Subscription Billing – What’s the big deal?

Subscription billing is not new. The media industry and the publication industry have been doing it for decades. However, with the business models made possible by today’s technology we are seeing an explosion in the number of companies using subscriptions and the types of products that you can buy with a subscription.

Netflix is the canonical example for Subscriptions 2.0, what Zuora is calling the “Subscription Economy”, but buying rentals by subscription seems very 2000’s. You can buy access to a car as a subscription with services like Zip Car or City Car Share, access to computer power on Amazon EC2 or Google Apps,  you can even buy razors from the Dollar Shave Club or Man Packs.

The key reason that subscriptions are so attractive is that they establish a formal ongoing relationship between buyers and sellers that turns out to be mutually beneficial. From the sellers point of view the benefits include:

  • Predictable cash flow – of course you have customers dropping out all the time but on balance, month to month or quarter to quarter your revenues become very predictable.
  • Sales are incremental – with conventional, one off sales a new customer adds a single purchase. With subscription billing each new customer is a new revenue stream that is added to the existing revenue stream. Of course, many conventional businesses are built on repeat business but subscriptions add additional structure to the relationship.
  • Customer retention – in s subscription model customers have to take action to opt out so they tend to stay longer.
  • Customer information – because the relationship is ongoing the seller has opportunity to learn much more about their buyers behaviors.

From the buyers point of view the benefits are:

  • Predictable costs – The cost of the purchase is ased on a regular fee. Costs can also be charged on a usage basis but even there the buyer knows that they are paying for exactly what they use, nothing more.
  • Low upfront cost – Avoiding the capital costs of purchasing compute servers or cars means that EC2 and Zip Car significantly lower the barriers to entry for new customers over conventional alternatives.
  • Costs are spread – subscriptions allow costs to be spread over time smoothing expenses.
  • Seller is motivated to listen –  the seller is now in an ongoing relationship. They need to listen to their buyers needs to retain them.

The options, of course, go way beyond a simple monthly or yearly fee. There are a number of pricing models including:

  • Tiers of subscription –  the Ning product has four levels, Mini, Plus, Pro and VIP
  • Add on subscriptions – incremental features that can be purchased along side the base product
  • Usage based billing – that is billing based on the number of units used, such as bandwidth, disk space, miles driven, hours of movies watched etc. Fixed subscriptions are normally billed in advance. Usage is usually billed in arrears.
  • Virtual currencies – this is really usage billing in advance. The customer buys units, called points, credits, gold pieces etc., they can spend these to buy services. one of the nice features about virtual currencies is that you can credit users for reasons other than payment. Users who contribute to your user forums, or contribute bug reports or participate in focus groups can be give credits.
  • Trials – many services offer free trial, allowing the user to see and test drive the product for 15 or 30 days before making a purchase.
  • Discounts – there are many models for discounts. For example customers can be given a coupon code that will give them some fixed percentage over all fees for a period of time. Alternatively discounts can be offered on the first few months of the purchase of a specific product. Or even “Buy 2 get 1 free” type deals.

Of course all these models can be mixed leading to extremely complex business and catalog rules. Having the flexibility to implement the right combination of these capabilities for your business is key to making the most of subscription billing.  The aim of ChargeThru is to provide a community of professionals who are working in this area to share knowledge, experiences and best practices.

Subscription billing is not new but with web technologies to allow the buyer to control their subscription purchases automatically it rapidly becoming an important cornerstone for Internet business models.