There are a lot of different tools available in the subscription billing tool kit. Here is a break down of 8 different ways of charging your customers. Many of these variations can be used in combination to create a pricing model for your product. In a follow up article I’ll offer some tips for creating a pricing model. In the meantime here are the charging tools:
1. Recurring payment
The bread and butter of subscription billing is the recurring payment. There are two important parameters to recurring payments:
- The Billing Period or Term – the time between charges. Typically this will be a month, a quarter, a year etc. Subscription billing will usually line up payments to a day of the month and so it is unusual to get billing periods that are counted in days.
- The Duration – this is the length of the subscription which is usually many Billing Periods. Subscriptions that do not have a duration are called Evergreen subscriptions. An Evergreen subscription continues until the customer takes action to cancel it.
An important difference between a Recurring Payments Service (like those offered by PayPal or WePay) and a Subscription Management service (like those offered by Zuora and Recurly) is that a Recurring Payments service just provides the ability to charge the customer multiple times your system has to trigger the charges. A Subscription Management system, on the other hand, understands the Billing Period and Duration and triggers the recurring charges itself.
Your recurring payment model will also needs to define what happens when a customer cancels. Does the cancellation take place immediately upon request, or at the end of the current billing term? In a system that charges in advance an immediate cancellation can trigger a refund to the customer for their unused time. As a result such system and often defined so that the cancellation occurs at the end of term.
2. Fixed Charges
A fixed charge is the simplest and most obvious way to charge your customer, a one-off charge. Fixed charges are not usually thought of as a subscription charge on their own. However, they are often used to charge for set up or one-off services. At Ning we charge a fixed price for design services that customers will use at the very start of their subscription.
3. Tiered plans
Tiering is a way of organizing different variants of a product, lets call them Gold, Silver and Bronze, with different prices and different capabilities. In a tiered model the customer can often upgrade or downgrade their plan. Upgrades and downgrades also need business rules to be defined. Downgrades, just like cancellations, can trigger refunds if they happen immediately so downgrades often go into effect at the end of the billing term. Whereas customers upgrading probably want to take advantage of the features in their new plan straight away and so upgrades happen immediately.
4. Add-on plans
Add ons are additional a-la-carte feature offerings that can be added to a core product plan, that we refer to as the base plan of the subscription. Some add-ons may be available at different tiers on the base plan and not at others and often features that are available as an add-on in one base plan might be included in a higher tier base-plan. For example, at Ning we have a Video’s feature. Videos are included in the top tier Pro plan, but not in the mid-teir Plus plan. However, customers with Plus can pay an extra $10 per month to get Videos as an add-on. Add-ons can also be tiered so that you can upgrade and downgrade individual features.
A subscription billing system should have business logic to ensure that when the base plan for a subscription is changed (upgrade/downgrade), that any associated add-ons are cancelled if they are no longer available (or included) in the new base plan. Similarly if the base plan is cancelled the add-ons obviously need to be cancelled too.
5. Advance vs Arrears
Billing can be done in advance so that you charge at the start of the term. Alternatively, it can be done in arrears meaning that you charge at the end of the term. Billing in advance has the huge practical advantages that (1) you can deny the service until you get the money and (2) getting paid in advance leads to a significant cash flow benefits for the business. Billing in arrears is sometimes required by enterprise customers particularly if you are charging based on usage.
6. Usage based
Usage based billing charges customers for their usage of a product or service. For example Drop Box charges per Gigabyte of data stored, Amazon charges you for the movies that you watch, AT&T charges you for the minutes that you are on the phone. Usage based billing is very different if the customer is charged in advance than if the are charged in arrears:
- In arrears, usage billing can be very straight forward, the customer pays for what they used
- In advance, the customer will pay for a block of units at the start of the term. The model then needs to specify what happens if they exceed the size of their block in which case they may have to pay overage charges. If they use less than the size of their block, in which case they may be able to roll over some of the excess to the next period.
7. Credits and Virtual Currencies
Credits and virtual currencies are very similar to usage based billing in advance. The difference is that there is usually no billing term associated with the purchase. In this model the user buys so many credits and these credits are consumed as the user consumes the services of the product. For example, in a streaming video service credits might be consumed per movie watched or even per minute of viewing time. In online games credits can be given more exotic names like “Gold Pieces” or “Doubloons” and be used to purchase enhanced capabilities for your character.
One of the nice features about this model is that credits can be given to a customer to help incentivize participation and engagement. In a social network the NC might give credits to members who invite 50 of their friends to join. Once credits start to be used in this way they tend to be referred to as Virtual Currency. In many online games you can buy things off other players using these virtual currencies.
8. Trials and discounts
Trials lower the barriers to entry and give customers the opportunity to test your product before buying it. They are largely required for online consumer products these days. Trial periods are often expressed in days, 15 day and 30 day trials are common.
Discounts can be used to test price sensitivity or to help drive a marketing promotion. An important class of a marketing promotions is the referral program. Several companies will offer referral programs, service providers like ComCast, PC manufacturers like Del will have ways of offering your product to their customers and for every successful sale, they get a cut. These referrers often want to be in the position of offering their customers a ‘deal’ of some sort and will want to offer your product at a discount from the list price.
Subscription billing offers a lot of different ways to charge your customers. Above I have outlined eight techniques but the possibilities abound when you consider that these techniques are usually combined in complex ways.
In a later article I’ll offer some tips on creating pricing models for now I’ll just say this: keep your pricing as simple as possible and try to align it with the value the customer obtains from your product.