With the maturation of SaaS products, digital content paywalls and downloadable software products, there is even more demand for improved multi-period subscription billing. Straight forward subscription billing is an accepted practice for legacy products, like newspapers, magazines and cable TV, but many online sellers have been slow to adopt subscription billing models for their own digital products.
A common fear among digital vendors is that many customers hesitate to enter into a contract where they are re-billed on a pre-defined schedule. These fears are certainly valid, making it even more important to understand the different options you have when selling your products on a subscription basis. Of course each option has pros and cons. So rather than forcing a rushed subscription billing implementation, you should study the available options so you can choose the right subscription model for your business.
There are two traditional models for customer renewals: automatic and manual. Subtle differences exist within each of these models, but the automatic vs. manual rebilling process is the fundamental difference to focus on.
Automatic Subscription Renewal
The most commonly implemented option occurs when a customer provides payment information, receives the product and is billed again at fixed dates in the future. As long as the customer pays the bill, he will have access to the product. Typical examples of this renewal type are monthly cable TV bills, annual anti-virus definitions and per-gigabyte data storage fees. Because customers are familiar with what the billing amount will be, they are typically OK with automatic payment.
Manual Subscription Renewal
A less-popular option occurs when the customer is not billed again in the future unless he willingly agrees to the charge. This method often requires the customer to re-enter payment information – but could also leverage previously submitted payment information and require the press of just one button. A good example of this type of subscription is a utility bill. You definitely want electricity and natural gas, but you generally choose to complete payment manually each month because you want to see and approve the amount before paying.
Consumers are familiar with subscriptions that have automatic billing, but are also more likely to complain publicly if they are upset with the way that companies go about implementing automatic subscription renewals. Check out these examples of complaints about BitDefender‘s automatic renewal practices. This is not unique to BitDefender, and often is a function of how obvious the selling entity notifies the customer at the time of purchase about future charges.
The pros for the automatic subscription renewal should be fairly obvious:
- Continues until canceled by customer
- Doesn’t require manual intervention by marketer
- Increased conversion rates because valid billing information was already captured
- Incremental costs are minimized because the product was already delivered successfully
For all of these reasons, companies love an automatic recurring subscription. The typical renewal rates for a monthly automatic subscription are in the 90+ percent range. For annual cycles, the number drops into the 80s because of expiring credit cards and accounts.
However, as automatic recurring subscriptions apply to online products, there are quite a few drawbacks that companies need to balance as well:
- Increased refunds and chargebacks because of customer forgetfulness and deceitful marketing tactics
- Increased customer contacts to support inquiring about credit card charge or account debit
- Offline payment methods, like wire transfers, require customer action, so you will have to send reminders via e-mail
- Negative SEO and social media messages from backlash
Before making a decision for or against the automatic renewal process, consider the pros and cons for a manual subscription renewal. The pros are:
- Low levels of customer complaints, refunds, chargebacks because of advanced renewal notice
- Ability to increase conversion rates by optimizing your marketing message
- Additional marketing opportunities while communicating about original purchase billing cycle
- Receive real market feedback about product pricing/positioning by testing renewal efforts
- Adjust renewal price when re-marketing to customers to increase conversion rates
Companies skilled in e-mail marketing or concerned about reputation find the outlined pros listed above pretty attractive. However, there are serious cons that need consideration as well:
- Conversion rates are substantially lower than automated methods
- Requires high manual efforts to execute renewal marketing messages
- You need to provide a new purchase order for each subsequent billing event
It may help to think of these options outside the realm of digital goods. For example, when setting up a new e-bill payee in your bank account, the vendor presents your bill within your online banking interface, then you choose between automatically paying the entire amount or manually approving the payment amount each month.
I certainly don’t want a utility company to automatically withdraw from my account each month in case there is a mistake. So in that case, I am willing to go in each month and approve the amount paid to the utility. However, I know my mortgage payment will be about the same each month so I’d prefer to have that payment automatically deduced from my account.
Taking this concept to the next level, if your rebilling event is a shorter time frame such as monthly, an automatic subscription is likely to be better since both you and the consumer won’t want to deal with manually approving a payment each month. This applies to many SaaS products. However, if the time frame is longer, like six months or a year, then the manual renewal may be best to reduce the complaints about automatic charges. This can apply to anti-virus and anti-malware software products.
Whichever way you choose to go, carefully consider the buying behavior of your customers. As the attitudes of online shoppers evolve, you may find even more opportunities in the area of automatic or manual subscription billing.
Keystone
Automatic subscription renewal is the default choice of many companies looking to capture subscription revenue online. However, you should look at all the options out there and choose a renewal process based on your customers buying habits.
Great article. I have been involved with the transition from a manual renewal model to an auto-renewal model with a major security software vendor and the long-term financial benefits can be significant. Typically you will experience a lower initial conversion rate, but once the auto-renewals start kicking in, you can see significant year-over-year renewal revenue growth.
Two important points that I learned the hard way:
1. Auto-renewal acceptance varies greatly by country & industry, so do your research.
2. Communication is key. Emailing your customers before the auto-renewal occurs with a clear explanation or what is about to happen & how to unsubscribe from the auto-renewal process will help to maintain overall customer satisfaction.
Hi Jamie,
Thanks for the comments. You definitely hit the nail on the head about communication. With the advent of social media, the risk of being trashed in public and ruining your reputation is something that seems like too great a risk to me, but every company has to make their own decision.
cheers,
craig.
Good article, but I think the yearly renewal rates you’re mentioning are a bit.. unrealistic – just for the same reasons you mentioned in one of your paragraphs (“However, as automatic recurring s…”.
Typically the rates are between 35% and 65% based on the product price, online payment method selected, product demand and target market – like Jamison said.
Thanks for the comment. It does depend a bit on the time frame that one looks at. For an annual subscription, I agree that 90% is a nearly perfect result. On the other hand, for a monthly subscription payment, like for SaaS products, 90% isn’t that unrealistic. Of course, with a monthly subscription, churn (the number of people that unsubscribe each month) grows as time goes by so if the product isn’t quality, even that 90% renewal number won’t keep revenue rising as time goes on.
cheers,
craig.
Always a good read Craig and I think that if you leave it up to the customer around “auto” or “manual” then the company will experience success all the way around.
We are in the process of moving our “manual” subscription model to a SaaS model and so far the beta clients love the idea of opting in to any type of payment method supported on the Cazoomi Sync App platform.
Thanks for all the great reads here that have guided us to navigate the murky waters of subscriptions.
When you are in SF again ping me again.
Enjoy the weekend:)
~Clint
@cazoomi
Hi Clint,
Thanks for the information about your process of moving to a manual subscription model. Keep us posted as things become more firm.
I’ll definitely contact you during my next trip or two. Thanks for being a loyal reader.
cheers,
craig.