Subscription Billing Explained: A Guide For SaaS Businesses

Expected to reach $1.5 trillion by 2025, recurring payments are the preferred billing choice for most eCommerce brands. While revolutionary, recurring billing is not without its challenges.

Key Takeaways

• Subscription billing complexities are growth killers. Managing diverse pricing models, international payments, and churn can easily hinder expansion and success.
• A comprehensive recurring billing solution is how you remain competitive within this dynamic landscape and maintain your focus on your product rather than operational difficulties.
• The right recurring billing partner is the one that goes beyond straightforward subscription management, offering additional features to support your SaaS’s global growth.

59% of subscription companies encounter significant customer friction due to billing misunderstandings, whereas 32% of them have technical issues when introducing new pricing plans leading to time-to-market delays.
So, yes, even though the subscription billing model can ensure SaaS business growth, its complexities can often leave businesses uncertain and puzzled.

In this article, you’ll get a thorough understanding of recurring billing management by looking at:

• What is Subscription Billing?
• Subscription Billing Models
• 5 Subscription Billing Challenges
• Why Use Subscription Billing Software?
• How To Choose The Right Recurring Billing Platform
• Is The Merchant of Record a Solution?

What is Subscription Billing?

Subscription billing is a comprehensive business approach where customers are charged on a regular basis be it monthly, annually, or other predefined intervals for products or services.

How Does Subscription Billing Work?

With the recurring payment model, customers receive invoices at set intervals, and they can:

Manually submit orders through different payment methods each time.

Allow their payment information to be kept on file and used on a recurring basis.

Considering how subscription billing works, it’s important to clarify that it includes several fundamental aspects:

• Triggering billing cycles
• Invoice delivery
• Payment collection
• Subscription management

Subscription Billing Pricing Models

One of the key features of the recurring billing model is its flexibility. Because you can offer different pricing models and packages, you can better cater to various customer preferences and ultimately increase your recurring revenue potential.

Here’s a rundown of the most popular subscription models:

Flat Rate Pricing

This is the most straightforward pricing model, and it is an excellent option for subscription businesses with a clear value proposition and target audience.

When opting for fixed billing, your customers pay the same price on a recurring basis for access to your product. Through a single price point, SaaS brands are simplifying the customer’s decision-making process.

Tiered Pricing

Unlike the previous model, this is a flexible pricing strategy where subscription-based businesses offer several price points to their targeted clients. These are known as tiers, and they differ based on different criteria, such as usage, users, or features.

Tiered pricing’s major benefit is that brands can target different market segments by responding to multiple needs and requirements. Additionally, with gradual increases, multiple ters allow for cross-selling and upselling opportunities.

Per-User Model

Common in the world of B2B and SaaS products, the per-user model billing logic hinges on the number of users who access the platform. The more users, the higher the price, of course.

What is most useful about this billing option is that it offers flexibility and predictability to both the merchant and the customer. It provides multiple subscription plans allowing the user the ability to meet their business needs.

Usage Based Model

Employed mostly in industries like telecommunications, and cloud computing, usage-based monetization is also successfully applied for SaaS brands.

In this context, the client is charged based on their product usage.
But here is the thing. You can apply this model in the traditional manner, calculating usage and billing accordingly or you have the option to use a hybrid option.

In this variation, you can set up thresholds with a flat price. Once those thresholds are exceeded, different fees are then applied.

Freemium Model

One of the stars of subscription marketing strategies, called freemium, is a popular choice for SaaS businesses.

Freemium pricing provides interested users with access to a product version with limited functionality at no cost. The intention is to convince them to upgrade to a paid tier and enjoy the full power of the app for a price.

However, you mustn’t confuse free trials with freemium. While they are both solid strategies for attracting and upgrading customers, they differ in approach.

Free trials have limited time access and a greater urgency to convert, whereas the freemium model can be used over prolonged periods of time.

5 Subscription Billing Challenges

Unadaptable Billing Structure

The subscription-based business model offers significant advantages in flexibility for both users and brands, driving faster business growth, enhanced customer relationships, and increased revenue.

However, without a scalable billing infrastructure, these benefits become unattainable.

As your SaaS expands, managing new customers, pricing changes, subscription updates, and international expansion all introduce complexity. Factors such as compliance regulations, automated tax calculations, and multi-currency payments add to the challenge.

And on top of that, you need to move fast because successful business scalability is a time-sensitive matter.

Keep this in mind: a growing business will eventually outgrow an outdated subscription management platform.

Insufficient Operational Insight

SaaS metrics are very much like success compasses. Follow the right one, and you’re bound to reach your destination (eventually).

Churn, MRR, ARR, or ACV, are just a few examples of what subscription companies should be tracking if you wish to answer critical questions like:

• Is my SaaS business profitable?
• Am I offering sufficient payment methods?
• What’s the strongest product functionality?
• Is my pricing strategy done right?
• Why am I losing my subscribers?

Detailed SaaS analytics is essential for obtaining actionable insights and identifying growth opportunities. However, an outdated and unstable subscription billing system acts as a roadblock, hindering your gathering of this crucial data.

Systematic Revenue Loss

Subscription products face a persistent challenge: revenue loss due to failed payments and involuntary churn.

Whether it’s expired cards, insufficient funds, or bank errors, failed payments occur. This is part of how the world of eCommerce functions. The danger is the domino effect triggered by these lost transactions, further amplifying involuntary churn.

Additionally, with involuntary churn being a massive part of churn in general, your subscription channel could end up bleeding revenue.

Of course, there is a solution, multiple, if we’re being honest. Automated retries, backup payment methods, dunning management, and smart payment routing all qualify as effective revenue recovery best practices.

However, only a modern subscription billing platform will have these necessary features.

Growing Invoicing Complexity

Subscription brands thrive on recurring revenue, but managing invoices is a major headache as your customer base and product catalog grow.

Offering multiple pricing plans, discounts, and promotions, being able to collect payments on a global scale, switching to different monetization strategies, and handling prorated billing all introduce increased complexity.

As a result, this leads to time-consuming manual work leaving room for greater error risk and potential revenue loss.

Without joining forces with a fully-featured, comprehensive subscription billing system, this challenge will not be completely overcome, and in time, it will undoubtedly contribute to a growing churn rate.

Increased Tax Burden

Business growth requires greater attention to ever-changing tax regulations, especially if you are considering expanding your SaaS operation overseas.

With each region having specific taxation rules and regulations, billing existing customers, registering, collecting, and filing the right amount of tax in every country becomes a complicated process.

Without establishing solid partnerships with subscription billing systems with the required features to handle these complexities, e-commerce developers might find it difficult to achieve long-term success.