What is subscription billing?
Typically, subscription billing is set up on a monthly or yearly basis—hence the ubiquitous terms “monthly subscription” and “yearly subscription”—but quarterly subscriptions exist as well.
What is the advantage of subscription billing?
Among other things (like convenience—more on that later), subscription-based agreements and billing setups all but guarantee a regular and reliable revenue stream for businesses. This is hugely important for companies to maintain predictable cash flow levels, empowering them to be more proactive and less reactive in their business strategy, modeling, and planning.
And, when it comes to this whole subscription thing, well, people seem to like them, too. A survey of 2,500 Americans revealed that, on average, each person paid $237.33 per month on subscription services and memberships.
That’s either a sign of American indulgence or an example of how many businesses are subscription-based these days (likely a little bit of both).
What are the different types of subscription/recurring billing?
Today, there are a handful of subscription billing models utilized by companies depending on their product, service, or internal structure.
Here’s a brief overview of some of the most common ones we see here at Zone:
Fixed price billing is when you have a single period price that includes everything.
This is the most common type of subscription billing used by companies today. It allows you to offer multiple plans with a fixed cost (e.g., monthly, annual, basic, professional, premium, enterprise, etc).
This is a pricing model where your users are charged for each unit of measure that has access to the account. The more users your client has, the more they pay.
Usage-based or Pay-as-you-go
The usage-based (or pay-as-you-go) pricing model is similar to Fixed Plans except that your customers are only billed for the exact amount of the service that they use. The more a customer uses your service in a given month, the more they’ll have to pay you that month.
Prepaid Usage or Credits
This pricing model allows you to charge your customers for estimated usage or consumption upfront. Then, as they use your product or service, they’ll be depleting from their credit bucket.
One-time or Professional Services
This model could be related to fixed or time & materials professional services, installation fees, early termination fees, and other services of that nature.
Hardware billing is found in companies that offer a physical item that needs fulfillment with other services. This could be a one-time shipment or recurring.
Why is subscription billing such a popular option for companies?
Subscription billing is popular because of two things: revenue and convenience. Revenue for the company and convenience for both the company and the customer.
In particular, subscription billing is most important for predictable revenue, as it makes it easier for finance teams to forecast, value, and report revenue metrics.
Some subscription billing platforms also automate the subscription management process, which makes daunting tasks like customer management and customer service significantly easier.
With a subscription model, the company has a reliable, predictable view into recurring revenue, and the customer enjoys goods, services, or access to something they need or want in exchange for a reasonable fee.
Plus, the exchange of money is facilitated by saved payment info and doesn’t need much, if any, manual attention. That’s convenience at its best.
Think about it:
If you were to sift through your credit or debit card statement right now, you’d likely find a membership subscription charge or two from this past month.
I just looked at mine and what do you know? There’s a $14.88 charge from Netflix.
Maybe yours is from Hulu. Or Apple. Or Spotify. Or Amazon. Or all of them—in which case, good for you...let me know when movie night is!
But unlike almost everything else you pay for, you probably weren’t notified of these transactions or were even aware of when they were occurring, right? All you know is that you signed up for something, you gave them your payment info, and you get charged once a month for it.
(Of course, if you’re a diligent Dave with the finances, then you knew exactly when this charge was coming and for how much. But if you’re like the vast majority of people, then you only noticed it now, after I put the idea in your head to look through your statement.)
That, right there, is why subscription-based businesses and subscription billing are so popular:
Regular, recurring payments that are made either automatically by the customer’s preloaded credit or debit card, or manually with a single click because the customer’s payment information is stored in the system.
Quite simply, subscription billing guarantees a business a certain amount of revenue that they can confidently rely on earning on a consistent basis. And in return, customers get unfettered access to whatever it is they’re paying for.
It’s a win-win, really.
But what about B2B SaaS businesses, you ask? What makes SaaS subscription billing so popular?
Let’s take a look.
Why is subscription billing such a popular option for B2B SaaS businesses?
At a high level, subscription billing is a popular option for B2B SaaS and B2C companies for the same reasons: revenue and convenience.
However, there are a couple of specific aspects of subscription billing that are typically more beneficial to B2B SaaS companies.
Subscription billing is free trial friendly. Meaning, subscription billing platforms make it incredibly easy for customers to switch from free trials to paid services. The same goes for customers seeking to switch from one tier of a subscription’s services to another. All of this is a breeze with a subscription billing platform.
Subscription billing makes it easy for SaaS companies to navigate the complexities of SaaS pricing plans. Many SaaS companies allow product add-ons, professional service add-ons, upgrades, downgrades, custom packages, and so on, each of which are a mess to handle manually. With a subscription billing platform, all of the migraine-inducing minutiae of customer admin, renewals, and invoicing is handled automatically.
What companies need subscription billing software?
It all depends on the business model of the company.
If yours meets certain criteria, then a subscription billing platform is definitely a worthwhile investment. If not, however, then adding one into the fold will only cause more chaos and confusion.
You don’t want to add subscription management software to the mix too soon, but you also don’t want to wait until you’re losing customers and revenue due to faulty billing operations.
So, how do you know when the right time is?
You know it’s time to invest in a subscription billing platform if...
- Your company has or is moving to a subscription-based business model
- Your company offers upgrades, downgrades, and add-on features
- Your company is able to manage individual subscribers
- Your company is capable of charging on a recurring basis
- Your company wants to automate revenue recognition
- Your customers want to own their experience on your platform (start subscriptions, input payment info, etc.)
What subscription billing models are commonly used today?
Today, there are all kinds of subscription billing models in use.
From monthly membership subscriptions to pay-as-you go subscriptions, there’s no shortage of options, and the best subscription billing software can handle any kind of model your business is operating under.
Business-to-consumer (B2C) subscription billing
B2C companies usually employ either tiered, recurring pricing for access to a varying level of goods, services, or content, or flat-rate pricing for a standard level of goods, services, or content.
One place where you’ll find both B2C subscription billing models at work: the publication industry. Some publications are a prime example of the tiered, recurring pricing model: They offer an entry-level subscription at a set price for access to their online content, but they’ll also offer higher tier subscriptions at an increased price point for access to additional online content as well as physical content. Other publications, on the contrary, are a perfect example of flat-rate pricing, in that they simply offer access to all of their content for a flat, recurring payment.
Business-to-business (B2B) subscription billing
B2B companies typically offer either tiered pricing or per-user recurring pricing.
In tiered pricing models, you’re typically paying to get access to a specific amount of features and service level for a predetermined number of users, while in per-user pricing, you’re paying for each specific user to have access to a predefined—and typically less robust—amount of features and level of service.
Most B2B companies start their tiered offerings at a certain usage rate, like user count, meaning you have to pay for a minimum number of users to gain access to certain features and services. This model helps B2B companies, SaaS companies in particular, retain customers as they grow because as they do, they’ll likely want to stay on the same platform that’s been working for them. However, in order to do so, they’ll need to upgrade to another tiered solution.
How a subscription billing platform can help you
I’ve covered a lot of the basics of subscription billing.
But you might be asking yourself:
What the heck does a subscription billing platform even do to help me?
Good question. It does a lot. It simplifies and streamlines processes and saves you time and money (and your sanity) in the process.
And while traditional third-party billing solutions can be powerful, there are more modern all-in-one alternatives that cover more than merely billing. I’m talking about things like revenue recognition, financials, renewal automation—you know, the big stuff.
In other words, traditional third-party solutions adequately take care of the booking-to-billing journey, but only an all-in-one subscription billing platform can take care of the entire booking-to-revenue journey.
So, when looking for a billing solution, consider an all-in-one quote-to-cash or lead-to-revenue solution (like NetSuite) so you can handle all of your key financial processes with a single software.
Now, here’s a breakdown of what the best all-in-one billing and subscription management platforms will do for you:
Your subscription billing software should help you bill for a custom period of time, in advance, and in arrears.
Sure, we’re talking about subscriptions here, but you’ll want to make sure you have a billing platform that can also facilitate single or one-time purchases.
Depending on your subscription model, your billing platform should also be able to calculate pricing based on customer events.
With today’s all-in-one subscription billing platforms, you can easily bill for services, software, and other physical goods (like subscription boxes), and track inventory.
For SaaS and software subscription billing, you’ll want your platform to have tiered capabilities, which means it’s able to calculate charges based on your designated product tiers.
Promotions are an effective way to attract new subscription customers, so your billing platform needs to be able to handle different promotion pricing.
Templates or Plans
The best subscription billing platforms allow you to quickly and easily template common contracts and subscriptions, radically improving efficiency.
Traditionally, billing software platforms have not included revenue recognition or management functionality, forcing businesses to buy another third-party solution. This causes significant disparities in data and forces finance teams to perform lengthy manual calculations, leading to inaccuracies and late closes. With an all-in-one solution, however, RevRec and management is all handled on the same platform with ease and accuracy, allowing you retain your compliance with ASC 606 and IFRS 15.
Reporting and Analytics
Similar to revenue recognition, unified financial reporting and analytics capabilities have long been absent in billing platforms. Typically, a billing solution will require some kind of integration or manual reconciliation with ERP/financials data for comprehensive reporting, which, as you can imagine, leads to more hours of manual work, more errors, and less accessibility to the data. All-in-one billing platforms (like ones built for NetSuite) have native reporting and analytics capabilities, eliminating the headaches of integration and providing you with accurate data and insights—quickly and at scale.
Believe it or not, but the story with subscription renewals is the same as it is with revenue recognition and reporting and analytics: Traditional, third-party subscription billing platforms don’t support the ability for you to renew your customers’ subscriptions for end-to-end lead-to-revenue management. This has serious and costly consequences, as the complexities of another integration bring along more work and more manual errors, and, in the case of renewal software, potentially more customer churn. But, thankfully, all-in-one solutions include renewal capabilities, streamlining that process for you and your customers.
Want to learn more about subscription billing?
Like many of the things we do here at Zone & Co, subscription billing is a simple concept with many complex processes involved.
So, if you’d like to learn more about subscription billing and management, feel free to shoot me a message on LinkedIn with any questions, thoughts, or feedback. I’d love to chat.
By the way—while you’re here, if you’d like to learn about ZoneBilling (built for NetSuite), and how it differs from other billing solutions, click here.