A definitive guide to recurring billing and subscription commerce
Recurring billing powers many of the services that both businesses and consumers use, rely on, even love every day. These automatic payments handle all the payment details on a regular schedule without each person (from customer to payment processor to business owner) having to manage these transactions. Can you imagine if each month, you had to remember to pay your Netflix bill or risk losing access to all your shows? Or what if your new business needed software licenses for all its employees, and instead of paying a monthly subscription fee, you had to purchase licenses outright for hundreds of dollars each for all of your employees?
The recurring revenue model is so powerful because it provides subscribers with convenience and access, via a pay-as-you-go model. For businesses that sell via subscription, recurring revenue is a predictable revenue stream, which results in a more loyal customer base compared to one-time commerce. It also provides ongoing insights from the data generated each month from the convergence of subscriber, billing, and marketing events.
The staying power of the subscription services model and its popularity is borne out by data. The subscription e-commerce market value is forecasted to grow to US$2419.69 billion by 2028. Many startups, supported by venture-capital investments, have launched recurring revenue businesses in a wide range of categories.
Let’s dig in further to what recurring revenue is, what it does, and what you as a business or a consumer need to know to take full advantage of this dynamic and ever-evolving business model.
What is recurring billing?
Recurring billing occurs when a business provides a customer with a product or service on a regularly established cadence, such as monthly, quarterly, or annually. The business processes the customer’s payment for the subscription on an automatic, recurring basis, as set out by the terms of the plan.
Basic examples of recurring billing businesses include gym memberships and streaming services.
Benefits to subscribers
Subscribers—whether businesses or consumers—benefit in myriad ways from recurring purchases, as many different industries have discovered.
The recurring model allows subscribers to amortize the cost of a product or service over time, rather than paying a large upfront cost. This is easily demonstrated by the widespread adoption of the SaaS (software as a service) model. Prior to SaaS, access to software involved purchasing a license which required a large upfront expenditure and manual software updates.
Another highly successful subscription industry is the subscription box which provides convenient and regular replenishment of necessary commodities, such as diapers, razors, feminine care products, coffee, tea, and more, on a monthly or other cadence. The list of products available through a subscription box is as varied as it is long.
Curated boxes are another type of recurring purchase that provide for an unexpected array of items around a particular theme, such as beauty and wellness, candy and other snacks, jewelry, art supplies, stationery, and much more. This surprise and delight found in every new box—in addition to overall cost savings compared to the per-item price—is what has made this vertical a subscription juggernaut.
Benefits to providers
As mentioned, businesses that choose to add a subscription component benefit from a continuous revenue stream as well as customer loyalty and ongoing insights that the subscription model can produce.
Due to the benefits of the recurring revenue model, many ‘traditional’ consumer brand manufacturers and retailers have been entering the space. For example, P&G (Gillette on Demand), Sephora (Play!), and Walmart (Beauty Box) have all launched new subscription businesses. The market has also seen significant M&A activity.
Another major advantage of the subscription model is the wealth of data that is generated from the events that occur over the entire subscriber lifetime. These include subscriber events such as plan upgrades, downgrades, and one-time purchases. Marketing events include promotions via different channels, media mentions, and messaging. Billing events typically refer to billing for renewals, add-ons, and other account adjustments.
This combination of data from marketing, billing, and subscriber events provides subscription businesses with a unique advantage through actionable insights on trends and patterns. Businesses with a recurring revenue channel can use these insights to identify the most productive acquisition channels, offers, and programs. This helps the business to discover the optimum mix of plans, promotions, and pricing that will maximize subscriber acquisition and retention. Non-subscription revenue models rarely have access to such a complete picture of customers and what drives their behavior.
Why recurring billing is complex
While understanding what recurring billing (also called subscription billing) means in practice, actually implementing this type of billing process—and then processing initial and automatic payments efficiently and effectively, each billing period—is actually a very cumbersome process that can involve several challenges. You want to be thoughtful when choosing your recurring billing software.
Different billing systems, different challenges
Recurring billing encompasses a wide range of billing models. Different types of businesses choose the billing model or models that best suit their product or service—and that best meet their customers' needs and expectations. But, regardless of the model chosen, the ability to bill correctly for these different scenarios is paramount to providing superior customer service and ensuring operational efficiency.
There are several types of billing models commonly used with monthly payments:
Fixed recurring billing: This is the most simple of the recurring revenue models, used by companies that provide a product for a single price and charge regularly, and typically charged at the beginning of the billing cycle.
Quantity-based billing: Used by SaaS companies that charge customers based on the number of users or ‘seats,’ and these seat charges are commonly prorated if a new seat is added at any point after the beginning of the billing period.
Usage-based billing: Best for companies with a transactional business who want to enable customers to pay for only what they use. Common examples include document or data storage services that charge per gigabyte (or other measure) used.
One-time charge: Some subscription businesses include one-time products as part of a subscription plan (e.g. setup fee or purchase of equipment required for a subscription).
Hybrid billing model: This model is used by companies that sell a mix of both recurring and non-recurring products and want to allow their customers to pay for these different product types in a single purchase.
Why recurring transactions fail
In one-time e-commerce, payments are straightforward: Payment information is captured and authorized, with a high likelihood of transaction success. If there’s an issue completing the transaction, an error message provides information to the customer, who can then provide a different payment method.
But recurring billing is far more complex. The payment information that is captured during the initial sign-up transaction is held over the life of the subscription, and this information is used automatically each billing period. This means that with each renewal, there’s a chance that the payment will be declined.
There are a variety of reasons for payment declines, and these reasons can vary based on whether a credit or debit card is used. In general, payment information, especially credit cards, can become outdated over time. The more time that elapses since the initial transaction, the greater the likelihood that the payment for the recurring charge or renewal will return an error. And, of course, banks may decline transactions for other reasons even if the information is not out of date.
Gateways that support recurring billing
Choosing a payment gateway can be a time-consuming process, but a critical one. Because changing gateways is also time-consuming, it’s a good idea to do your due diligence at the outset and find the gateway that will best meet your needs. Knowing the factors that are most important to your business and knowing how well a gateway can meet those requirements will set you up for success, both in the present and as your subscription business scales and evolves.
In order to process recurring payments, you must choose a payment gateway that supports this type of transaction. As well, depending on your business, you may benefit from using multiple gateways—if not now then possibly in the future. Having a second gateway can be used as a failover gateway if your primary gateway experiences an outage or issue which can result in lost revenue from failed transactions. A second gateway may also offer other benefits such as reduced rates for processing certain types of transactions, which can be determined through AB testing.
Refunds, credits, and prorations
Part of what makes recurring billing a challenge to do well each month—calculating accurate charges and doing so efficiently, at scale—is that the subscriber lifecycle can involve several complex billing scenarios. These scenarios include upgrades, downgrades, adding or removing additional products, changing quantities, or any combination of these billing events. With each change, you may be required to prorate the invoice to accurately reflect the change in terms of usage and calculate the correct recurring billing amount for that period.
In addition to product or plan changes, an unsatisfied subscriber might need a refund or service credit, or you may decide to issue promotional credits or discounts to reward and retain your most loyal subscribers.
Subscription businesses must account for all of these changes accurately, not just in terms of the invoice sent to the customer but also in terms of the accounting team’s monthly process to close the books and produce financial reports. Managing complex recurring billing scenarios at scale can quickly become a workflow and reporting challenge.
Recurring billing and subscription analytics
Subscription businesses rely on easy access to robust analytics to make informed decisions to support and grow their business. Subscriber and billing data—along with trends over time—provide a gauge of business health, subscriber engagement, and customer loyalty, now and in the future. Measuring results and understanding the factors that contribute to growth are critical for intelligent decision-making.
Optimizing recurring revenue is a function of building and maintaining customer loyalty. This is accomplished by aligning the most compelling products and services with the subscribers that will be most inclined to remain loyal paying customers well into the future—maximizing customer lifetime value (LTV).
Look for an analytics toolset that includes an easy to understand dashboard, dynamic graphs, and key performance indicators (KPI). For example, subscription businesses track churn rates, subscriber growth rates for top plans, or changes in ARPU (average revenue per user).
A good analytics tool will provide a clear overview of the current state of your business, along with insights into how to improve it. With these insights, you can then devise strategies to improve performance, based on an in-depth understanding of the drivers of both retention and churn, along with other activities that impact your business.
Recurring billing and the finance function
In addition to the complexity that recurring billing naturally entails, additional complexity is created through the use of different billing models, mid-month customer upgrades and downgrades, add-on charges, etc., each of which impacts billing, revenue recognition, and other financial reporting.
In short, recurring billing and recurring revenue complicate the process of creating accurate financial reports each month and doing so efficiently. And as a business scales, this complexity only increases. Another challenge for finance professionals is that most ERP and CRM systems are not designed to handle recurring revenue.
One key means of addressing these challenges includes a recurring billing solution that is integrated with the most popular accounting software. As well, having an automated revenue recognition solution eliminates the need for manual calculations, which can be resource-intensive and error-prone.
Taxation is another complicated area, with different rules for different types of services and for when the tax is levied. Having a tax solution integrated with your subscription billing platform makes compliance much less time-consuming and onerous.
Fighting CNP fraud in recurring billing
For e-commerce merchants, card-not-present (CNP) fraud is an ever-present concern. All the research indicates that fraud attacks are on the rise and that fraudsters’ strategies and tactics are becoming increasingly sophisticated, as they become more brazen and more creative in their tactics for stealing from businesses and consumers.
As a result of fraud, businesses selling both one-time and recurring items face losing revenue from chargebacks along with the loss of the fraudulently obtained goods or services. If the fraud exceeds card processors’ thresholds, they can also face potentially damaged relationships with card issuers, gateways, and merchant banks—the entities that businesses depend on to be able to process their payments.
The only truly effective way to fight CNP fraud is through a dedicated fraud management solution that can automatically identify potentially fraudulent activity for well-known types of fraud, high-risk countries, high-velocity attempts (for example, multiple sign-up attempts with the same credit card), and also identify repeat offenders.
These solutions provide “set and forget” configurations that allow businesses to determine how aggressive they want to be in their fraud defense, and set up their rules accordingly. The fraud solution will automatically identify potentially fraudulent transactions and respond based on the business’ pre-set configuration.
How to fight churn in recurring billing
As we’ve outlined, recurring transactions are declined more often than one-time transactions or the initial transaction that begins a subscription. According to industry sources, an average of 13% of recurring transactions are declined each month. Successful recurring billing must repair as many of these transactions as possible before the transaction is permanently failed. This is the key to reducing involuntary churn, which is when a subscriber is lost not because they actively canceled their subscription but because their payment fails and is never repaired.
Fortunately, within recurring billing are methods and solutions that can address these payment declines and repair them.
Automatic updates through account updater
One method to address a common source of transaction declines is with Account Updater services provided by most payment gateways. Some subscription management platforms provide a similar service.
Account Updater services monitor subscribers’ credit and debit cards. If any aspect of the payment information has changed, the service updates the subscriber’s record automatically, which improves the likelihood that the payment will go through. If the update can’t be made automatically, the Account Updater provides an alert so the business can address it with the customer directly.
Recurly’s Account Updater takes a step further and check a card’s status a few days before a subscription is set to renew. If changes are needed and can be made automatically, the service makes them, improving the success rate of renewal transactions.
Automatic transaction retries
When a transaction fails, the payment gateway returns an error code which can shed light on the reason for the failure. Errors are categorized as ‘hard’ or ‘soft’ declines. Hard declines include things like “card stolen” or “account closed.” In these cases, additional retries are not likely to be successful but will result in additional transaction processing costs. In these situations, the best option is to contact the subscriber directly during the dunning process to get updated payment information.
Retrying a transaction due to a soft decline, however, can result in a successful payment. For example, if a debit card is declined for having insufficient funds, it makes sense to wait a few days and try the card again, as the subscriber may have added funds to the account to cover recent purchases.
In recurring billing, this kind of smart retry logic can reduce involuntary churn and increase subscriber retention.
Effective dunning strategies
Dunning is the process of communicating systematically with subscribers, usually by email, to collect overdue payments. An effective dunning process will vary based on various factors and, when implemented strategically, can improve predictable cash flow from your subscription payments.
With Recurly, for example, the dunning process differs depending on the payment type. For automatic (credit card) invoices, the due date is essentially the date the invoice is issued. For manual invoices (for example, those paid by check, wire, ACH, etc.), the due date can be a set number of days after the invoice is issued. If the invoice is not paid by the due date, the dunning process begins.
Many subscription management platforms conduct dunning in tandem with their static retry processes. But to achieve the best results, the dunning process must function independently from the retry process.
Decoupling these processes improves transaction success rates and provides control of the amount and cadence of subscriber communications, an especially sensitive topic when discussing unsuccessful payments. Here are some best practices for effective dunning:
Set up your ideal dunning settings
For a monthly billing cycle, dunning cycles should not exceed 28 days. Cycles over this limit cause invoices to get into a “loop” state where a new invoice is issued even though the prior invoice was not collected.
Send multiple emails during the dunning process, reminding subscribers to update their payment information.
Customize subscriber communications
Set up a return email address that accepts replies. This lets you acquire subscribers’ email addresses to update information on file and has the added benefit of making the email feel less anonymous.
Customize your emails to match your branding and the voice of your marketing team to improve open and click-through rates.
Customize and revise the message in each email to maximize the impact of each communication. For example, you may want to make the tone of each email increasingly urgent to reflect the approaching payment deadline.
Have a clear call to action for your subscribers.
Easy subscription cancels
While recurring revenue businesses hope their subscribers remain for a long time, it is a best practice to ensure that unsubscribing is a straightforward and easy process. As a matter of fact, many states have passed legislation wherein these businesses must enable their customers to cancel the service online if the customer has agreed to an automatic renewal or continuous service offer.
There are also requirements that companies present the terms of an automatic renewal or continuous service offer in a "clear and conspicuous manner.” Businesses that obfuscate the cancellation process risk lawsuits in states that regulate subscription terms or at minimum, very unhappy subscribers who may share their negative experience widely on social media.
How Recurly helps you streamline and scale recurring billing
The key to success in subscription commerce is to eliminate the complexities of recurring billing while, of course, delivering high levels of subscriber satisfaction. Meeting the demands of the rapidly changing subscription landscape requires a recurring billing and management platform that's easily implemented so a new or transitioning business can get to market fast and seize opportunities.
The platform should be nimble and flexible enough to let businesses respond to market changes with ease. It should also support efficient, automated, scalable processes, and designed from the ground up for streamlined integrations with other solutions.
Also critical in successful recurring billing are strong decline management and revenue recovery processes, as these help to ensure subscriber retention. Robust analytics bring clarity to key metrics and provide insights on how subscriber, recurring billing, and marketing events are driving the business forward.
A recurring billing platform that meets these fundamental requirements will unlock the power of subscription commerce, unleashing a thriving, growing business.