So many businesses could benefit from a subscription model as a way to provide their products and services. It’s a great way to build recurring revenue into your business but how often should you ask for payments?
We’ve been exploring subscription models lately. We are highlighting subscriptions right now because they just make a lot of sense for so many types of businesses. When executed well, inviting your biggest fans to subscribe and receive your product or service can be a powerful driver of recurring revenue. In a recent article, I looked at how pricing in tiers helps you reach customers at multiple price-points. Tiered pricing allows you to reach more people while you target the niche that would be most likely to purchase at that tier.
One big decision when it comes to setting up a subscription model is recurring payments and just how often should people pay? Predictable, recurring payments are the beauty of the system and the question of when those payments should come in is totally a business decision based on what makes sense for your market.
For some business sectors, there might be rules and expected practices within an industry that dictates when and how recurring payments occur. In the financial services industry, there are rules about how much clients can be charged per year. For example, when regulators take a look at us, it can look like you are holding clients’ money if you hold more than $500 over a 6 month period of time. So we couldn’t utilize an annual subscription of $1,000 because if we get it all at once, that’s over $500 in a six month period.
What’s Right for Your Business?
Previously, I used Fab Fit Fun as an example of a subscription model. Fab Fit Fun offers boxes filled with curated items on a quarterly basis. So for them, a monthly subscription model doesn’t make sense. For media services like Hulu, Spotify, and Netflix, a monthly fee makes a lot of sense, but if you are offering something quarterly or on some other unique schedule it might be more of a challenge to get subscribers to pony up more frequently.
So, yes, offering your product or service for a monthly payment is a popular subscription model. The downside of this payment schedule is that there is more potential for problems and frustrations with billing, managing canceled credit cards, and just basic attrition as people decide to stop using what you are selling. On the plus side, monthly payments give you a lot of what you are looking for in a subscription model: regular, recurring revenue. It’s helpful operationally to have this regular income for payroll, utilities, and other regular costs that are due monthly. So, while collection can get somewhat more complicated, the steady month-to-month cash flow makes the idea of monthly payments very attractive.
Charging one annual fee can be effective for a premium service. An annual premium price can create emotional buy-in and commitment via financial skin in the game for subscribers. It also alleviates the concern about changing bank or credit card information from subscribers. And while it’s great that you get all that money upfront, the downside is that you need to plan and budget that money to last 12 months, while fulfilling the subscription agreement for the whole year. Another challenge is that life happens – sometimes people have unforeseen circumstances and they can’t finish a full year commitment. Will you offer or honor a requested refund?
Whether you decide to bill for a subscription monthly, quarterly, or yearly, understanding the pros and cons can help you put systems in place to avoid problems.
Now it’s your turn. Have you started a subscription service? I’d love to hear about your billing cycle and how that is going so far. Or if you have questions I didn’t cover here, let us know. We are here to help!