The relationship between Subscription Billing, Recurring Billing, and Subscription Management.
Billing.
A process that dates back to about 3000 BC, when the Mesopotamians used the cuneiform script on clay tablets to record transactions. And since then, it has remained an integral component of a business.
Apart from the obvious function of getting the cash register clinking, billing also plays a pivotal role in customer relationships. It ensures that the customers get to know what they pay for, when, and why.
And in a business where it gets promoted from a one-off affair to a recurring event and is assigned the moniker of "Subscription Billing", it becomes all the more noteworthy.
For a SaaS business, a billing software is like the hub of the subscription wheel that holds the multiple spokes (like subscription management, billing, invoicing and accounting, payment processing, fraud management, et cetera) together, ensuring that the wheel keeps spinning smoothly and steadily, so that your SaaS vehicle can efficiently climb the mountain of growth.
And this crisp guide is all about helping you do just that - get on the right billing launchpad.
The relationship between Subscription Billing, Recurring Billing, and Subscription Management.
Subscription billing is the process of billing customers for their subscriptions, on a recurring basis. At its core subscription billing comes down to identifying:
Recurring billing is the process of billing your customers (aka subscribers) a specific amount on a recurring basis, as opposed to one-time billing. Anything that ranges from magazine subscriptions to music apps to CRM solutions, generally sport a recurring billing model.
For a SaaS, this involves managing the pricing model (tiered, volume-based or metered), the billing cycle (weekly, monthly, etc.), automatically sending invoices and handling collections.
Subscription management is the process of managing your subscribers, and their preferences across their lifecycle. A subscription management system stores your product catalog, their prices, your subscribers’ data i.e. their subscriptions, any add-ons, history of their transactions, and billing cycles.
For a SaaS, this includes the managing of trials, grandfathering in the event of a pricing change, trial-to-paid upgrades, downgrades and cancellations across the entire subscription lifecycle.
As you can imagine, recurring billing and subscription management go hand in hand.
You’ll see in the later sections that subscription billing can have far-reaching consequences across your revenue operations all the way down to revenue recognition.
The primary (and the obvious) attribute:
Enabling and streamlining the billing process for you, and thereby giving you the ability to realize the fruits of your labor - the labor of acquiring and serving your customers.
In less dramatic words - collecting payments from your customers, through a flexible range of payment options (credit cards, debit cards, PayPal, Amazon Payments, ACH, wire transfer, checks, cash, etc.).
The not-so-obvious, but equally significant attribute:
Managing and where possible, automating, the operational side of subscription management and billing i.e.
You’ll notice these are tasks that would otherwise require a developer(s) to dedicate considerable effort in first setting up and later, maintaining the codebase. By providing these capabilities out of the box, the subscription software can turn an inconvenient hassle into a business advantage to drive growth.
To give you a sense of the broad capabilities of subscription billing software here’s a comparison as seen in G2Crowd
Subscription billing platforms work on top of payment gateway(s), triggering charges to a customer’s card or bank as dictated by the billing logic that’s configured within.
"If there’s one reason we have done better than our peers in the Internet space over the last six years, it is because we have focused like a laser on customer experience, and that really does matter, I think, in any business. It certainly matters online, where word of mouth is so very, very powerful."
That quote right there would pretty much justify the "why?". Customer experience is of foremost importance for any business, and this only gets amplified for a SaaS business, where concerns like "Churn" and "Customer Retention" take the foreground.
With capabilities that minimize friction across every stage of a subscriber's lifecycle, your subscription management and recurring billing system should help you provide a stellar subscription experience.
To help small businesses out, some payment gateways have also built out basic modules for handling subscription management. And while there’s merit in getting started with the same product for both gateway and recurring billing, growing businesses soon outgrow the modest billing capabilities of a gateway. From an economics point of view, the payment gateway market is much larger than the subscriptions market and it’s genuinely hard for them to specialize in subscription billing.
From a strategic point of view, there is another fundamental advantage that a billing software has over a gateway. Recurring billing systems are designed to be integrated with multiple payment gateways and payment methods. This helps in two fundamental ways:
Here’s our 3-page guide that shows the differences between a gateway and a subscription billing software.
When it comes to your subscription business, a payment gateway focuses on receiving payments and a subscription billing system focuses on managing your subscriptions (who are also your customers).
In essence, the subscription billing solution makes your payment gateway smarter, and smarter is better.
A couple of arguments to ponder about, when taking the Make or Buy decision:
For good reason, business growth and recurring billing complexity go together. What could start off as a simple CRON job will get more complicated over time, slowly at first, and faster as you scale. Every additional subscriber, pricing change, upgrade and downgrade request will add to the code complexity exponentially.
Running an in-house billing system is like running a second product within your core product.
Developing the solution, testing and releasing the application, fixing the bugs, ensuring security, providing ongoing support and maintenance - you’ll need to be ready to spare resources for these as they come up.
Beyond operations, there’s the compliance part.
Starting from payment related PCI DSS compliance requirements, to ASC 606.
Using an accounting software doesn’t speed up anything unless the data that’s received by it is formatted correctly, following revenue recognition ASC 606 norms.
A good subscription billing solution goes far beyond just being ‘software’. For a product/service that’s as influential in your business growth as it is, service-level indicators are just as important as feature-level indicators. Let’s look at each separately:
From the moment a user hits your checkout page to forever after, ‘change’ will be a constant in their lifecycle. There are changes that are a reflection of their evolving preferences - upgrade, pausing or canceling their subscription. And there are changes brought about by your business preferences - a pricing change, discount coupons, trial and freemium experiments and so on.
To handle the volume of such changes across a growing volume of subscribers, you need a system that’s equipped for today and tomorrow.
Here are some questions to keep in mind:
Here’s a look at the feature-set you want to see in a subscription management system.
Recurring billing can snowball from a harmless CRON job into a messy patchwork of code that needs continual tweaking and a roadmap all for itself.
Furthermore, since billing is inherently tied to pricing, you want a recurring billing system that can adapt as your pricing evolves. True, it sounds like insurance; but this is insurance you will certainly cash multiple times through the lifecycle of your product.
Here are some questions to help you grade the maturity of a platform:
Here's a rundown of the product level capabilities you should expect:
This is the module that puts money in the bank - the collections module. Subscription billing systems integrate with multiple payment gateways and support a host of payment methods - credit cards, wallets, bank transfers, offline. If you have a largely self-serve subscription business model, it’s likely that you’ll need to support multiple gateways. On the other hand, if you have a strong sales-driven model, you’ll need support for wire transfers, cheques, and other offline payment methods.
Here are the feature level capabilities you should be looking for
Dunning process is the term given for payment retry in the event of a payment failure. It’s estimated that over 20% of a subscription business’ revenue churn is involuntary churn due to payment failures.
A few of the many perks of having this feature are: not having to manually check accounts for declined charges, automatically retrying failed payments at the time they're most likely to go through, letting the customers know about declined payments, and easily keeping a track of all of these actions. This is especially true for subscription businesses with a high volume of transactions.
[Here’s our extensive guide on 23 tactics you could employ to reduce involuntary churn.]
Here are some questions to keep in mind while evaluating the dunning feature:
We see that involuntary churn hurts the most when you have a relatively low ARPU product (Average Revenue per User), serving a large customer base. If that sounds like you, check out our extensive guide with 23 failed payment recovery tactics you could be using today to reduce involuntary churn.
On a feature level here are some features to look for:
As the source of truth for billing and payment information, the recurring billing system takes the responsibility to seamlessly sync with your accounting system. Everything from plans, add-ons, discounts, coupons, credit notes, and even ad-hoc charges need to get correct mapped.
You’ll also expect your billing platform to automatically calculate tax based on the region you are selling into - be it US sales tax, Australian GST or EU-VAT.
[EU-What? Here’s our easy guide on how to tackle EU-VAT]
Compliance with GAAP and/or IFRS are just as important for accurate deferred revenue reporting and revenue recognition.
Some questions that will help you judge a recurring billing system:
Feature-level capabilities you should be looking for:
As the system that collects revenue, you should expect deep analytics and a wide range of reporting capabilities from your subscription billing platform.
Starting from reports on checkout abandonment, SaaS metrics like MRR/ARR/Churn and all the way to deferred revenue reports your billing system can potentially drive major business decisions. As such it should provide reporting accuracy along with diagnostic capabilities to dive deep and analyze.
Here are some features you should expect from a mature system.
Billing systems don’t work in isolation and as a core component of your revenue operations tech stack, it needs to have robust integration with a variety of business software:
Subscription management and recurring billing solution is not a single-function system. With so many different roles in your organization using it in many different ways, where does the solution rank in terms of user-level access and internal security?
Here are some questions to help you grade:
Needless to say, compliance and security levels expected of a recurring billing system should be nothing short of best-in-class.
[While we are on this, how are you shaping up for PSD2? You might want to check out our must-read guide around SCA and PSD2 for subscription businesses.]
See All Features of ChargebeeBeyond product features, you’ll want to work with a vendor that’s able to go above and beyond the boundaries of the software. This is especially true for a subscription billing software given how sensitive the data it handles is.
Here are some questions to help you assess relationship indicators:
It’d be unfair to leave without also giving you a sense of the best billing software in the market today and how they compare. Here’s a loud disclaimer: Chargebee is a subscription billing software and it just so happens that customers peg us as THE best 😎.
Here’s how Chargebee compares against others on product features:
Based on G2Crowd's 2019 Summer Report
And here’s how Chargebee compares against others in terms of service level indicators:
Based on G2Crowd's 2019 Summer Report