Subscription billing is an increasingly popular way for online merchants to get paid by their customers – and for many good reasons. Subscription-based and recurring payment models provide tremendous growth opportunities, including boosted sales, more predictable income streams, deeper insight into consumer tastes, and higher customer retention.
And studies show the trend is here to stay. The global subscription ecommerce market is expected to reach $2.6 trillion by 2025, with a projected annual growth rate of 72% from 2021-2028. With more than half of online shoppers reporting at least one active subscription, consumers are embracing recurring billing in their everyday lives for both basic needs and indulgences.
To remain competitive, businesses must consider convenient payment models that suit their shoppers’ evolving habits. For many online merchants, this means implementing the right technology to support subscriptions and recurring payments in addition to traditional, one-time transactions.
In this article, we’ll explore three ways subscription-based products and services help businesses grow – Revenue, Retention, and Relationships – and how the right recurring payment software can help.
- Revenue – Generate more sales and increase average order value
- Retention – Keep existing customers away from the competition and increase their lifetime value
- Relationships – Deepen the knowledge of buyer preferences to identify trends and capitalize on marketing opportunities
What is a Subscription-Based or Recurring Payment Model?
Before we dive into the benefits of subscription billing, let’s first define the term.
A subscription-based or recurring payment model is one where customers pay for a product or service on a regular interval — such as weekly, monthly, quarterly, or annually.
The income a business earns from these regular payments is called “recurring revenue,” also known as “recurring income” or “recurring profit.” The sum of all subscription revenue is typically expressed as a monthly value, Monthly Recurring Revenue (MRR), or an annual value, Annual Recurring Revenue (ARR).
For example, let’s say a business has 100 customers subscribed to a delivery service priced at $40/month; from this, it can expect a monthly recurring revenue of $4,000. Using this same example, we can calculate an annual recurring revenue of $48,000 ($4,000 per month x 12 months).
Types of Subscription-Based Products and Services
McKinsey categorizes subscription types into three broad categories: Replenishment, Curation, and Access.
| Subscription Type | Definition | Examples |
|---|---|---|
| Replenishment | Pre-selected goods or services delivered to the customer on a set schedule | Amazon Subscribe & Save, Dollar Shave Club, Madison Reed |
| Curation | A varied or surprise selection of items, curated by the merchant | Ipsy, Stitch Fix, BarkBox |
| Access | Membership or exclusive access to a set of benefits/perks | Amazon Prime, SiriusXM, Wall Street Journal |
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Now that we’ve tackled the “what,” let’s discuss how ecommerce companies use subscription billing and recurring payment models to yield bottom-line results.
Why Do Ecommerce Businesses Choose Subscription Billing?
Revenue: Grow, Scale, and Manage Sales Better
An ecommerce business has to be growing to be successful — this means constantly seeking new and varied ways to keep revenues strong amid increased competition and seasonal sales fluctuations.
When selling on a subscription-based or recurring payment model, a merchant provides its customers flexibility to purchase products in a way that makes sense for their budget and lifestyle – making what the business offers even more attractive.
With a recurring payment model in place, businesses can predict monthly recurring revenue (MRR) and annual recurring revenue (ARR) streams more precisely than with a single payment model. Planning for costs, inventory, supplies, or labor hours also becomes easier when revenue is more predictable.
Further detailed below, merchants can also up-sell and cross-sell more effectively by implementing a recurring payment system. Because customers are actively making regular payments instead of being charged once at checkout, they have a more vested interest in what the business offers.
Retention: Keep Customers Longer and Make Them More Profitable
Smart retention strategies keep customers away from the competition and within your company’s marketing ecosystem.
A study done by Wharton Research shows that customers enrolled in recurring billing typically keep using a service 10% longer than non-recurring buyers. One year after purchase, almost half of those enrolled in recurring billing still used their service and only 15% had canceled (compared to 30% of non-recurring members).
And when it comes to generating more sales, retention pays off, with loyal customers generating more revenue each year they stay with a company.
The probability of making a sale to a new customer is only 5%-20%. For a returning customer, that probability jumps to 60%-70%.Customer Research Institute
What does this mean for businesses? Improving customer retention by just 5% can lead to an increase in profits by 25% – 95%.
The bottom line: having the attention and trust of existing customers makes them less likely to leave and more willing to buy.
Relationships: Understand, Engage, and Improve Marketing Efforts
With less friction and fewer payment distractions, businesses are more likely to see an uptick in customer satisfaction and loyalty. Subscriptions help create a stress-free experience for customers by having their products arrive right when they need them — giving them a great reason to keep coming back for more.
Companies using subscription-based payment models also gain powerful insights into their customer preferences and can use that knowledge to bolster marketing efforts. Data collected from subscription-based sales can be used to improve how, what, and when they sell – allowing companies to tailor their messaging and campaigns to specific segments of people.
For example, by analyzing subscription data throughout any given year, companies can determine specific time periods when they receive more orders, which products are most popular, and other spending habits to inform future product creation or promotion.
Choosing the Right Subscription Billing Software
Now that we’ve addressed the basics of subscription-based models and their benefits, what does it take to get one up and running in an online store?
When choosing subscription billing software, the right choice will offer flexibility for merchants and customers when applied to new and existing storefront products. Just like choosing product size or color, customers should have the option to purchase once or on a recurring basis when an item is added to their cart. Merchants should also have the ability to easily adjust the frequency/interval options and limit specific purchase options to subscription billing only, as needed. A good software will make order management a breeze, not a nightmare!
The right subscription billing solution will also support a seamless checkout experience. This means customers are not directed off of the merchant’s website to complete their purchase. Doing so allows for a less frustrating user experience and prevents any interruption in completing the transaction.
Finally, it’s essential to choose a subscription billing software that supports comprehensive and convenient reporting. At any given moment, merchants should be able to log into their website dashboard and easily view, sort, and filter data for any type of order (one-time or subscription) all in one place.
One solution that does all of these things (and then some) is Chargify Commerce by Ebizio. This robust all-in-one platform helps businesses reliably automate recurring billing and renewals, including dunning management, reminder emails, and billing alerts.
With Chargify Commerce, all order and customer details can be managed from within the app dashboard and allow merchants to sort, filter, and update any active subscriptions. Customers can also manage, change, and unsubscribe from their storefront by logging into their account – creating an all-around better user experience.
While it may have once been possible to handle the billing process manually, at some point it will become incredibly complex and time-consuming. Chargify Commerce automates and streamlines the process – allowing businesses to focus on more strategic activities.
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Chargify Commerce as a Recurring Payment Solution
Interested in learning more about implementing Chargify Commerce as a recurring payment solution? Reach out to our experienced development team for a custom quote, and to review your unique specifications.
From startups to large enterprises, Ebizio has helped hundreds of ecommerce companies implement the right subscription billing software that meets their business requirements and integrates seamlessly with their website.
Call us at +1-855-690-5903, schedule a free demo, or contact us today!
Sources:
Chen, T., Fenyo, K., Yang, S., & Zhang, J. (2019, October 3). Thinking inside the subscription box: New research on e-commerce consumers. McKinsey & Company. Retrieved March 14, 2022, from https://www.mckinsey.com/industries/technology-media-and-telecommunications/our-insights/thinking-inside-the-subscription-box-new-research-on-ecommerce-consumers
Iyengar, R., Park, Y.-H., & Yu, Q. (2020, March 1). The impact of subscription programs on customer purchases. SSRN. Retrieved March 14, 2022, from https://ssrn.com/abstract=3529681
Ross, L. (2020, May 12). The rise of e-commerce subscription model and services –… Invesp. Retrieved March 14, 2022, from https://www.invespcro.com/blog/e-commerce-subscription-model/
