What is Subscription Billing? definition

We've all come across subscription billing in one form or another. From big names like Netflix and Amazon to smaller, subscription billing is an increasingly popular option for companies across near-on every industry.

In fact, it's predicted that this year, more than half of all software revenue will be generated via subscriptions. While Amazon Prime leads the way with over 150 million users, 8 0 % of software companies now offer a subscription-based product.

Why is subscription billing so popular?

The answer is simple: Customers are more likely to stick with companies for longer terms. Take Spotify, for example; over 95% of its customers stick with the streaming service each month. On top of that, businesses can better predict and generate revenue more reliably.

With so many perks and its increasing popularity, it’s safe to say that subscription billing software is here to stay. With that said, let's discuss what you need to know about subscription billing.

What is Subscription Billing?

Subscription billing is when a company sells a product or service on a recurring billing cycle. For example, customers typically pay a monthly or yearly fee to access their desired products or services. For many, this billing arrangement presents a more manageable financial arrangement than shelling out significant upfront costs.

So, put simply, a subscription is a contract between a business and a customer, where for the customers to receive the desired goods over a set period of time, they pay for the duration they use the service/product. As discussed, payment typically follows a monthly or yearly schedule.

Typically, they choose how long and how often they want to subscribe at the start of the customer's subscription.

On the flip side, for businesses, revenue is calculated according to how much one customer pays over time. As such, pricing a product or service is based on the customer's lifetime value (LTV). You can check out our subscription billing calculator here.

In light of that, businesses primarily offering subscription-based products tend to focus on retaining rather than acquiring customers – as this is what ensures a healthy profit (at least in the long-term).

Customers can then choose to renew their subscription after the contracted time elapses. This is why subscription-based businesses need to ensure they cultivate healthy, long-term relationships with customers. Needless to say, this is key to ensuring a steady income.

To put what we’ve just said into context, one of the earliest examples of a subscription model is newspaper/magazine subscriptions. However, with the rise of SaaS products, like:

Website builders
Digital marketing platforms
Streaming services

Etc., where customers need long-term access to the product, as we've already hinted at, more and more businesses in the tech/software space are taking advantage of this business model to generate recurring revenue.

Types of Subscription Billing

Though generally, the premise of subscription billing remains the same, the nature of the subscription will vary between industries and businesses. For example, some companies might ship physical products, like food, clothing, or beauty-based subscription boxes. Whereas other companies (typically in the tech space) might grant customers access to their software product on a subscription basis- for instance, Dropbox, Apple Cloud, Google Drive, etc.

That said, below, we’ve listed some of the most common subscription billing types:

Fixed Usage Subscription

With this type of subscription, customers pay a fixed price for a set quantity of products or services within a given time frame. Typically, the customer pays upfront to receive a product or service at regular intervals.

Typical examples include:

Magazine subscriptions
Food boxes

Unlimited Usage Subscription

Here, customers pay a fixed, regular price for unlimited use of the agreed-upon service or product. The customers can then utilize the product/service as much or as little as they want within the given period.

Examples might include:

Internet subscription
Gym subscription
Phone subscription

Pay as You Go Subscription

With pay as you go, customers only pay for the length of time they wish to subscribe to a product or service for. This provides customers with a no-commitment option, as they can cancel at any time because they’re not locked into a contract.

Typical examples might include:

Beauty product boxes
Entertainment passes

Freemium Subscription

Many software and cloud-based services offer a freemium subscription. Here, customers get access to certain content for free. However, these packages typically form part of a broader tiered pricing structure, where customers can upgrade their plan to access more perks.

Examples include:

Music service providers
eCommerce platforms
Email marketing services

The Advantages and Disadvantages of Subscription Billing

As with most things, the subscription billing model comes with benefits and drawbacks. That said, let’s take a closer look at what these are:

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The Advantages

Generate a predictable revenue: As we’ve already said, the subscription billing model helps businesses generate a steady income stream. This is especially true of fixed-term subscriptions, as these enable companies to accurately forecast their finances.
Garner customer loyalty: When customers purchase a subscription-based product/service, companies have an opportunity to learn more about their customers, what drives them, why they’re using their service, their demographics, etc. This information can, in turn, be used to cultivate more robust and longer-lasting relationships with customers. Naturally, the longer the customer continues to subscribe to your product/service, the more trust they have in your brand, and consequently, the more opportunity you have to upsell and cross-sell different products or services.
Convenience: Offering different subscription models provides customers with the convenience of choosing how and when they want to pay, which can work wonders for attracting new customers.
Value: Why would shoppers opt for one colossal payment when they could make more affordable monthly payments?

In summary, the main benefits of subscription billing are as follows:

Predictable revenue
Better customer engagement
More convenience and flexibility for customers
Customer-centric model
The potential for businesses to earn more in the long-run

The Disadvantages

Having examined the perks of subscription billing, let’s look at the drawbacks:

The subscription model doesn’t fit: Here’s a common scenario: If a business relies heavily on just a few customers to generate revenue, what happens when a customer cancels their subscription? This is especially concerning for start-ups. While subscriptions can make revenue more predictable, when a company is yet to establish itself, the flexibility of a cancellable model seems risky. Though subscriptions are popular, in certain instances, the cancel rate is high. In fact, over a third cancel in less than three months, and over half within six. Needless to say, this is something worth bearing in mind if you’re just starting out.
It doesn’t add value for customers: The main benefit of subscription billing is the convenience and affordability it offers to the customer. The promise of not having to pay hefty upfront fees is an attractive option. However, subscriptions are typically only useful if customers want to use a product or service long-term. Unfortunately, this doesn’t apply to all customers. In these instances, paying a subscription might provide the customer with less value for their money. For example, furniture, appliances, kitchenware, etc. In these instances a one-off purchase is more convenient.
You have to add value: The burden of adding value falls heavily on the business to retain customers. People get bored quickly, and the subscription market is highly competitive. If one provider adds a little more value to their service than you, customers are easily lost.

In summary, the main disadvantages of subscription billing are as follows:

The subscription model is sometimes a little risky
Sometimes subscription billing doesn’t add value
You have to work hard to remain competitive

Initially Attracting Customers Can Be Hard

When you first launch a subscription-based business, you’re not just offering a product or service; you’re asking customers to enter into a contract. This is particularly true if you’re looking to adopt a fixed-term billing structure. Needless to say, customers are wary of entering contracts with brands they’ve never done business with – especially if a service isn’t tried and tested.

How to Remedy These Issues

Even though a few disadvantages accompany the subscription model, often these are easily solved by taking a more flexible approach.

For instance:

If you can’t bring down the cost of your subscription you can still make it worth the customer’s while to subscribe to your services. Think customer service, helpful resources, and giveaways. Done well, these can work wonders for enticing customers into the bargain.
If appropriate divide your service into a tiered pricing model. If viable, start with a free option, and as the monthly/yearly price increases add more features/value into the offering.
When it comes to adding value, listening to what your customers are asking for is imperative. Then, show them you’re making an effort to respond to their feedback. You could also create a community portal where customers can network with one another via forums, access self-help materials, and post other types of user-generated content. These are all relatively simple ways to add value to your subscription brand.
If a fixed-term subscription commitment is too offputting for customers, why not provide a free trial or a pay as you go option?

Subscription Software

Suppose you decide subscription billing is a good choice for your business. In that case, there are several subscription/recurring billing software available to you. These platforms help companies track subscription sales, automate the payments process, provide financial analytics, etc.

Here are a few subscription billing tools you could try:

Are You Ready to Start Offering Customers Subscription Billing?

Adopting subscription billing is a great way to offer customers a long-term service. During which you have ample opportunity to cultivate valuable relationships and engage with clients throughout their journey with your brand. On top of that, subscriptions are a way to make your revenue more predictable.

That said, subscription models can be challenging to implement for new or small businesses. While you can do things to mitigate these challenges, it really boils down to whether subscription billing is the right call for your business.

Whatever you decide, we hope this article clarifies what subscription billing is and how it can be used. So, over to you – what’s your experience with subscription billing? Tell us all about it in the comments box below!