Recurring Billing - Financial Heaven, Technical Hell close

Mark McDermott
Mark McDermott
In Online Innovation, Codegent College
15th December 2011
Recurring Billing - Financial Heaven, Technical Hell

What is Recurring Billing?

Recurring billing is effectively subscription modelling for businesses transacting online. You automate charging customers for a product or service at a predefined cost and schedule. There are two key factors involved in planning recurring billing.

  1. The time span between charges that affects how you retain and acquire custom.
  2. The access model - usually different price plans, options and possibly a freemium service, which offsets the cost of giving away a limited but free service against the profits of more likely upgrades.

Why is recurring billing good for my business?

A business relying on one-off transactions may initially bring in more revenue but will most likely struggle to retain the customer over a long period of time. Recurring billing usually results in a higher Average Customer Lifecycle Value (ACLV), a predictable income stream (Monthly Recurring Revenue - MRR) due to a combination of customer inertia and commitment as the relationship shifts from a purchase to opt-out decision and has more potential for up and cross sell as you have good reason to be in regular contact with your users.

In terms of valuing a business these patterns of predictable recurring revenue are hugely attractive to investors and purchasers as they can see genuine opportunities to scale and mitigate risk.

What the potential pitfalls?

The two major areas of difficulty revolve around the security of the sensitive information you acquire and the technical systems you need to put in place to automate these processes.

Storing sensitive financial data about your customers presents you with massive security risk and plenty of legislative red tape to boot. Your servers must be PCI-DSS (Payment Card Industry Data Security Standard) compliant which is costly and complex to achieve.

In addition to that you may be more susceptible to direct fraud as criminals often use free trial offers to verify stolen credit information.

You might remember the Sony PlayStation scandal in April this year when its systems were breached and the personal data of 75 million customers including some credit information and passwords were compromised. It brought the network down for several weeks and caused a public relations furore. Their systems were not fully restored until June and the trust of their customers was severely damaged. The whole episode is believed to have cost Sony £105 million. A security breach is not something to be taken lightly.

Building a recursive billing system quickly mounts up to be a considerable technical challenge (and therefore requires time and investment). Here is a quick brain dump of functions you will need to deal with:

  • Daily invoice generation and account management
  • Sending emails and dealing with spam filters, bounce backs etc.
  • Multiple prices plans
  • Credit card fails and re-attempts to bill
  • Discount coupons and free trials
  • Upgrades and downgrades
  • Expiring cards
  • Different currencies (potentially)
  • Tax implications of multiple geographic regions (potentially)

A complex system like this is inevitably going to have errors and bugs in it at launch. Every system does. Will your early adopters tolerate this whilst you fix the problems?

On top of that you will have a system running that needs to be continuously up, processing data, being maintained and scaling in order to keep the engine alive and up to date. And of course you need to make sure it is secure! For an engineer’s perspective check out this blog from Freshbooks.

What recursive business model should you adopt?

Broadly speaking the model splits into Annual or Monthly billing cycles with free trials or “freemium” no cost limited accounts as a popular extension.

Annual payments give you more cash upfront, guarantee customer retention for at least one year and reduce invoicing and collection costs. However monthly payments are less risky for the customer who may not be keen on such a long upfront commitment or high cost. Monthly therefore creates a lower barrier to entry so you could see an increase in customer acquisition. Your sales process should shorten, as the proposition is less risky and more cost effective.

I think for most online businesses the monthly billing cycle is better for the reasons outlined above but also as it provides you with an opportunity to talk more frequently with your customers, make sure they are still using your service to it’s fullest potential, up or cross selling and reminding them you are here and happy to help.

With annual payments you run the risk that your customers may have completely forgotten who you are, or moved on from their jobs or decided to seek an alternative. There is also a legal implication (in the US at least) that if you bill on anything over 60 days you must send ample warning of the renewal, at least 30 days. This gives the customer more time to consider cancelling or shopping around. On a monthly billing cycle you can bill and email them the same day but as they should be used to receiving the emails this shouldn’t be too great a shock.

You could also consider a combo deal that has a monthly plan as well as a reduced annual option for those customers that know they will stick with your service and are happy to just to pay in one go and save some money. These customers are less likely to fall into the annual payment traps above.

A few golden rules for emailing your bill:

  1. Always explain the charge. Remind them of the service they are getting and that it has been previously authorised. “You have been charged $XXX” does not cut it!
  2. Don’t miss the opportunity to upsell or add value with marketing copy. A slight discount on the next product tier could be all it takes to bring more revenue in. Likewise a gift or a simple thank you could seriously impact your retention and reduce “bill shock”.
  3. Make it super simple for the customer to access your customer service team. Preferably by simply replying to the email or with a clear phone number. This is really the point at which you want to be talking to them and cementing/saving your relationship.

What technology is out there to help me?

Over the last few years several companies have been launched to help alleviate the issues around recurring billing. These guys sit above payment providers such as Sagepay and do all the hard work so you don’t have to.

Chargify, CheddarGetter, Recurly, Spreedly and Zuora (more of an enterprise offering) are the major players in the space. Sadly most of them have quite poor UK payment gateway support so we plumped for Recurly for our apps who have been excellent. Spreedly also have good UK support and hopefully the others will catch up soon so you get a greater degree of choice.

Paypal have a recurring billing option but I would highly advise avoiding them despite the fact that getting setup is relatively painless. My reason? Poor support, random behaviour, tricky deep integration methods with a lack of features and customisation.

What you should be looking for in your billing partners, aside from price

  • PCI-DSS Level 1 Compliant service - which makes verifying your own business’ compliance easy
  • Support for your favoured currency(ies) and payment gateway
  • “Grandfathering” of costs - a pledge to honour the deal you sign up to if costs change in the future
  • Adherence for the Data Portability Standard to ensure you own your customer credit data
  • A complimentary feature set or flexibility for custom elements to fit with how you want to run the accounts of your business
  • Developer friendly tools such as well documented APIs and relevant code integration examples for your tech team’s preferred language

Phew, that was a longer article than I had planned! If you have any thoughts or questions on this please leave a comment below. Happy billing!