Subscription payment processing 101: What businesses need to know to get started


Stripe Billing lets you bill and manage customers however you want – from simple recurring billing to usage-based billing and sales-negotiated contracts.

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  1. Introduction
  2. What is subscription payment processing?
  3. Types of subscription payment models
  4. How does subscription payment processing work?
  5. How to process subscription payments
  6. How Stripe supports subscription payment processing

Subscription-based business models are increasingly being adopted across industries, from media and entertainment to software and services. Research from Zuora and the Subscription Economy Index reveals that subscription businesses have grown revenues nearly five times faster than S&P 500 companies from 2012 to 2022. Subscription models generate steady, predictable revenue streams and nurture long-term customer relationships, making them attractive to many businesses.

However, this shift to a subscription model brings challenges, mostly related to payment processing. Juggling recurring billing cycles, different pricing tiers, upgrades, downgrades, cancellations, refunds and multiple payment methods can quickly become cumbersome for businesses. And subscription-based businesses need to comply with international financial regulations and secure sensitive customer data, which creates additional complexity.

Subscription payment models can generate more predictable revenue, sustain customer engagement and increase customer lifetime value. But to effectively access these benefits, businesses first need to understand and implement efficient subscription payment processing systems. Here's what you need to know to get started.

What’s in this article?

  • What is subscription payment processing?
  • Types of subscription payment models
  • How does subscription payment processing work?
  • How to process subscription payments
  • How Stripe supports subscription payment processing

What is subscription payment processing?

Subscription payment processing refers to the systems and methods that manage recurring payments for subscription-based services. This includes businesses such as streaming platforms, news websites, SaaS providers and more.

Types of subscription payment models

Subscription payments don’t just operate on a single fixed model. There are a variety of subscription payment models that businesses can use, depending on their products and services, their customers, and what is operationally most efficient. These types of subscription models include:

  • Fixed subscription
    Fixed subscriptions are the most straightforward model, where subscribers pay a fixed amount at regular intervals to access a product or service. This could be monthly, quarterly or annually. Examples include Netflix’s monthly subscription or a newspaper’s annual subscription.

  • Usage based or pay-as-you-go
    In this model, the subscriber only pays for what they use. This model is common for utility services such as electricity and gas but has also become popular with digital services like AWS (Amazon Web Services), where you pay for the server resources that you use.

  • Tiered
    This model offers different levels of service at different price points. Each tier has a different set of features, allowing customers to choose the level that best suits their needs and budget. Many SaaS companies use this model.

  • Freemium
    In the freemium model, basic features of the product or service are provided free of charge, while advanced features or services are priced. This model is used by a lot of online services and apps, including LinkedIn, Spotify and many mobile games.

  • Per-user pricing
    This is often used by B2B SaaS companies where the price of the subscription increases with the number of users. This could be a fixed price per user, or discounts could be offered as the number of users increases.

  • Hybrid
    Some companies use a mix of the above models to provide flexibility to their customers. For example, a SaaS product might have a freemium model with both fixed and per-user pricing tiers.

How does subscription payment processing work?

Here’s a closer look at how subscription payment processing works and supports simple transaction management for businesses:

  • Customer sign-up
    The subscription payment process starts when a customer decides to subscribe to a service. The customer fills in a form, providing necessary details such as name, address and payment information. This could be credit card details, bank account information or access to stored payment methods in an existing payment platform like Shopify. The customer also selects their preferred subscription plan and billing frequency (monthly, quarterly or annually).

  • Secure storage of payment information
    Next, the sensitive payment information is securely stored for future transactions. This is usually done using tokenisation, where sensitive data is replaced with unique identification symbols, or "tokens", that retain all the important information without compromising security. Businesses often utilise third-party services, known as payment gateways, to store this data securely and maintain Payment Card Industry Data Security Standards (PCI DSS) compliance.

  • Subscription management system
    The subscription details, including the selected plan, billing frequency and tokenised payment information, are stored in a subscription management system. This system automates the billing cycle, charging customers according to the schedule and plan they have chosen.

  • Payment gateway and processor
    When a payment needs to be made, the subscription management system triggers a payment request. This request, including the amount and tokenised payment information, is sent to the payment gateway. The gateway communicates with a payment processor, which in turn liaises with the customer’s bank or card provider to authorise the transaction.

  • Transaction authorisation
    The customer’s bank or card provider checks the transaction details and either approves or declines the payment. The approval or decline is then relayed back through the payment processor and gateway to the subscription management system.

  • Notification of payment status
    The subscription management system records the transaction and its status. If successful, the service continues uninterrupted. If the transaction fails (due to reasons such as insufficient funds or an expired card), the system can trigger notifications to the customer to update their payment information and may even attempt to retry the payment after a specified period.

  • Recurring payments
    This process repeats at the start of each billing cycle, ensuring that customers are billed correctly for their chosen subscription. The entire process is automated, requiring minimal intervention from either the business or the customer.

  • Subscription changes or cancellation
    Subscription payment processing also handles subscription changes, such as plan upgrades, downgrades or cancellations. In the case of plan changes, the system calculates any proration and adjusts the billing accordingly. For cancellations, it ensures that no further charges are made.

Subscription payment processing manages and streamlines recurring payments effectively and securely. It’s not just a transactional mechanism – it also improves the customer experience, maintains service continuity and drives business sustainability.

How to process subscription payments

Businesses have several options for processing subscription payments. The choice often depends on business size, its technical capabilities, transaction volume and customer needs. Here are some common methods:

  • In-house processing
    For businesses with extensive resources and technical expertise, it may be possible to build an in-house system for processing subscription payments. This requires a solid understanding of payment processing protocols, strict adherence to security standards like PCI DSS, and comprehensive management of recurring billing cycles. While this can provide a high degree of control and customisation, it’s typically complex and resource-intensive.

  • Payment gateways
    Payment gateways act as a secure intermediary between your business and your customers, safely transmitting payment information to the relevant banks or card networks. These gateways support different payment methods, such as credit cards, debit cards, digital wallets and bank transfers. If your business works with a payment processing provider like Stripe, which extends merchant account functionality to businesses, you won’t need to acquire your own merchant account.

  • Subscription management software
    Subscription management platforms provide end-to-end solutions for managing and processing subscription payments. They process recurring billing, securely store customer payment information, manage subscription tiers and handle changes or cancellations. These platforms, including Stripe, typically either offer payment gateway functionality or integrate with a variety of payment gateways to process the payments.

  • Direct debit systems
    Direct debit systems allow businesses to collect payments directly from the customer’s bank account. This can be an excellent solution for long-term subscriptions or high-value transactions, as it bypasses the need for credit card processing and reduces the risk of payment failure due to expired cards.

  • Combination of tools
    Businesses may choose to use a combination of the above tools, depending on their specific needs. For example, a business might use a subscription management platform to handle recurring billing, integrate with a payment gateway to process credit card transactions securely, and also offer a direct debit option for certain customers or high-value subscriptions.

Whichever methods you choose should align with your customers’ preferences and your business needs. The goal should always be to provide a simple, secure, convenient payment experience for your customers, while also ensuring efficiency and scalability for your business.

How Stripe supports subscription payment processing

Stripe offers a wide range of solutions, including support for subscription payment processing. Here’s how Stripe enables subscription payments for businesses:

  • Stripe Billing
    Stripe Billing is a set of tools designed specifically to handle recurring payments. It helps businesses manage subscriptions, set up billing cycles and handle recurring charges. It also supports various pricing models including flat-rate, per-seat, tiered and usage-based pricing.

  • Secure payment information storage
    Stripe securely stores customers’ payment information using tokenisation, ensuring all sensitive data is optimally protected. Stripe also has the highest PCI DSS rating, meaning that it adheres to the strictest security standards.

  • Payment methods
    Stripe supports a wide variety of payment methods, including all major credit and debit cards, many country-specific payment methods such as Alipay or SEPA Direct Debit, and digital wallets like Apple Pay and Google Pay. This means businesses can offer their customers a choice of payment methods to suit their preferences.

  • Smart Retries and dunning management
    Stripe has smart retry logic to handle failed payments, automatically trying to charge the card at targeted times when it’s most likely to succeed. Stripe also includes built-in dunning management, sending customisable emails to customers if their payment fails and prompting them to update their payment information.

  • Flexible billing periods and prorations
    Stripe allows you to set up subscriptions with any billing cycle (monthly, annually, etc.) and handles prorations automatically if a customer upgrades or downgrades their subscription midcycle.

  • Reporting and analytics
    Stripe provides detailed reports and insights on your subscriptions and revenue, helping you to understand your business better and make data-driven decisions.

  • API-first approach
    Stripe is designed with an API-first approach, meaning it can be integrated into virtually any application or platform. This allows businesses to customise their subscription setup and user experience as needed.

  • Stripe Checkout
    For businesses that want a prebuilt, secure payment page, Stripe Checkout provides a fast, customisable payment process that supports subscription payments.

Through these features and Stripe’s broader ecosystem of payment solutions, Stripe delivers a comprehensive, resilient platform for processing subscription payments, providing businesses with the flexibility required to create a simple customer experience. To learn more and get started, go here.

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