Subscription Billing

What is Subscription Billing?

Subscription billing is a financial process companies use to send invoices to customers at regular intervals and then collect the associated payments.  Subscription billing is a key part of the recurring revenue business model, which has become commonplace in today’s economy.  Subscription billing powers the cash flows of many of the world’s fastest-growing companies, including Netflix, Spotify,  Microsoft, and Google (Alphabet), as well as millions of small businesses.  More and more companies in the technology, media, entertainment, apparel, and food sectors are introducing subscription services.  The overall market is expected to reach $1.5 trillion by the year 2025 – all of which will be processed through subscription billing platforms.

What are Examples of B2C Subscription Billing?

These are all examples of subscription billing. During the purchasing process for a subscription, customers are required to put a payment method on file, such as a credit card. Once a month, during a “billing run,” the customer’s card will be charged, and an email will be sent with an invoice explaining the charges.

What are the Differences between B2C versus B2B Subscription Billing?

Subscription billing isn’t just used in business-to-consumer (B2C) relationships, it is important to B2B relationships as well. The biggest tech companies in the Software-as-a-Service (SaaS) and cloud computing sectors all run subscription or other types of recurring revenue business models. However, it is less common for businesses to use the words “subscription” to describe B2B services. Businesses often use different terms like “contracts” to describe the relationship they establish with customers.

What are Examples of B2B Subscriptions?

These are all examples of subscription billing. During the purchasing process for a subscription, customers are required to put a payment method on file, such as a credit card. Once a month, during a “billing run,” the customer’s card will be charged, and an email will be sent with an invoice explaining the charges.

B2B Subscription Billing Complexities

Why is Subscription Billing Important?

The ultimate goal of any subscription business is to get customers to commit to a recurring billing relationship and for good reason. But regardless of whether the customer is on a monthly plan or annual contract, the billing process is critical as it provides the cash flow to fund operations.

Revenue Collection

Billing provides the cash to fund operations.

In many ways, billing is the heartbeat of a business.  The process of collecting payments from customers provides the cash that is needed to fund day-to-day operations.  Without billing, a company would not have the regular influx of money needed to pay employee salaries, supplier invoices, office rent, or any of the other expenses needed to function.  If a subscription business cannot collect customer payments in a given month, it may not have sufficient funds to operate and will have to raise capital from external investors or financial institutions.

Monetization Strategy

Billing is critical to pricing innovation

Traditionally, subscription businesses have used relatively simple pricing models with fees tied to the number of users or feature set. However, in recent years, entrepreneurs have been introducing more innovative pricing strategies tied to new billing metrics like GB of storage, number of API calls, or the number of hours the product was used. Subscription businesses must have a flexible billing capability that supports different pricing models to remain agile and responsive to changing competitive dynamics. Flexibility is especially important in B2B. Subscription businesses need to support a wide variety of customer preferences for different payment schedules (quarterly, annual), payment channels (cards, ACH), and local currencies (US Dollars, Euro).

Billing Errors Break Customer Relationships

Business leaders often take billing for granted when it is working as expected. However, some subscriptions – especially B2B services – with complex pricing models and multiple product offerings require sophisticated calculations that are sometimes performed erroneously. Billing errors create distrust in customer relationships and cause customer satisfaction issues. Incorrect invoices can also delay new sales opportunities.

Customer Experience

Billing errors impact CSAT and NPS

Billing errors create friction in the customer relationship. If customers identify a billing discrepancy, they will call the subscription provider to complain and initiate a dispute resolution process. Even if the error is corrected quickly and a refund is issued, the customer experience is negative and a sense of distrust has been created. Billing errors have a direct impact on the metrics used to quantify customer satisfaction such as CSAT and net promoter score (NPS). Customers who experience billing errors may be reluctant to participate in auto-pay programs and may switch to “bill me” programs. Others might cancel the subscription altogether.

Customer Growth

Billing errors stall upsells and renewals

Billing errors in B2B relationships lower customer satisfaction and can stall and delay growth initiatives. Disputes about money create an unusually high level of friction in the customer-supplier relationship – especially in larger B2B contracts that are over $100K or $1M in value. If the initial bill a business customer receives does not match the details on the contract or the expectations set during the sales process, the relationship gets off to a rocky start. Contract changes are another common source of billing errors. When upsells, cross-sells, or renewals occur, there are often changes to discount levels, payment schedules, or contract lengths that result in complex, error-prone calculations.

What is Subscription Management?

Subscription Management vs Subscription Billing

You may have heard people talking about “subscription management,” and you may wonder how it differs from subscription billing. Subscription management includes a much broader scope of activities than just billing. Subscription billing is limited to financial processes like invoicing and payments. Subscription management refers to all of the activities across the entire customer lifecycle – from the initial customer acquisition and product adoption to the longer-term retention and expansion of the relationship.

The Subscription Management Lifecycle

1) Acquisition

How does Subscription Billing Work?

1) Enrollment – the Start of the Recurring Billing Relationship

The subscription billing process starts when the customer initially enrolls for the service.  During the registration process, the customer will provide their physical address, which is needed for tax calculations, and their email address, which is needed for invoice delivery.  The customer also will make choices about the specific products and plans they want, which are used to calculate charges.  Elections will be made about the commitment timeframe – monthly pay-as-you-go or an annual subscription, impacting the discount levels and the payment schedule.  Most importantly, customers must enroll in auto-pay or opt to be invoiced and remit payment independently.

Once a customer is enrolled in a subscription, the recurring billing relationship begins.  The customer may be billed only once per year if they opted for an annual plan paid upfront or they may pay in more regular installments throughout the year.  Monthly payments are the most common frequency. 

Once per month, a billing run will be performed which consists of two primary phases – 1) invoice generation and 2) payment collection.

2) Invoice Generation – Calculating the Monthly Charges

The billing engine will determine which customers need to be invoiced each month and then kick off a batch process to generate the bills.  The hardest part is calculating the line item charges, which depend upon the customer’s specific products, pricing, and discount levels.  The line items will be added into a sub-total, and sales taxes will be added if appropriate.  The line items, totals, and taxes are inserted into the customer’s invoice template, and a PDF of the invoice is rendered. 

3) Payment Remittance – Collecting the Subscription Fees

For customers enrolled in auto-pay, the billing system will charge the customer’s credit card or debit their bank account on the appropriate date.  For customers not on auto-pay the customer will need to take action to send the payment by the due date.  The billing system tracks which customers have paid and which have outstanding balances.  A series of dunning communications is sent to customers reminding them of upcoming invoice due dates and, if appropriate, past due payments.

Subscription Changes and Renewals

If the customer changes their subscription, for example, by upgrading or downgrading their services, a new billing cycle will be initiated to determine if additional charges are due.  Upgrades and downgrades create the most complexity in the billing process because charges must be prorated across a month or year.  Renewals can create similar challenges, especially if the customer adds more products or has a scheduled price increase.

What are the Challenges with Subscription Billing?

1) Complex Line Item Calculations

Many subscription providers have simple, straightforward pricing models in which the fees are consistent each month.  However, others have variable pricing that is tied to the number of active users, the volume of data processed, or the length of time the product is used.  Calculating the monthly charges for line items can get really complex, especially for B2B providers which might have multiple different products each with different pricing models.  More complex pricing models increase the probability of calculation errors and inaccurate bills, which frustrate customers.

2) Mid-Contract Subscription Changes

Subscription providers not only want to retain their customers, they want to grow them.  Ideally, a subscription customer’s revenue grows over time as they purchase more of the same product or purchase new, additional products.  Subscription companies have automated marketing campaigns and designated sales teams focused on upsells and cross-sells. Upgrades result in billing changes often involving complex proration calculations requiring manual processing.  These types of billing changes are also highly error-prone.

3) Multi-Channel Payment Collections

Collecting subscription payments can also present challenges, especially for B2B providers.  Business customers often request flexible payment schedule options – monthly, quarterly, semi-annually, or annually.  More payment options result in more billing frequencies.  Businesses also utilize more payment channels.  In addition to paying with credit cards, businesses also remit funds through wire transfers, ACH, and checks.  Tracking the payments collected at many different frequencies through many different channels creates challenges for accounts receivable teams.

4) Failed Payment Transactions

One of the most coveted aspects of the subscription business model is the ability to collect recurring payments from customers automatically.  The auto-pay model simplifies the collection process and creates more predictable cash flows.  However, it doesn’t always work perfectly.  A meaningful percentage of credit card transactions fail because the card has expired, the account has been closed, or the credit limit has been reached.  Subscription providers can automatically retry the payment transaction a few times but often need to involve the customer to resolve the issue.  Sometimes customers do not respond, and the subscription eventually is canceled due to non-payment.

5) Customer Disputes

Subscription billing can be a big negative for customers if they no longer want to use the service or are not expecting to the charges.  A common source of complaints relates to free trials.  Customers will often share a payment method to gain access and then forget to cancel the subscription before the trial expires.  Another common scenarios is auto-renewals.  The customer is unaware of the auto-renewal process or forgets to cancel before the billing process occurs.  In both of these scenarios, the customer may initiate a dispute process with the subscription provider or the credit card company.  Disputes can be time-consuming and may result in a refund or credit to the customer’s account.

Examples of Complex Subscription Billing

Business-to-Consumer (B2C) Example

For example, consider the complexity of subscription billing for a large B2C service like Netflix. Calculating the monthly charges and producing the invoices for a streaming media service is relatively straightforward as there are only a few plans and price points. However, the sheer volume of the bills and payments can be massive. The subscriber base of Netflix is 250,000,000 (250M) consumers, who are spread across dozens of countries with many different currencies and many different tax jurisdictions. Credit cards are the most common channel, but there are many local, country-specific payment methods as well. However, even payments made with credit cards cause challenges when performed on a massive scale. Suppose that 1% of the card transactions Netflix processes each month failed due to a processing error. That would result in over two million failed transactions per month, many of which would need to involve the customer to resolve.

Business-to-Business (B2B) Example

Consider the complexity of subscription billing for a large B2B SaaS company such as Salesforce.com. The company only has 150,000 business customers. That’s a large customer population for B2B, but smaller than many B2C communities. Most Salesforce customers don’t have just one product they need to be billed for, but two or three that are being used to enable their sales, marketing, and support teams. Most of Salesforce core products are priced on a per-user, per-month basis. As teams expand and contract, customers will scale up or down their user count creating lots of billing adjustments. Billing frequencies vary as well. Some accounts pay once per year, while others have installment plans paying monthly, quarterly, or semi-annually. Also noteworthy is that Salesforce has performed numerous acquisitions over the past few years and has multiple billing systems. Billing for subscriptions to Slack, Tableau, and MuleSoft may be generated from separate systems from the other products.

What is Subscription Billing Software?

Small businesses with a handful of subscribers can generate invoices in a word process or spreadsheet each month. However, any subscription business operating at scale will need a technology solution to bill hundreds, thousands, or millions of customers at a regular frequency. Starting in the 2000s, a specialized group of subscription billing software vendors began to emerge in the market with features designed for the unique challenges of recurring revenue businesses.

Features of Subscription Billing Software

The capabilities of subscription billing software applications vary, but some common features include:

Ordway offers subscription billing software that calculates line items and sales taxes, manages payments and collections, customer communications and dunning.

Differences between Subscription Billing Software

There are dozens of subscription billing software applications on the market.  Understanding the differences between the vendors can be challenging.  A few key differences between providers include:

Integrations with Other Applications

One of the most important features of subscription billing software is the ability to communicate with other business applications.  Some of the most common applications that billing systems integrate with include:

Learn more about the various applications that can be connected to a subscription billing system.