Everything You Need To Know About Subscription Billing for 2024

Did you know that in the last decade, subscription-based businesses have grown 4.6x faster than the S&P 500?

Even though subscription billing is already widely popular among companies, we have just scratched the surface with this rapidly developing business model.

And considering that this industry is projected to reach $1.5 trillion by the end of 2025, understanding how it works is crucial if you want to stay competitive in the hectic business landscape.

In this article, we’ll help you do just that.

We covered everything you need to know about subscription billing – what it is, how it works, its advantages, which types of models exist, and even check out some of the best subscription billing software on today’s market.

Let’s dive in.

What Is a Subscription?

Subscription is an arrangement between a customer and a business where the customer pays a recurring billing fee at regular intervals in exchange for ongoing access to a product or service.

They date back to the 1980s when people used to subscribe to monthly issues of magazines or newspapers, but have evolved greatly beyond that in the last two decades.

Nowadays, they come in the form of streaming services like Netflix and Spotify, Software (SaaS) platforms, ecommerce products, and physical goods like meal kits and beauty boxes.

What Is Subscription Billing?

Subscription billing refers to the process of managing and collecting payments from customers who are subscribed to a recurring product or service.

There’s a wide range of industries that implement a subscription-based business model, but some of the sectors where it’s most commonly used include SaaS, streaming services, membership-based organizations, publishing companies, ecommerce businesses, and more. SaaS billing is particularly on the rise, with 80% of SaaS startups implementing a subscription-based billing business model.

How Does Subscription Billing Work?

Subscription billing follows a specific workflow that outlines how customers are billed for their recurring subscriptions.

And while the exact process may vary depending on your specific subscription billing software, here are the steps that are generally involved:

• Customer setup: The subscription billing process begins when a customer signs up for a subscription-based service. This usually involves providing payment information, selecting a subscription plan, and agreeing to the terms and conditions.
• Billing period: Once the customer is subscribed, the billing period comes into play. The billing period determines how often customers are billed – usually, it’s annually, quarterly, or monthly billing system.
• Invoicing and payment collection: At the start of each billing period, the subscription system generates an invoice for the customer. A SaaS invoice includes details like the subscription fee, any applicable taxes or fees, and the due date.
• Payment processing: After receiving the invoice, the SaaS billing system processes the payment. This involves charging the customer’s chosen payment method, such as a credit card or bank account.
• Automatic renewal: To ensure uninterrupted access to the product, many subscription models include automatic renewal. This means that unless the customer cancels their subscription, it will automatically renew at the end of each billing period.
• Subscription changes: Throughout the subscription period, customers may subscriptionswant to make changes to their subscription plans. This could include upgrading or downgrading their plans, adding or removing features, or adjusting billing details. SaaS billing solutions often provide self-service options to manage these changes easily.
• Dunning and failed payments: In cases where payment fails, subscription billing systems employ dunning mechanisms. For example, these mechanisms automatically send notifications to customers, informing them about the failed payment.
• Cancellations: Customers may decide to cancel their subscriptions at any time and businesses should have clear cancellation processes in place that allow them to easily opt out.

To handle all these complexities of subscription billing, businesses need a robust recurring billing system in place.

Subscription Billing Platforms List

Even though it’s technically possible to manage billing subscriptions manually, the amount of time and labor it would take just isn’t worth it.

Instead, you should go with a robust subscription billing platform to handle the complex processes for you.

And with the subscription and billing management industry projected to reach $10.5 billion by 2025, there’s no shortage of SaaS subscription billing solutions on the market.

But what is the best subscription billing platform?

Here’s a list of some of the top software for subscription billing you’ll find on the market today:

Subscription Billing Challenges

Even though subscription billing brings a long list of advantages to the table, there are some challenges associated with it that you should know about.

Software & Saas: Unlocking Its Full Potential

You acknowledge having read our privacy policy by clicking on the button above.

Here are some of the most common subscription billing challenges:

• Payment failures: Payment failures occur when customers’ payments are declined or unable to be processed for whatever reason. Managing payment failures can be a big issue, as businesses need to implement effective dunning processes to notify customers, collect outstanding payments, and minimize this type of churn.
• Finding the right pricing strategy: Determining the right pricing strategy for subscription offers isn’t easy. Businesses need to strike a balance between customer value, market demand, profitability, and competition. Choosing the appropriate monetization model, such as flat-rate pricing, usage-based pricing, or tiered plans, requires careful evaluation of customer preferences and market dynamics.
• Subscriber churn: If you run a subscription business model, you need to be prepared for handling customer churn. High churn rates significantly impact a business’s overall revenue. Identifying the reasons behind churn, improving the overall customer experience, providing personalized offerings, and addressing prospect needs can help mitigate the issue. Keep in mind that the average annual subscription churn rate is 5-7%.  

Keep in mind that no matter what business model you use, you’re bound to face some challenges with it.

That’s why you need to assess whether the benefits of that model outweigh the challenges, and in the case of subscription billing, the answer is usually “yes”. That is, if you follow SaaS billing best practices.

Subscription Billing Benefits

There are numerous reasons why subscription billing is the go-to pricing approach for so many businesses.

Let’s go through some of the main benefits this billing model brings to the table:

• Predictable revenue stream: Subscription billing provides businesses with a predictable revenue stream. Instead of relying on one-time purchases, businesses can generate ongoing revenue from loyal customers, which allows for better financial planning and helps maintain stability and growth.
• Fosters customer retention and loyalty: By continuously providing a convenient experience, businesses can build long-term relationships with their customers and foster loyalty. Also, subscription businesses have more opportunities to get to know their customers better, which means they can develop more personalized offers to get them to stick around.
• Reduced customer acquisition costs: Subscription models often lead to reduced customer acquisition costs compared to traditional models. By focusing on customer retention and maximizing customer lifetime value, businesses can allocate resources more efficiently. Satisfied subscribers are also more likely to refer others, which means you can also spend less on costly acquisition channels. Notably, acquiring new customers is 5x more expensive than retaining existing ones.
• Scalability and business growth: As the subscriber base grows, revenue scales accordingly, allowing businesses to expand their offerings. With proper infrastructure and systems in place, businesses can smoothly handle increased subscription volumes, ensuring more recurring revenue.
• Better upsell opportunities: The longer customers stick around, the better you get to know them. You’ll have sufficient data on their usage patterns and preferences that you can use to create better and more personalized upsells.

Different Types of Subscription Billing Models

There are various forms of subscription billing models, with each one offering a unique pricing structure and value proposition.

When choosing a model for your own business, you have to take your specific industry and business model into consideration as there’s no one-size-fits-all solution.

Here are the main types of subscription billing models:

Freemium Model

The freemium model offers a basic version of the product or service for free, enticing users to upgrade to a premium version if they want to get additional features or enhanced functionality.

With the free plan, businesses can prove their value and acquire a large user base, and then monetize it by upselling premium subscriptions.

The main disadvantage of the freemium model is if the free features and capabilities already cover the customer’s needs, leaving them with no reason to upgrade to a premium plan.

Some popular examples of companies that offer freemium plans include Dropbox, Spotify, and Canva.

Tiered Fixed Fee Model

In the tiered fixed fee model, businesses offer different subscription tiers at fixed prices, each with varying features and benefits. Customers can choose the tier that best aligns with their needs and budget.

Typically, higher-tier subscriptions will offer more advanced functionality, such as increased storage capacity, priority support, or access to exclusive content.

Popular examples of this model are Salesforce and HubSpot.

Pay-As-You-Go Model

The pay-as-you-go model involves charging customers based on their actual usage or consumption of the product or service. It’s also known as consumption-based or usage-based billing.

Customers are billed only for the resources they use, measured in specific units such as hours, data usage, or transactions.

This model offers customers flexibility and cost control and it’s commonly seen in cloud computing services, telecommunications, utilities, and other industries where usage varies significantly.

Companies that use this model include Amazon Web Services (AWS) and Microsoft Azure.

Fixed Price Model

In the fixed price model, customers pay a consistent, predetermined amount for their subscription at regular intervals. Regardless of their level of usage, the price remains the same.

This model provides simplicity and predictability for both businesses and customers.

It’s often used for subscriptions where the value remains constant regardless of usage, such as digital media streaming services or membership-based platforms.

Netflix is one of the bigger businesses that implement this model.

Overage Model

The overage model involves charging customers for additional usage when they exceed predefined limits.

Businesses set specific thresholds and usage limits, and if customers go beyond them, they incur additional charges.

For example, a SaaS subscription billing company might charge extra when a customer surpasses a certain number of users or data storage capacity.

The overage model allows businesses to align pricing with usage and generate additional revenue from customers who require more resources.

One popular company that utilizes the overage model is Twilio.

Custom Model

The custom model is the most flexible subscription model and it’s tailored to meet specific customer requirements.

Businesses work closely with customers to create a subscription plan that aligns with their individual needs, offering personalized pricing, features, or service-level agreements (SLAs).

This model is often used in enterprise software or service-based industries where customers have unique demands and require a more bespoke solution.

With the custom model, clients can basically mix and match the features they need the most and build their own subscription plan.

Hybrid Model

The hybrid model combines elements of different subscription billing models to provide more flexibility and diversity in offerings.

For example, a subscription plan may include both fixed pricing and pay-as-you-go options, allowing customers to choose the most suitable payment structure based on their usage patterns or needs.

Hybrid models are designed to cater to a broader customer base and offer more pricing options to accommodate varying preferences.

Subscription Billing Best Practices

To effectively manage subscription billing, businesses need to know and adopt the industry best practices.

Here are some of the main ones you should be familiar with:

• Clearly communicate pricing and terms: Transparency is crucial in subscription billing. Clearly communicate the pricing structure, recurring charges, billing frequency, and any additional fees or taxes to customers upfront. Avoid hidden costs or surprises that may lead to customer dissatisfaction or disputes.
• Offer flexibility to customers: Provide customers with a range of subscription options, so they can choose which best aligns with their needs and budget. Flexibility in subscription options enhances customer satisfaction and improves conversion rates. In fact, 86% of customers would rather consider a flexible, new subscription offer than cancel a subscription altogether.
• Simplify the onboarding process: Make the subscription sign-up and onboarding processes as seamless as possible. Minimize friction points by reducing the number of steps, simplifying form fields, and providing clear instructions.
• Optimize dunning and churn management: Develop effective dunning processes to swiftly address payment failures and minimize churn. Add automated notifications and reminders to notify customers of failed payments and provide them with opportunities to update payment details.

Continuously monitor and analyze metrics: Regularly monitor key subscription metrics such as churn rate, customer lifetime value (CLV), average revenue per user (ARPU), and renewal rates. Use analytics to gain insights into customer behavior, identify trends, and make data-driven decisions. Analyzing these metrics helps optimize pricing, identify customer segments with high churn risk, and refine subscription offerings.

How To Do Billing?

The best way to manage your complex SaaS billing processes is to implement a robust subscription billing platform.

Doing it manually simply isn’t sustainable in the long run, especially if your business is experiencing continuous growth and rapidly expanding its customer base.

When looking for a suitable billing platform, make sure it aligns with your business requirements, scalability, and integration capabilities. It’s important to consider factors such as ease of use, customization options, security features, and customer support.

That said, here’s a general outline of how businesses should manage billing:

• Set up products and pricing: Once you select a subscription billing software, you need to then configure your products or services within the system. Define the pricing tiers, features, billing cycles, and any applicable discounts or promotions. Ensure that the software allows you to easily create and modify subscription plans to accommodate different customer preferences.
• Configure billing cycles and terms: Determine the billing frequency (monthly, annually, etc.) and billing terms (prepaid, postpaid, etc.) for your subscriptions. Next, set up the billing cycles and intervals within the software to align with your pricing structure. This ensures that customers are billed accurately and consistently based on their chosen subscription plan.
• Integrate payment gateways: Integrate payment gateways to enable seamless online payments. Select reputable payment processors that support various payment methods, and currencies, and offer robust security measures to protect sensitive customer information.
• Automate invoicing and notifications: Leverage the automation capabilities of your billing software to generate and deliver invoices to customers automatically. Customize your subscription invoice templates with your brand elements and include all relevant billing details. Set up email notifications to inform customers about upcoming renewals, payment confirmations, and failed payment reminders.

Enable self-service customer portals: Add self-service customer portals within your subscription billing software. These portals allow customers to manage their subscriptions, update payment information, view billing history, and make changes to their plans. Self-service portals improve customer satisfaction by providing convenience and reducing the need for manual intervention.

Subscription Billing Software vs. Building Your Own Subscription Billing Platform

Implementing existing subscription billing software is generally the most popular approach to handling subscription billing.

However, there are some companies that consider building their own platforms instead.

While this approach might have some advantages, the risks and challenges heavily outweigh these benefits.

Here are some of the main reasons why it’s better to use an existing subscription billing software instead of building your own platform:

• You need to constantly make new modifications: Subscription billing is a dynamic environment and every time your system needs to be updated, you need to manually make new additions to the software. These modifications can include updating billing cycles, changing upsells and cross-sells, adding new subscriptions and payment methods, etc.
• Building a platform takes a toll on your schedule: Creating any kind of software from scratch is time-consuming, but this is especially the case with billing systems for SaaS that have some of the most complex algorithms and coding requirements. If you haven’t planned this process on time, building software can put your business on hold for several months.
• Building software is expensive: Not only is it time-consuming, but building subscription software can also get very expensive. Some of the biggest costs are related to upfront development, hiring the right talent, maintenance, and testing the platform until it meets the necessary requirements.
• Security concerns: If you’re building your own platform, it means you’re also handling all the security concerns. You need to use the latest firewalls and have a team that will stay on top of all the new patches and changing regulations.

Overall, using an existing subscription billing software is a much better option – it’s more affordable, less time-consuming, and you don’t have to worry about things like maintenance, security, and adding new upgrades.

Find a Reliable Subscription Billing Software Solution

If you plan on including subscription billing in your business, it’s crucial that you also find the appropriate billing software to manage your complex systems and processes.

In this post, we showed you how subscription billing works, what benefits it brings, which best practices to keep in mind, went over the different models, and explained how to actually do billing.

All that’s left is to find your perfect subscription billing software fit.

Ready to get started?

Learn how your business can thrive with Tridens Monetization for Software & SaaS.

Schedule a Demo