Subscription billing 101: What businesses need to know

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Billing

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. Introduktion
  2. What is subscription billing?
  3. How does subscription billing work?
  4. Types of subscription billing
    1. Pricing models
    2. Common features
  5. Subscription billing benefits for businesses
  6. How to set up subscription billing for your business

Software-as-a-service (SaaS) companies have long embraced subscription billing as a cornerstone of their business model, and subscription billing is rapidly becoming a must-have for all kinds of consumer businesses, from household products to utility companies to fitness clubs. By 2023, as many as 75% of direct-to-consumer (DTC) brands are expected to offer customers some form of subscription billing. The subscription billing and management market is already colossal: In 2020 alone, the industry was worth more than $6 billion, according to Zion Market Research.

That subscription billing is used by so many companies in a range of industries speaks to one of the key benefits of this payment structure: its flexibility. Far from a one-size-fits-all billing method, subscriptions allow businesses to customize options to fit their offerings and audiences.

So how do you decide what type of subscription billing model is a good fit for your business—and how do you get started? Here’s everything you need to know about subscription billing and how it could benefit your business.

What’s in this article?

  • What is subscription billing?
  • How does subscription billing work?
  • Types of subscription billing
    • Pricing models
    • Common features
  • Subscription billing benefits for businesses
  • How to set up subscription billing for your business

What is subscription billing?

Subscription billing is a payment model that allows businesses to charge customers for products or services repeatedly, at predefined intervals. Recurring payment intervals can be weekly, monthly, or annually or run on a customized time frame.

How does subscription billing work?

Subscription billing works in one of two ways:

  • Customers are given invoices at regular intervals (weekly, monthly, annually, etc.) and manually submit a new payment for each invoice.
  • Customers submit a payment method for the business to keep on file, along with preauthorization for that payment method to be charged on a recurring basis, according to predetermined parameters (frequency, amount, etc.).

Types of subscription billing

Subscription billing’s flexibility makes it popular among a variety of businesses—it’s accommodating and customizable. Depending on the products or services you offer and what customer segments you focus on, there are a number of different ways you can structure your subscription billing model. Here’s an overview of some common billing types and features:

Pricing models

  • Fixed

    • Standard fixed pricing
      With this billing model, customers pay the same amount every billing cycle for access to the same product or service, usually in the same quantity. For example, a magazine subscription might charge $19.99 per month for one print magazine and unlimited access to digital content.
  • Variable

    • Usage-based pricing
      This model charges customers based on the quantity of a product or service they use during each billing cycle. Utility companies, for instance, typically operate this way.
    • Hybrid or overage pricing
      This billing model uses a flat base fee with a contingency for additional fees to be incurred if usage exceeds a certain threshold within a billing cycle. For example, some older cell phone billing models charged a flat rate for up to 1,000 minutes per month, and then a separate per-minute rate for anything over that.
    • Pay-as-you-go pricing
      Customers are charged a unit price and are billed for the amount they use.
  • Freemium pricing
    With freemium pricing, customers have access to a limited scope of features for free, with the option to upgrade to a paid tier that offers additional functionality, access, or services.

Common features

There are countless ways to customize your subscription offering—and, historically, certain types of incentives have proven enticing for most consumer audiences. Here are just a few of the most common features that businesses use to supercharge their subscriptions:

  • Introductory promotions
    Subscriptions frequently offer special introductory pricing to get new customers to sign up for service or membership. For example, a gym membership might offer a promotion in which they waive sign-up fees or offer free personal training sessions to new members.

  • Discount coupons
    Discount coupons are popular marketing tools across industries and billing structures, including businesses that use subscription billing.

  • Free trials
    Free trials are another common tool for subscription-based businesses. Some free trials require customers to submit payment information when they sign up for the trial, with the understanding that they will be automatically charged for a regular subscription at the end of the trial period. Other businesses offer customers a chance to proactively opt in to a regular subscription near the end of their free trial, instead of automatically charging them.

Subscription billing benefits for businesses

There are many reasons why so many businesses in a range of industries and markets are embracing some form of subscription billing. Here are some of the biggest upsides to adopting a subscription billing model:

  • Agility in responding to business and market changes
    Subscription billing is highly flexible and offers businesses the granular usage insights necessary to make strategic decisions. There are countless aspects of your billing model that can be modified as you go, such as offerings in different tiers, incentives at various touch points in the customer journey, and overage thresholds and usage rates. Maybe you’re launching a new product or service or expanding into a new market segment. Maybe your current performance data indicates you should commit further to something that’s working well or pivot in a different direction. No matter what evolutions are in store for your business, this is a billing model that accommodates change—allowing you the freedom to adapt and grow.

  • Smoother customer experience
    Because subscription payments are usually automated, customers don’t have to take any action to continue using your company’s goods or services. The more effortless the customer’s experience, the higher their satisfaction.

  • Better customer retention
    Subscription billing thrives on clear communication and expectation-setting. When customers know exactly what they’re being billed for and when payments are due, they can clearly see what their money is getting them—and appreciate the value of their subscription. But even outside of cultivating an easy customer experience, subscription billing reduces churn and maximizes customer retention by giving businesses the insights they need to identify trends and trouble spots. When subscription billing is tracked in detail, the resulting data offers businesses highly actionable user insights that can mitigate churn and create opportunities for re-engagement of at-risk customers.

  • Predictable cash flow
    Because of variables like cancellations and failed payments, you won’t be able to fully predict how much revenue your subscriptions will bring in every month. But subscription billing models give businesses a much stronger ability to forecast revenue and gain a better idea of how much cash they can expect to have on hand. You can further refine your ability to predictively model income once you’ve been using subscription billing for multiple years and start picking up on seasonal trends.

  • Time-efficient
    Subscription billing saves time for both customers and businesses. If you automate every possible part of your subscription (recurring payments, notifying customers when their payment method is set to expire soon, etc.) and create a streamlined approach to handling tasks that can’t be automated, then you can minimize the overall drain on time and resources associated with subscriptions. On the customer end, the time savings is readily apparent: Customers don’t have to manually initiate a payment every cycle. Instead, they’re charged automatically and sent an invoice or other documentation notifying them what they’ve been charged for—no effort required on their part.

  • Fewer failed payments
    Subscription billing reduces the number of failed payments in two ways: by using stored payment methods for automatic payments and by preemptively identifying soon-to-expire cards before their expiration date, which gives customers a chance to replace them before a failed payment occurs. In 2021, Stripe Billing helped businesses recover 38% of failed payments, on average.

How to set up subscription billing for your business

To start using subscription billing for your business, you need a payment processing provider. If you’re already accepting payments from customers in other ways, chances are you have this covered. Stripe users are already equipped with everything they need to set up a subscription billing plan. Stripe Billing is an end-to-end billing solution for businesses who want to accept recurring payments globally. Stripe Billing easily integrates with your current payments setup, and everything is accessible through your Dashboard.

Working with Stripe will allow you to either adopt a subscription billing model as your primary payment strategy or fold subscription billing into a more complex payment strategy that includes one-off transactions made in person and online. Once you’re onboard with Stripe, you still have a few decisions to make about how your business will approach subscription billing. Some questions to consider:

  • Will you offer a single tier of subscription or multiple tiers? What will be included with each tier?
  • Will you charge flat rates or variable rates? If variable, what determines that variability? What is the essential “unit” of usage for your business?
    • For example, if you’re a SaaS company, you might charge customers for each user to whom they’ll offer access to your software. If you run a coworking startup, you might charge membership fees based on how many hours or days per month someone can access the space.
  • What incentives will you incorporate?
    • Subscription billing models have meaningful structural overlap with the marketing plans that support them. For example, if you’re going to offer incentives like free trials or coupon codes associated with affiliate or influencer marketing, these are considerations you can incorporate into your subscription billing from Day 1.

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