The debate on whether businesses should switch to a subscription model is long over. According to Gartner, all new software entrants and 80% of historical vendors now offer subscription-based business models. This trend can be observed across all industries and markets.
The pandemic-led push for digital transformation and the fiscal attractiveness of revenue predictability during uncertain times has accelerated the rising popularity of the subscription industry – among business owners and investors alike.
If you like the idea of recurring revenue hitting your coffers and are curious about how recurring billing works and whether it could work for your business model – you’ve come to the right place.
Let’s dive right in.
What is Recurring Billing?
Recurring billing is when subscription businesses charge their customers for a product or service regularly. The billing schedule frequency can be monthly, quarterly, or annually.
It is the process of ensuring subscriptions to your product or service are billed accurately and on time for each customer, accounting for global taxes, proration, payment failures, etc.
What types of businesses benefit the most from recurring billing?
Here are some of the businesses that leverage recurring billing:
- SaaS: Slack, Dropbox, Chargebee
- eCommerce & DTC: Amazon’s ‘subscribe & save,’ subscription boxes like Birchbox, Barkbox
- Entertainment: Netflix, Amazon Prime, Hulu
- Health and fitness: Practo, 24-Hour Fitness
- Education and e-learning: Udemy, Shaw Academy
- Publications: The New York Times, newsletters like ‘A Media Operator’
How Does Recurring Billing Work?
Once the customer has subscribed to your product or service, recurring billing allows you to process recurring payments from them. For processing the payment securely, payment gateways are used. Once the transaction is authorized and processed, it can be routed to accounting and reporting for accurate revenue recognition.
A recurring billing management platform like Chargebee helps streamline this process by:
- Automating the recurring billing process and eliminating manual errors.
- Handling complex billing scenarios like upgrades, downgrades, add-ons, and taxes.
- Removing developer dependencies and giving you complete control over your billing and invoicing.
What’s Better: Monthly or Annual Subscriptions?
Annual subscriptions improve your revenue, remove the need for monthly invoicing, and put more cash in the bank. However, monthly subscriptions are flexible and relatively risk-free, giving customers a low barrier to entry. Businesses tend to prefer annual subscriptions to increase cash flow and offer exclusive discounts or prorated refunds to encourage long-term commitment.
The best strategy is to provide both options to your customers to choose what seems more suitable.
Recurring Billing Works with Different Pricing Models
There are several different kinds of SaaS pricing strategies you may be using based on your business model. Some of the most common use cases for recurring billing are seen in these pricing models:
- Usage-based billing: Here, you charge customers based on their product or service usage. And customers are billed post usage on a regular, pre-determined schedule.
- User-based billing: SaaS software typically employed by larger teams may use a user-based billing model, where you bill the customer on a recurring basis based on the number of ‘seats’ that are serviced.
- Tiered billing: Different products or services have different price points. When the customer chooses another bundle of features or exceeds a particular volume of features, they need to upgrade to a higher pricing tier.
If you follow any of the above, a recurring billing system should facilitate it and remove unnecessary complexity from your plate.
Are Recurring Payments and Subscription Billing the Same?
The terms recurring payments and subscription billing are often used interchangeably. That’s because they’re closely related and go hand-in-hand with each other.
In the recurring payment model, customers sign up and input their payment information, such as credit card details, and authorize the merchant to deduct the payment at the agreed frequency. For instance, setting up your insurance policy for automatic renewal instead of having to do it manually every year.
On the other hand, subscription billing is the automatic recurring billing process after a customer signs up for a service. It could be for a subscription box of beauty supplies, a streaming service, or your favorite magazine. Customers are charged regularly on a frequency they prefer, like monthly or yearly, with the option to cancel at any time.
There are some clear benefits and shortcomings of recurring billing and the subscription business model. Let’s look at both sides of the coin and how you can overcome the shortcomings.
Recurring Billing Pros
- Predictable Revenue: Recurring billing brings in more predictability in your cash flow. Recurring revenue helps cushion any unpredictable turbulence in the market. It allows businesses to scale with better forecasting leading to efficient capital allocation and a higher ROI.
- Revenue expansion opportunities: For SaaS businesses that use tiered pricing plans, it is an opportunity to expand revenue by upselling and cross-selling existing customers to higher-value plans and add-ons.
- Convenience and Personalization: Recurring billing means that customers do not get hounded for repeated payments. It saves them time and money (longer commitments entail discounts!) and provides a personalized customer experience, such as custom-made subscription boxes.
Recurring Billing Cons
- Customer Churn: Subscribers have an option to cancel anytime. If the customers fail to see value in your product as you intended, there is always a chance of customer churn. So you have to win customers at every renewal cycle, unlike a one-time sale. Head to here to know how you can analyze and reduce customer churn. It is also why focusing on customer retention is vital for subscription businesses.
- Complex Process: Recurring billing process is more complicated than one-off payments. There are non-recurring add-ons, multiple pricing tiers, discounts, and taxes, to name a few. When you have multiple billing cycles, recognizing revenue for each financial period can also require extra efforts from your finance team.
Handling recurring billing in-house can turn your billing into a big bowl of spaghetti – complex and entangled. That’s where a robust subscription management platform like Chargebee can help.
Recurring Billing for Your Subscription Business
If you have a SaaS or Subscription business or you’re planning to start one, one of the most critical and frustrating things you’ll bump against is the pricing strategy. But if your pricing is right and you provide value, your customer base is going to grow.
If at this point, you don’t use a recurring billing platform to support your pricing model, it’s like putting jet fuel in a steam engine. As Jason Fried says, ‘Complexity is like a leak in your roof. It starts small. But over time, it does real damage. And once that damage has begun, it’s hard to stop. Best not to let it happen in the first place.
The billing needs of growing businesses are constantly evolving. An in-house system can generate invoices automatically, but the bubble will soon burst. Homegrown billing systems cannot handle the complexity of recurring billing for rapidly growing businesses that come with global expansion, pricing experiments, discounts, and add-ons.
Should You Build Your Recurring Billing System?
Recurring billing can seem easy enough to set up on your own. All you need to do is collect payments, send invoices, and record transactions. Most startups integrate with a payment gateway and manage to cobble together a functional billing system with a medley of tools.
It sounds like it could work, right? No, it rarely does.
Recurring billing is a function whose complexity is revealed with scale. As your customer base starts to grow, your subscription billing needs grow along with it. Your customers demand multiple payment options, the product team wants a pricing experiment, and the leadership requires coherent reports. Suddenly, you’re managing multiple payment methods and currencies, discounts, refunds, pricing changes, and consolidated invoices – for multiple products.
Any discrepancies in your reports would take hours to resolve because you need to consolidate data from multiple tools. Handling sensitive data like customer information, payment details, or card information comes with its own set of compliance standards like GDPR and PCI DSS. That’s a big ask from your development team.
Every subscription business outgrows its homemade billing system; it’s not a matter of if but when. Businesses that ride out the turbulent waves of the market are the ones who are forward-looking about efficiency and sustainable growth. In a precarious market, the opportunity cost of sticking with your homemade billing system might be too expensive for your business.
Setting Up Recurring Billing with Chargebee
Opting for a robust subscription billing tool early on in your growth journey can save time and reduce manual labor for your core team. In addition to recurring billing, a sophisticated billing tool like Chargebee enables you to
- Maximize cash flow by automatically recovering failed payments and collecting offline invoices seamlessly with an end-to-end AR software
- Minimize voluntary churn through personalized cancel experiences
- Monetize your product better with feature provisioning
- Automate compliance for revenue recognition and global tax laws
- Integrate with existing tools in your tech stack through APIs or out-of-the-box integrations
- Gain a 360° view of your business through exhaustive reports and ready-to-use dashboards
Recurring Billing Shouldn’t Be an Afterthought
Some of the world’s most successful subscription businesses surged ahead of the competition simply because they were built to scale. Your subscription billing solution needs to scale as gracefully as you do, regardless of the growth you achieve in a month or year. To know more, check out our guide on unhacking SaaS growth with recurring billing.
Traditional accounting software doesn’t provide the flexibility your business needs. A scalable, efficient recurring billing software like Chargebee not only automates your subscription billing but also acts as your growth partner, scaling with you. Chargebee is a subscription management revenue operations platform that integrates seamlessly with your existing systems and streamlines your billing operations.
Head here to know how Chargebee can help your business scale with recurring billing!