If you’re business
is considering a move to a subscription-based commerce model, you’re certainly
not alone. The growing need to conform to consumer preferences has made
subscriptions the new model of choice across countless industries from baby diapers to snowboards and luxury cars. So how do you get started?
Unfortunately, subscription models are not all created equal, so companies first
need to determine which one is the right fit for their product offering,
customer base and future of their business.
Let’s take a
look at three basic subscriptions business models. Understanding which one is
right for your business will ultimately dictate how you restructure your
operations and online payments processing, especially if your company plans to scale
Prepaid Subscription Service
This is a subscription model with a prepaid monthly or annual subscription, but
no long-term commitment: if a subscriber stops paying, he stops receiving the
A key consideration
for the business, however, will be the cadence of customer transactions and how
this affects billing. For instance, a company may introduce a monthly
subscription versus an annual subscription to help lower the barrier to entry
for consumers. This strategy also dramatically increases the volume of
transactions the business must process in a year to 12 payments instead of just
one – increasing transaction fees, creating new billing cycles and more.
And as a
business scales, this increase in transaction volume only becomes more
complicated from a back-office infrastructure and operations perspective.
Twelve transactions a year versus one doesn’t sound complex, but when you apply
that to a million customers, you’re now turning one million transactions a year
into twelve million. More billing cycles requires more infrastructure, more
overhead, storage and bandwidth. More transactions also means dramatically
higher payment costs for the business since the per transaction fee charged by
card providers will be applied to 12 transactions a year rather than just one.
These all are things a business needs to take into consideration.
As you can
see, moving to a monthly subscription service sounds simpler than it really is
beneath the surface. Not to mention that introducing more billing cycles also
introduces more opportunities for a customer to opt out entirely. Churn is a
major issue for subscription providers and challenges them to continually
create new value for their subscribers or risk losing them entirely.
Term-Based Contract Subscription
DirecTV. In this model, a subscriber agrees to a specific contract length or
term, typically a year or multiple years, but is billed on a more frequent
cycle, often monthly. Usually when subscribers commit to a longer term – say 24
months rather than just 12 – companies often discount the monthly fee, which is
a better value for customers. While this model increases financial
predictability for companies by locking in subscribers for longer terms, it
also brings into play a tradeoff that companies must reconcile. And that is
whether or not it’s worth it to take in less money in exchange for the security
of a longer term contract.
also comes with some accounting challenges. Businesses must be sure their back-office
infrastructure is flexible enough to handle not only the variety of payments they
will see from the different contracts they strike, but also unexpected charges
and penalties they must assess when contracts aren’t honored. At the end of the
day, the ultimate value this model offers businesses is the financial
predictability of long-term deals. And depending on the service they are
offering, it might be the best subscription model for their company.
Usage-Based Subscription Billing
your electric bill. In this model, consumers pay for what they use after
they’ve used it. This gives consumers flexibility and ties payment directly to
their behavior. But it also limits financial predictability for both consumers
and the business. We saw this years ago when text messaging was billed this way
and parents got saddled with $500 bills when their children abused their
texting privileges. Today, usage-based models are more often seen as an add-on
to regular prepaid or term-based subscriptions. For example, you might pay a monthly
fee for cable or satellite TV, but incur additional charges for ordering a
This model brings
about variability in revenue as companies never know how much their customers
will use the service. Another issue is the fact that payment occurs after a consumer has received the goods
or services. This can lead to lost revenue from nonpayment or disputed charges.
For this reason, businesses pursuing this model need to have the infrastructure
and payments tools to handle a highly fluid billing volume and monitor a wide
variety of usage variables (e.g., length of use, number of users, downloads,
Choosing the Right Model
As you can
see, there are a variety of moving pieces that companies need to consider when
deciding on the type of subscription model they select. It is important to
acknowledge that flexibility should be a priority in any implementation. Given
how quickly consumer preferences can change, and how much those preferences
influence sales, it is important that companies build out a subscription
payment infrastructure that supports the model(s) they choose today, and can
shift in the future to a new model if necessary. It is essential that businesses
are able to pivot without enduring unnecessary administrative complexity. The
sooner a business can understand how their operations and payments processing
will differ depending on the subscriptions model they decide is right for their
business, the sooner they can reap the benefits that subscriptions promise.
Content Provided By: James Gagliardi, Vice President – Strategy & Innovation at Digital River