subscription service. The average American has three monthly subscription-based payment services, at $10 or more per month.

Given the popularity of services like HBOMax, Netflix, and Hulu, most people are fairly familiar with the subscription billing model by now. This has encouraged many businesses to expand their service offerings in order to compete.

Subscription Billing Model

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What Are the Different Types of Subscription Billing Models?

When it comes to subscription models, there are four primary pricing models that merchants typically use to attract and retain subscribed customers. These are:

Fixed Pricing

Fixed / Flat-Rate Pricing

Pricing based on a single product, a fixed set of features, or a fixed price per month.

Fixed Pricing

Tiered Pricing

Pricing is based on a tiered system (i.e. basic to premium), with more features added as the price increases.

Fixed Pricing

Per Unit/User

Pricing is selective according to the number of users (this model is most often employed by online software systems).

Fixed Pricing

Usage

Pricing is based on the amount of data transmitted, or the CPU power used each month.

Most merchants tend to combine one or two of the models above. They also often provide incentives to upgrade to higher commitment levels. We can divide these popular methods into three categories. Let’s break them down now:

Ongoing Subscription Model

The ongoing subscription model (also known as “limited promotion to subscription”) operates by hooking customers with an introductory trial period. Then, after this period ends, payment is required to maintain service.

Many companies that use this model also tie in tiered pricing for various levels of service. Streaming services like Hulu, for example, may offer ad-free or premium versions of their streaming service on an escalating payscale.

Fixed-Price Model

This one sounds straightforward, but is actually quite tricky. With this model, a customer is presented with the option to pay upfront, in-full, for the service, or select a “premium” option based on a weekly, monthly, or quarterly basis. The former option is often cheaper, but can be extremely cost-prohibitive. This makes the latter option more attractive for many buyers.

Some services and apps that use this model are Adobe Creative Cloud, dating apps like Bumble and Hinge, and web services like Wix or Weebly. The “fixed-price” model can actually blend several of the types of subscriptions outlined above, but present them in a way that gives customers a greater range of options.

'Freemium' Model

Like the name implies, a “freemium” model is a marriage of “free” and “premium.” This subscription billing model blends a fixed-rate model with a ‘free’ introductory model. That means a customer will download an app and use its basic features, but must opt-in for premium features.

Some gaming apps will offer ‘coins’ or ‘tokens’ to unlock special features, for example. The app developers hook customers by giving a playing advantage to users who choose to pay for these upgrades.

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Benefits & Drawbacks of the Subscription Billing Model

Whichever classification, all subscription billing models have a few key benefits in common. In all cases, subscription models let businesses secure a consistent stream or revenue each month while offering great benefits for customers. It's a win-win for both parties.

Pros

Fixed Pricing

Reliable Revenue Stream:

With customers locked-in for scheduled, periodic payments, you can better anticipate your revenue stream from month to month.

Fixed Pricing

Broader Customer Base:

Allowing customers to break up cost-prohibitive expenses into smaller payments can make your product or service appealing to more people.

Fixed Pricing

Increased Trust:

Many customers want to sample services before making any long-term commitment. A service, which they can cancel at any time, is easier to rationalize.

Fixed Pricing

System Complexity:

Providing products on a subscription basis lets customers reimagine their relationship to those goods. Think about services like Dollar Shave Club; it's a new angle for a familiar item.

Cons

Fixed Pricing

Increased Chargeback Risk:

Subscription billing is more susceptible to chargebacks. As a result, most businesses that deploy subscriptions will be labeled as “high-risk merchants” by banks and card networks.

Fixed Pricing

Higher Upfront Costs:

Subscriptions can have a high churn rate. The process of onboarding new subscribers is more time- and resource-intensive than working with one-off buyers.

Fixed Pricing

Greater Expectations:

Customers expect improvements and greater value from your service over time. You may feel pressured to produce new features or roll out new options in order to maintain interest.

Fixed Pricing

Expanded Product Line:

More moving parts means more opportunities for trouble, and problems will inevitably pop up from time to time. When they do, it can be easy to fall behind, and very difficult to get caught up.

Subscription Billing Model

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Banks and processors recognized these potential complications early into the recent eCommerce subscription boom. In response, most set certain criteria for merchants looking to benefit from the subscription billing model.

Subscription Billing Requirements

Not every business is set up for subscription billing…and for good reason. Without a structured framework, operations at this level can lead to complications like increased disputes and chargebacks.

There are a few basic requirements you have to meet before successfully integrating subscription billing. These include:

Desirable Subscription Options

You want to provide an incentive for customers to select a recurring payment plan. To do this, you should provide payment tiers that reflect both the target customer's needs, as well as access to the goods and services they want. Finally, those options must be provided in a simple, straightforward manner that reflects your customers’ preferences.

Subscription Framework

Businesses that want to explore payment subscription models must be able to process and manage those payments internally. For this to work effectively, businesses must have access to technology and payment services providers that can accept a broad range of digital payments on a regular basis.

Subscription Automation

It’s possible to manage recurring payments without machine learning and automation. These methods are ill-equipped for eCommerce, though. If the goal is to capture and retain shoppers as loyal customers, regardless of location or time of day, you need to automate certain practices, including:

  • Customer management
  • Billing workflows
  • Billing analysis

Advanced billing automation must typically be implemented via your payment processing platform. For some businesses, especially smaller ones, built-in payment automation features may be available through your web service provider (i.e. Wix or Squarespace).

Get Expert Help

No doubt about it: subscription billing models are a lucrative payment solution for most eCommerce businesses. You must remember, though, that no opportunity comes without risk.

The good news is that you can pursue a subscription billing model while still managing your chargeback and fraud risk.

With over a decade of experience in the chargebacks and payment industry, the experts at Chargebacks911® are uniquely placed to help in the fight against chargebacks. Call us today for a free demo.


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