Nature of Recurring Billing
Recurring billing, or subscription billing, is the cyclical process in which a client gets charged automatically for having access to a particular commodity for a period of time.
The underlined words define the essence of the term.
- It's cyclical, ie charging occurs more than once, at even intervals.
- It's automatic, happening without any action on the client's side after the first payment.
- It is done in return for access. It is enough that the client has entered in agreement with the vendor and the commodity is made accessible; if it is actually used is irrelevant. The access itself is commonly referred to as a service. One may have access to a rented car (product) or an online banking dashboard (service), in either case case the access is the service subject to billing.
- The billing period is the unit for which price is defined – a day, a month, anything that makes sense.
In the software industry recording billing is often associated with SaaS (software as a service). It is not impossible to implement for downloadable software products, especially ones that use a live internet connection and are updated automatically, but the risk of hacking and piracy is much greater with downloadable software. Below we are looking at the pros and cons of recurring billing versus a one-time payment with unlimited use.
Recurring Billing vs. Single Payment
From a vendor's perspective:
Implementation and cost
- A single payment is easier to process and less expensive.
- Recurring billing is generally thought to drive more revenue than one-time billing. This can be explained with:
- The greater variety of service plans that can be offered. More choice and more flexible payment options mean more paying customers.
- Automation. As soon as one cycle ends, the next one is being charged for, no gap in between.
Cash flow and analytics
- Subscriptions lead to better distributed and more easily predictable cash flow. The shorter the cycles, the more accurate the stats about usage and payments.
- On the other hand, single payments generate a larger sum of cash upfront.
- If not implemented correctly, subscriptions provide short-term access to valuable resources (like an online database, for example) which can be exploited to a great extent by some consumers even before the end of the first billing cycle. Contrary to this, an unlimited plan has all risk covered in the price.
- The buyer's service expectations become elevated. They tend to think "if I'm continuing to pay you then I expect a continously high level of service and support".
- Subscription billing tend to increase consumer discontent. There is always a portion of subscribers who consider the practice unethical, even illegal, and these subscribers often managing to make noise and undermine the vendor's reputation.
From a consumer's perspective:
- Subscriptions are more cost-effective in the short-term. One can use the service for 5 months and when it is no longer needed, the subscription can be canceled. Much better than paying for an unlimited plan. There is, of course, a cross-over point at which the sum total of the subscription payments exceed the upfront cost of a one-time payment.
- In today's world, end-user agreements are ubiquitous and overwhelming and consumers sometimes do not realize they have agreed to pay on a recurring basis. Even if they know about the billing method, they may forget to unsubscribe after they stop using the service. This can lead to ill-will and lower a vendor's customer satisfaction ratings.