Ecommerce has opened up a new market opportunity for direct-to-consumer (D2C) sellers. Brands no longer have to go through retailers to reach their fans and shoppers can often save money by going straight to the source.
Subscription sales are a big player in the D2C boom as well. As of early 2023, 24% of consumers had at least one retail subscription — for goods varying from food and makeup to household goods and hobby merchandise. There’s a clear market for merchants who can offer unique value on a recurring basis.
There’s a lot to think about if you’re looking to get started with recurring billing but this guide can help you consider some of the foundational questions that face subscription merchants and navigate the multiple subscription management options on the market. Read on to learn how you can build and administer a subscription offer that’s a good fit for your industry and intended audience.
What Is Recurring Billing?
Recurring billing is any payment scheme in which a business is authorized to periodically charge a customer’s account in exchange for ongoing goods or services. It’s a convenient way to collect payments from a customer with whom you have a long-term relationship, as it saves both parties the hassle of dealing with monthly invoices.
Recurring billing is widely used by subscription sellers but traditional retail and SaaS subscriptions aren’t its only use case. Rental payments, payment plans and memberships can also be managed through today’s leading recurring billing management platforms.
How Recurring Billing Works
Every recurring payment starts with consumer enrollment. The decision to pre-authorize regular charges is the only active step customers need to take. It’s up to the company to initiate charges each billing period.
Merchants charge the transaction to each customer’s saved payment method on the schedule each customer agreed to. Since customer approval isn’t needed at the time of billing, sellers typically alert the customer before initiating the transaction (in case the customer would like to cancel) and as soon as the charges have been processed (so they can have a receipt for their records). Once a payment is processed, the company delivers the service or product to the customer. Then, the process starts over for the next billing cycle.
Why Use Recurring Billing?
For companies able to offer products or services that justify a subscription, setting up recurring billing can help foster growth. However, it shouldn’t be done without considering the potential downsides.
Benefits
Successful recurring billing systems can be the foundation of a strong company. One of the strongest arguments for recurring billing is the predictability of recurring revenue. If you have 100 subscribers paying $20 a month for your product, you’ll know you can expect a monthly gross income of at least $2,000. Merchants who only handle one-off purchases find it much harder to predict monthly sales.
Companies that enable recurring billing also have an easier time retaining customers. It’s much easier for a customer to enroll in a subscription plan than to remember to refill a product they want more of. Consumers appreciate the convenience of recurring billing and receiving your product or service on a set schedule can strengthen the relationship between you and your buyers.
You can also win consumers over by finding new ways to deliver value. For example, merchants can track subscriber behavior to make upsell and cross-sell offers that help customers discover new products they’ll enjoy. Loyalty programs help you reward frequent buyers with perks like free shipping or sample products.
Finally, subscription businesses are easy to scale. You can watch your subscriber numbers to predict when you’ll need to increase your order volume or staffing. And, since the customer’s default is to keep buying, each new acquisition means a bigger recurring customer base and more monthly recurring revenue (MRR).
Drawbacks
Failing to correctly administer a recurring billing program can turn a good business idea into a bad business outcome. To handle this unique billing model, merchants need to invest in subscription management software. These tools typically come with regular costs of their own and if you choose the wrong one, you might not be able to offer the convenience your customers are looking for. Additionally, errors caused by an automated payment system can be harder to catch. Unexpected charges or ongoing billing mistakes can lower customer satisfaction.
Subscription businesses are also considered a higher fraud risk. Scammers hack subscription accounts to sneak unauthorized purchases past victims (and their banks) who expect regular charges from your brand. Friendly fraud is also a concern, as customers may either forget about a soon-to-renew subscription or claim their ignorance to justify a chargeback.
Finally, just because subscription businesses can bring revenue stability and good growth prospects doesn’t mean they will. Multiple subscription businesses have started off with a good outlook and plenty of subscribers, only to discover later that their customers don’t stick around. Subscription merchants must know their revenue churn rates and constantly work to decrease them, or their business won’t be around for long.
Is Recurring Billing Right for My Business?
If you have a business that can justify asking customers to pay on a regular schedule, recurring billing could be the next good way to monetize. Even companies that can’t create a standard subscription offering may be able to think outside the (subscription) box to find a way for recurring billing to serve customers. For example:
Software companies whose products range from productivity apps and design suites to accounting tools can sell ongoing access to their applications, keeping subscribers around with the promise of customer support and continuous feature development.
Service providers that serve professional or consumer audiences with necessities like legal consulting, tech support or household cleaning can set up recurring billing to support regular service appointments or a retainer arrangement.
Companies that make digital products or content, including music, downloadable goods and newsletters, can give subscribers ongoing access to a digital library or exclusive access to new media as it’s released.
Merchants who sell expensive “splurge” items like appliances, vehicles or luxury goods might use recurring billing software to set up payment plans for customers who can’t make the purchase in cash.
Lease-based or rent-to-own companies need recurring billing to support customers’ active leases or rental contacts.
Businesses that charge for access can range from gyms and museums to social clubs, and all can benefit from a recurring billing solution to automate their regular membership fees.
One thing to note about every one of these setups is that they’re relationship-based. Switching to recurring billing (or launching it as an add-on) will require your company to focus on the consumer experience. If that’s not a good fit for your company, you may struggle to succeed with a recurring billing approach.
Common Subscription Models
The various subscription offers on the market are all based on a few types of underlying subscription models. The recurring revenue model you choose should match your target audience’s needs while allowing you to provide unique value to your subscribers. Here’s how you can think about three popular subscription models in terms of feasibility, benefits and drawbacks.
Fixed-Rate
Fixed-rate subscriptions are exactly what they sound like: services that charge every subscriber the same amount each billing cycle and deliver the same product to each person they serve. This is a good solution for companies that have a small range of products or are trying to appeal to a discrete and homogenous audience.
It’s easy to administer fixed-rate subscriptions because everyone is always paying you the same amount. However, these subscriptions lack flexibility. Consumers who want a different subscription experience may turn to a competitor that better meets their needs.
Tiered
Tiered subscription offerings allow you to court different segments of your audience with offers that cater to various demographics’ needs. They’re a common model among merchants that offer a range of products or services. Sellers can create tiers for basic versus advanced services, no-frills products versus luxury products, or just different volumes of products.
Companies can make more money from tiered subscriptions because they allow you to court a larger audience and personalize offerings to multiple market segments. However, they’re harder to set up and deliver because your process won’t be as standardized. Merchants also have to think about how they can differentiate each tier in a meaningful way to appeal to a different demographic.
Variable
The “variable” in variable subscriptions refers to the pricing rather than the billing cycle. Consumers always pay on the same schedule, but their bills are dictated by how much of the product they used in the previous subscription period. This subscription model only works for goods or services that can be delivered incrementally and on demand. It’s a model that we see used for utilities like electricity or pay-as-you-go cellphones, but it could also work for SaaS or online content libraries.
Variable subscriptions can be pitched as the ultimate in efficient spending because each subscriber only pays for what they use. Any subscriber who uses less than your average customer will save money with a variable (vs. flat-rate) subscription. However, high-volume users might prefer a tiered subscription model because it’s less expensive, leaving you to serve low-volume (and low-paying) audiences. Additionally, variable subscriptions lead to less revenue predictability, as consumers’ usage can fluctuate wildly from month to month.
What To Look For in a Solution
By now, you have seen how many use cases exist for recurring billing and understand some of the concerns merchants might face when setting up a payment processing system. The best recurring billing enablement platforms have features that smartly address many of these problems — and the worst will only get in your way as you struggle to sell. Here are six must-haves for ecommerce subscription merchants.
1. Advanced Billing Logic
The more types of subscription models you can support, the wider the range of product or service offerings you can make. At a minimum, you should look for the ability to:
- Bill cyclically by day, date or relative date
- Bill on pre-scheduled dates
- Schedule subscription start and termination dates
- Set billing cycles on a different frequency than shipment deliveries
Companies planning more complex subscription setups may need to directly ask if their needs — for example, a payment plan program or a rental arrangement — can be supported by subscription management tools. Many recurring billing programs are geared toward traditional box-of-the-month or service-based subscriptions.
2. Complex Payment Processing & Orchestration
Handling online payments efficiently will save merchants money on each transaction, which matters when you’re automating countless payments each subscription term. Software that allows you to set rules for how to process certain payments or that uses machine learning to find the most cost-effective choices is a must for any business that wants to get ahead.
Payment processing features you should look for include:
- Access to multiple payment gateways, especially for high-volume sellers who might experience delays from overloaded gateways or high-risk merchants who will want multiple merchant accounts in case their merchant ID (MID) is revoked
- Support for multiple payment methods, including credit cards from various issuers, digital wallets like Apple and Google Pay and buy now, pay later (BNPL) services, so consumers can use their favorite payment method
- Multi-currency support to allow customers from across the world to pay in their currency of choice
- Payment routing or intelligent payment routing, both of which guide payments to the banks that will process them quickly and for the lowest fee
- Payment cascading to retry failed transactions through a different payment gateway and increase the chances of approval
These must-have capabilities help you provide a smooth checkout experience for the customer, which can help keep today’s demanding ecommerce shoppers happy.
3. Retention and Monetization Features
Customers will only be willing to keep paying — or pay more — if they’re happy with the service you deliver. Likewise, the more value you can deliver, the more your subscribers will be willing to shell out.
Get the most from your subscriber base by offering:
- Control and flexibility via subscription self-management features that allow customers to pause or skip purchases or swap products
- Upsells and cross-sells that pitch premium or complementary products to subscribers who have demonstrated positive sentiment
- Membership or loyalty perks like free shipping or exclusive deals that make buyers feel valued
- Uninterrupted service thanks to an Account Updater and other tools that fight involuntary churn
The above features do double duty by giving your subscribers a unique experience and providing you with more chances to increase average order value (AOV) and customer lifetime value (CLTV).
4. Decline Management Tools
Alongside those monetization tools, look for a platform with strong decline management capabilities to reduce customer churn. Keep CLTV up with:
- Automated dunning emails that alert customers when payments have failed and urge them to update their billing information and keep their subscriptions active
- Automated retries on any transaction marked as a soft decline or Smart Dunning capabilities that use machine learning to increase your percentage of successful transactions
Payment failures can account for up to half of a subscription seller’s churn. Set up systems that internally address soft declines while helping customers update their payment information after hard declines to ensure subscription continuity.
5. Post-Processing Services
We recommend two tools to protect your business against this threat:
- Chargeback alerts inform you when a customer reaches out to their credit card issuer and give you a chance to refund them before the complaint is registered in your chargeback ratio.
- Representment services work chargeback cases for you, presenting proof to show credit card issuers why you shouldn’t have to refund a customer.
Chargeback prevention best practices go far beyond what any app or platform can offer, but these two features are an essential part of a strong company strategy.
Subscription merchants also have to worry about the potential for chargebacks, which can happen due to scammers, friendly fraud or customers who simply didn’t realize they were still paying for your subscription. Each chargeback costs your company money, and a high chargeback ratio makes the situation worse.
6. Security and Compliance
Any company that handles payment information must keep its systems up to date to prevent damaging hacks. It’s easiest for most companies to find a subscription management platform that includes strong security features or integrates with other tools that help you implement:
- Payment Card Industry Data Security Standard (PCI DSS) compliance
- Data practices consistent with the General Data Protection Regulation (GDPR), California Consumer Privacy Act (CCPA), and other data privacy laws
- Service Organization Control Type 2, also known as SOC 2, standards that protect customer data
- Anti-fraud tools that monitor consumer behavior to catch scammers
- A disaster recovery plan that will allow you to process transactions and fulfill orders or service requests despite any interruptions you might face
- Monitoring systems that track site performance and alert you of any outages or errors so you can address them promptly
Customers won’t notice if you have these behind-the-scenes tools properly configured, but they certainly notice the outcomes: more downtime, costly data breaches and unauthorized charges on their accounts. Save yourself the high cost of security issues by investing in tools that safeguard your store and customers.
How To Get Started With Recurring Billing
There are multiple ways to launch an ecommerce subscription, and the right one for you will depend on the resources and technical support you have available at your company. Here are three methods, from least to most intensive.
On an Ecommerce Platform
Software made to host ecommerce storefronts, like BigCommerce and Salesforce Commerce Cloud, can also handle subscriptions with the right app or plugin. Your biggest limitation here will be the number of products available for the storefront you’re already using.
On the other hand, the low number of options will make it easier to compare head-to-head by top features and price. Once you make your choice, it’s simply a matter of installing the app for your store. Some (like sticky.io Subscriptions for BigCommerce) will sync with your product catalog; others will require you to re-upload any items you want to include in a subscription offering. Once you have all of your products in the subscription app, it’s simply a matter of adding subscription pricing and setting billing cycle options.
With a Recurring Billing Management Tool
You can also build your store using a turnkey recurring billing management tool. Tools like the sticky.io recurring billing platform have everything you need to create sales funnels, administer subscription orders and track your performance through analytics.
Working with a standalone platform means you’ll likely have access to more built-in capabilities along with add-on services to help you go above and beyond for your customers. However, you can expect a bigger learning curve — so be on the lookout for tools with robust documentation and/or a dedicated customer service team that will help you get started.
You’ll want to start by familiarizing yourself with the platform’s features, in a free trial if possible, to make sure your app of choice meets your needs. Then, import or add your product data and start configuring your backend settings, like payment processors and shipping tools. Search out integrations or add-ons to fill in any feature gaps. Then, you’re ready to set up subscription offers and create campaigns to find your perfect customers.
On Your Customer Storefront
Ecommerce companies that have an existing storefront may opt for headless (API-driven) and composable commerce solutions to find the perfect mix of backend tools and capabilities. This approach is most suitable for established companies that have already built a technical ecommerce infrastructure and have experienced developers in-house.
Building a composable commerce tech stack requires planning. First, you’ll need to make a list of all the capabilities you’re looking for. You’ll need to find tools that support everything, from your subscription type of choice and your customer experience to your payment processing and beyond. Once you have that list, it’s time to shop for microservices or packaged business capabilities (PBCs) that work together to provide the subscription experience you’re after.
Each microservice or PBC will need to be integrated into your site via its API and then configured to meet your needs. This is where your developers come in! The good news is if you find part of your subscription setup isn’t working the way you envisioned, you can easily switch out a microservice while keeping all of your other features intact.
What’s Your Subscription Niche?
The subscription market has opened up greatly in the past decade, which means it’s easy for anyone to start selling. That’s both a blessing, in that today’s companies have more tools than ever to choose from, and a curse because you’ll be competing against many others in your industry.
As you’re wondering how to move forward with your subscription offering, the most important thing you can do is find a way to offer unique value to your specific audience. It’s usually better to build a subscription offering tailored to a small group of your most loyal consumers. You need dedicated, ongoing buyers to grow, and courting an overly large audience often results in a product that’s not a perfect fit for anyone.
Successful subscription sellers focus on tailoring the product and experience to their target audience. Sticky.io has the tools and support you need to launch flexible subscriptions catered right to your customers.
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