4 Benefits and Challenges of Executing A Successful Recurring Billing Business Model

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Business models are in a constant state of flux, as they adapt to meet customer needs. One significant, relatively recent change has been the widespread adoption of the recurring billing model.

Within this approach, financial transactions are spread out over an established timeline, as opposed to consumers being forced to issue payment in full at the time of purchase.

Historically, this model has been popular with property transactions, where it is difficult to impossible for the consumer to make an upfront lump sum payment.

As the recurring billing model has been incorporated into more businesses, it has been found to be an ideal solution where continuous service is anticipated. This model is also the preferred method for services such as utility payments.

Regardless of industry, businesses and consumers have benefited from the convenience of a consistent billing cycle. Although the recurring billing model offers a lot of inherent benefits, below are some of the most visible advantages.

Four Benefits of Implementing the Recurring Billing Model into Your Business

1. Increase your market size by offering flexible payment options

The recurring or subscription billing model is extremely successful because it makes it convenient for consumers to purchase your goods or service. Subscription payments lower the price barrier for potential customers to purchase your product. So while these customers may pay more over the long term for the convenience, the smaller payments allow them to immediately take advantage of the benefits your product or service provides.

By offering a recurring payment plan, as well as giving the consumer a couple different payment term options, you are able to make your product accessible to more people and thus, increase your market size.

2. Recurring billing makes it easier to measure and predict revenue

Due to the way that recurring billing is executed, it helps facilitate predictable revenue streams. When a customer is set up within the recurring billing model, a business can move forward with confidence that on a specific date, payment will be issued.

Because both payment and frequency were already established at the time of the initial purchase, a business knows down to the penny how much income that sale will generate, not only during each billing cycle, but also throughout the customer lifecycle.

Being able to predict and measure the amount of anticipated income is invaluable and a number of industries are shifting to this paradigm, even those that held a long tradition with an upfront payment model.

3. The recurring billing model is adaptable to a variety of businesses

Although subscription billing has been around for a while, the trend toward automated recurring billing really took off with the emergence of SaaS (Software as a Service) offerings. This shift has placed more options and control into the end user’s hands.

For example, only a decade ago, if a consumer wanted to purchase a specific piece of software, such as Microsoft Word, the only options were to purchase a specific version of the program, either as a standalone product, or as part of the entire Microsoft Office suite.

And then have to make another purchase or upgrade when a new version was released.

These days, a customer can subscribe to Microsoft 360, pay a monthly fee, and have access to the most up-to-date products the minute they are available on the cloud.

As recurring billing has proved so successful with SaaS products, other companies have sat up and taken notice. Now, start-ups like the Dollar Shave Club as well as huge retailers like Amazon offer goods which can be purchased under a recurring payment model.

In fact, in some locations, even the law industry has started to use recurring billing with some of its clients, as opposed to tracking each hour and billing every month. By moving their billing methods to this model, it is easier for law firms to budget for predictable expenses such as salaries, as well as capital expenses.

4. Recurring billing options reduces customer churn by increasing retention and facilitating growth

Billions are spent every year on marketing to acquire customers. Besides a quality product and good customer service, the way a company handles financial transactions is just as important for the customer experience.

Providing the option for smaller payments or the ability to upgrade or downgrade the purchased products and services is an excellent way to retain customers by demonstrating that the business is open and flexible to their needs.

This also reinforces the customer-first image that consumers expect, which helps preserve the current customer base while also paving the road toward attracting new business.

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Complete Guide to Subscription Billing.

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Some Common Pain Points of Improperly Planning your Jump to Subscription Based Pricing

As you can see, offering customers the opportunity to subscribe on a recurring basis to products and services can ensure consistent business growth and a strong fiscal future.

If subscription billing processes are implemented without adequate forethought, though, they can cause any number of bumps in the road. There are several common denominators associated with poorly executed transitions to recurring billing. What are some of those hiccups and how can a business overcome them?

1. Failing to facilitate an optimal experience during the customer journey 

Businesses work hard to stand out from their competition and acquire customers, but customers can be soured to a business just as quickly, and that often happens at the support level.

Providing a quality product is critical, but equally important is a process that manages your customers and responds to their needs promptly and courteously. The longer customers have to wait for an answer to a question, the greater their frustration.

It’s also critical that the recurring billing system is proactive in its communication, notifying customers ahead of time of any billing changes or potential billing issues, such as a credit card nearing its expiration date.

Chose a billing system that supports your business goals, instead of standing in the way. When you look into implementing a billing system, it should include:

  • Intelligent retries – Your system should be able to attempt to retry a failed credit card, even after it has initially failed. By implementing this system, many businesses find this process cuts your churn rate considerably—some by as much as half, versus no retries.
  • Customer communication – Communication is a vital aspect of the customer experience. A robust billing system will generate receipts, advise when there are upcoming renewals or new system options and report on expiring credit cards or payment failures.
  • Credit card management – Billing systems can provide customers with the means to manage payment methods and access invoices or other vital account information.
  • Account status implementation – Some billing systems enable the connection between account status and billing status, allowing you to limit specific features or block access to an account if a customer isn’t current with their payments. Doing this encourages customers to fix any billing issues before their services are canceled.

2. Failure to effectively scale the business as customer demand grows

Anytime a company institutes a new system, there are likely going to be some issues that crop up as a company adapts to these changes.

For example, how are you going to manage multiple purchases? Or, if a customer makes a purchase on one date, and then a second purchase at a different time, how will your system reconcile the additional billing cycle?

Now, multiply that by hundreds or thousands of customers.

As you implement a billing system, it’s critical to anticipate changes as customers and customers’ needs grow. Even if you have a simple billing plan, you may need to consider bundled plans, and other pricing options for domestic and international customers.

Your subscription-based business model needs to be able to support growth, while also managing your established customers and keeping them happy.

In essence, you can track recurring billing activities through a number of different approaches. A smaller company, or a startup, might even try tracking everything through an Excel spreadsheet. With formulas and macros in place, this might work for a while.

However, a rudimentary tracking system doesn’t account for any changes that need to be made to subscription details. Making manual adjustments increases the chance for errors and is time-consuming to make sure all areas are attended to. For example, consider the steps involved in making subscription changes manually, even if it is a ‘simple’ modification. You have to:

  • Cancel the existing subscription
  • Reverse current charges
  • Create a new subscription
  • Migrate information (i.e., settings and usage) from the old subscription
  • Prorate any necessary charges
  • Align backend systems to complement existing ledgers
  • Check and validate that the client is charged for the difference between new charges and charge reversals

What a headache! But there are still several questions to consider. What happens during busy seasons when changes can increase in volume? Can your system easily scale to accommodate new customers? How do you manage late payments?

A solid recurring billing system takes the manual steps out of the equation and reduces the possibilities for errors. With this flexible subscription billing platform in place, you are fully equipped to make any changes on the fly, while adding to your current customer base.

3. Difficulty tracking revenue through recurring billing cycles

According to Generally Accepted Accounting Principles (GAAP), tracking revenue is critical for businesses. But is that revenue earned or deferred? What’s the difference?

Say you’re a daily newspaper. A customer will pay for your service at the beginning of every month, with the expectation that you will deliver their newspaper to them each day for the duration of that month. That subscription would be considered deferred income, since you’re getting payment ahead of time for ongoing services.

At the end of that month, when you have delivered every newspaper, the deferred income becomes earned income.

Some recurring billing systems do not have a sufficient way to track the difference between deferred and earned income. However, the ideal billing system will give you the option to set up products or services in such a way that it can either recognize revenue as soon as a customer has been charged, or accrues revenue throughout that charge cycle.

The ability to recognize your revenue quickly and accurately, at any point in time, allows you to meet your account closing deadlines, ensure compliance with the new ASC 606 standards, and have access to an accurate real-time picture of your revenue.

When you can adjust customer lifecycle settings, you can more easily adapt your system to meet the unique needs of your company. This, in turn, has a positive impact on the workload for your finance department.

4. Inability to easily make changes to recurring billing cycles

The more customers are exposed to other popular business practices, the more they are likely to expect the same from you as well.

While monthly payments were once the norm, payment schedules are increasingly varied these days. Some people want to pay for a subscription once a year so they don’t need to be bothered with a monthly transaction. Others may want to make smaller payments more often.

Customers now expect a variety of payment options. If your business steadfastly bills out only once a month, customers seeking alternate schedules are going to start looking for a business that will accommodate their needs.

Consumers also expect multiple package options. What if you have an SaaS company that has 6 different products, but your customer only uses 1 or 2 of those programs? Customers are apt to think that a full package is a waste of their money.

Not only is it often necessary to accommodate different packages, but you also have to have a billing platform that is flexible enough to manage these changes.

Without a robust billing system in place, manually changing a subscription is time-consuming and complex. Every change requires settings to be turned on or off to alter the desired plan. Any change also impacts finances in several ways, including the need to:

  • Prorate charges for a new subscription
  • Cancel or partially reverse old subscription charges
  • Ledger movements for earned or deferred income
  • Tracking monthly recurring revenue (MRR) changes

With a solid subscription management platform, which includes a self-serve option for your customers, you and your customers can automatically upgrade or downgrade their subscriptions. The capability to automate this process empowers you to cost-effectively address and satisfy customers’ needs in real time.

Making the transition from a lump-sum payment system to the recurring billing business model is challenging. However, taking the time to anticipate and mitigate problems ahead of time will pave the way to a successful, long-term solution, and a scalable business.

Tags: Subscription Billing Recurring Billing Revenue Management Accounting Subscription Management

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