Payment Processing for Subscription-Based Businesses: Challenges and Solutions

Monthly subscriptions for a product or service are a great source of predictable revenue. As such, many retailers are offering subscriptions. Certain types of businesses, such as cloud-based services or SaaS, are inherently subscription-based models. In addition to managing the customer’s payment information across channels, your payment processor should also support recurring or subscription payments.

Subscription businesses need an automatic way of processing payments to protect cash flow. A payment processor that seamlessly integrates with a subscription management platform will help keep track of recurring payments to ensure they are processed on time. This also allows you to integrate with other tools, like CRM and accounting software, for better financial management.

Understanding the Subscription Business Model

A subscription-based business model involves billing customers regularly in exchange for access to services or the delivery of tangible goods. Netflix and Amazon Prime are two household-name subscription services. Consumers of every kind enjoy watching shows or movies and lightning-fast delivery of items they need (and don’t need).

But in addition to these B2C subscription services, there are also plenty of B2B subscriptions. Most contemporary business software is cloud-based. That means the software user can access the platform remotely from any computer, tablet, or even phone. Tools like CRM (customer relationship management) and IMS (inventory management software) allow businesses to manage their assets without servers.

This type of B2B software is typically called SaaS, or software as a service. B2C subscriptions like Netflix, Hulu, and Disney+ are called streaming services. In addition to these Fortune 500 corporate behemoths, many small businesses have realized the value of a subscription-based model. Makers of homemade soap, bespoke hand-crafted products, and gourmet meats are also delivering monthly packages to subscribers.

Subscription models have pros and cons—but the positives definitely seem to outweigh the negatives. Customer acquisition and customer retention are two obvious challenges. In a sea of competition, how do you attract new customers and prevent current customers from leaving?

Other challenges are unique to each type of business. For cloud-based businesses, a growing customer base presents an increasing need for large-scale security. For businesses shipping tangible goods, procurement, fulfillment, and delivery will be ongoing challenges.

However, one challenge that all types of subscription businesses face is how to most effectively collect payments from their subscribers.

Common Challenges in Subscription Payment Processing

Subscription models have pros and cons—but the positives definitely seem to outweigh the negatives. Customer acquisition and customer retention are two obvious challenges. In a sea of competition, how do you attract new customers and prevent current ones from leaving?

Other challenges are unique to each type of business. For cloud-based businesses, a growing customer base presents an increasing need for large-scale security. For businesses shipping tangible goods, procurement, fulfillment, and delivery will be ongoing challenges.

However, one challenge that all types of subscription businesses face is how to most effectively collect payments from their subscribers.

Safely Storing Customer Financial Information

Recurring billing obviously necessitates storing customer financial information, whether that’s a credit card number, debit card number, or ABA and checking account number. There are regulations that specify how this information can be stored. Some of these laws are set by federal and state lawmakers, while others are set by card networks like Visa and MasterCard.

The risks of running afoul of legislated regulatory practices are typically financial penalties (fines and fees). In some ways, the risk of running afoul of Visa or Mastercard is even greater because they may blacklist a business and prevent them from collecting credit card payments. Successful subscription models cannot rely on cash or even check payments, so this is effectively a death sentence.

These card networks, in partnership with banks and other financial institutions, have created a set of protocols called PCI DSS compliance, or Payment Card Industry Data Security Standards. It is often cost-prohibitive for SMBs to adhere to PCI DSS on their own. Depending on the size of your organization, a thorough audit alone can cost thousands of dollars.

Chargebacks and Disputes

Other challenges that subscription-based business models face are chargebacks and disputes. Consumer protection laws heavily favor cardholders in disputes—so much to the point that an increasing number of consumers are gaming in acts of “friendly fraud.” To protect yourself, you need robust tools that can provide detailed documentation about transactions.

In addition to friendly fraud, regular old fraud is on the rise as well as cybercriminals come up with increasingly innovative ways to steal credit card information and make purchases. Victims of this fraud may initiate a dispute with their bank or credit card issue instead of reaching out to you, especially if they don’t know who you are. This type of dispute is called a chargeback, and I can create a cascade of fees that will slam your business.

On the more prosaic end of things, there is always the challenge of failed payments. Customers can lose their cards. Cards can get stolen. Cards also expire periodically. Any of these issues can interrupt the continuity of collecting payments from a specific customer.

Choosing the Right Payment Processor for Subscription Payments

If you want to add a subscription model to your existing business, or your business is inherently a subscription model, you’ll need to find a good payment processor. This payment processor will collect and store customer payment information so that you don’t have to. They will largely take on the burden of adhering to PCI DSS standards.

A good subscription-based business payment processor will also have a robust dunning management protocol. Dunning management is the science of collecting failed payments from customers…although, because customers are sometimes unpredictable, it’s also a bit of an art.

Take note of what lenders do when a payment goes missing—they call, text, email, and send paper mail…certainly within the bounds of legality and hopefully within the bounds of tact. 

Could you juggle doing all that for just one customer in an attempt to recoup dropped payments? This process needs to be automated, especially if it’s going to be applied to dozens, hundreds, or thousands of customers every month. Once again, a payment processor can help with that.

Beginner Processors

Shopify (Stripe), Square, and PayPal are all examples of large payment aggregators that offer customers (merchants) the option of charging their customers (subscribers) recurringly. These options are fine as long as your sales volume is very low. But if your subscription service accelerates to a more substantial subscriber base, the flat rate pricing offered by these companies will eat away at your profits.

Flat rate pricing means you will pay the same for every type of transaction, whether it’s a Visa, MasterCard, Discover, or American Express… whether it’s a credit or debit card. In reality, each one of these cards has a different processing fee.

Getting charged 2.90% plus $0.30 for every transaction is not something that established subscription services like Netflix or Amazon Prime tolerate. They work with payment processors who can provide more nuanced, interchange-plus pricing, like ECS Payments. This type of pricing model more accurately reflects the true cost of running card transactions.

Optimizing Recurring Payment Systems

From your end of things, a payment processor should offer a comprehensive, robust, intuitive dashboard. A dashboard is your command center for managing your subscribers and should display relevant KPIs without overloading your purview with irrelevant statistics. But at the same time, it should provide you with the opportunity to take a deeper dive into more nuanced statistics, if you should choose.

There are several ways to prevent a disruption of continuity in collecting payments from subscribers. Talk to your payment processor about their relationship with card networks and banks. Can it assist in updating card information automatically when cards expire, are stolen, or are routinely replaced?

Some types of “subscription” businesses are inherently better off ACH payments instead of credit or debit card payments. Landlords, utility companies, insurance providers, and educational services (e.g., those that charge tuition) are a few examples of organizations that are better off collecting an ABA and checking account number for recurring ACH payments.

In addition to the fact that banking numbers never change, ACH fees are significantly lower – usually a fixed amount less than a dollar rather than a percentage that would significantly eat away at card sales. If you are collecting rent payments over $2,000, would you rather pay a dollar per transaction or 3% in the form of $60?

Another important consideration is how well the payment process integrates with other software that you use. Do you have a CRM for managing your sales leads, an ISM for managing your inventory, an ERM for assessing risks to your business? Whatever types of systems you use, You should ensure your payment process is successfully integrated with them, minimizing the amount of manual labor you need to invest in transferring data.

Managing Customer Relationships and Retention in Subscription Payments

The other part of customer attention is more of an art form. It involves people skills, if you will. Even so, a payment processor can help with this as well. A smooth payment experience is paramount to ensure customer satisfaction.

According to faceless payment aggregator PayPal, 46% of consumers will abandon their online shopping card if they cannot find their preferred payment method (specifically, a digital wallet), while 17% will abandon their car if the checkout process takes too long.

Once you’ve got those card numbers, you’re good to charge the customer on a recurring basis, as long as you have obtained their permission. But that initial sign-up process must be seamless in order to create a positive brand experience.

Payment Reminders

Today’s consumers highly value, transparency, and pro activity. They’ve come to expect reminders from multiple angles – email and text, for instance—that a payment is about to be processed. This is especially true and light of the fact of how many subscriptions consumers have today.

The average millennial has as many as 17 subscriptions. When they are hit with a payment from a subscription – even if they want – if they were expecting, the impact on their finances, creates a negative perception of your brand. if you are proactive with automated email, and or text reminders, this will reduce some of the friction with such customers.

Adding Value

Today’s customers have come to expect added value from their business relationships. This means delivering “extras” such as content to your subscribers through social media, email, and other means. Even if customers don’t voraciously consume your content or participate in events, they’ll see that other companies are doing this and compare.

You do not want customers to cancel their subscriptions. Even though subscriptions facilitate automated, on-time payments, do not leave your business relationships on autopilot. Just as you would not (ideally) automate your customer support, you do not want to automate (e.g., forget about) customer relationships.

One great example of “added value” is delivered by Amazon. Amazon Prime is primarily about getting your items within 24 hours and hearing the quacking sound of Amazon Trucks backing up. Quack! However, Amazon Prime members can also enjoy lots of free streaming video content, like movies, shows, and even Amazon-original productions. While you don’t need to go to that level necessarily, consider what you can do to strengthen the subscriber bond.

Leveraging Data and Analytics for Subscription Growth 

Data analytics are another feature that a robust payment processor will offer. Your payment processor can assess the payment trends and demographics of your subscribers so that you are better poised to make high-level decision-making. Think of this dashboard as a sort of table of contents or index.

Where are your subscribers located? What are their ages and genders? What type of payment methods they use can even yield some interesting information. For instance, if most payments are made with a mobile wallet, your subscriber base is probably mostly mobile and would probably appreciate an app over a desktop interface.

You can use some of this information and future marketing campaigns to attain more subscribers. It all begins with the data that becomes available at the payment gateway. The payment gateway can also become the starting point for understanding Customer lifetime value, (LTV), and customer acquisition cost (CAC).

Let’s look at CAC, for example: payment data can integrate with your marketing management software, and you’ll see how much effort needs to be put into acquiring certain types of customers. You can use this information to make rejections moving forward and adjust your budget accordingly.

What about LTV? If your product has multiple tiers, you could assess how long a subscriber stays with you in each tier. You could experiment with ways of motivating an upgrade, such as tailored marketing campaigns and incentives like discounts. Ultimately, you want to lower your CAC while increasing your LTV. The key to doing that is understanding your customers. And the key to understanding them is the data at the point of sale.

Case Studies and Industry Examples For Subscription Payments

Let’s look at some hypothetical examples of scalable payment solutions for subscriptions.

The Candy Shop

Our first case study is a local candy store. Although candy is food, it’s definitely more discretionary than eggs, bread, and milk. The economy has been down, inflation is up, and candy sales are struggling. Could automated billing for subscriptions sweeten the struggle?

Yes, indeed, with the right amount of marketing. Using social media ads, in-store flyers, and giveaways at community fairs, our candy shop starts selling hand-delivered, monthly or weekly candy platters. There are even 10 themes to choose from! Of course, there is no way an SMB owner can juggle subscription revenue management by hand.

What if subscription payment issues like declined cards come up? How will the candy store afford to stay abreast of Visa’s and Mastercard’s demands for subscription payment compliance? Recurring billing best practices don’t have to be a struggle: let someone else handle it. That someone is your payment gateway for subscriptions.

Personal Finance App

Next example: a personal finance app that facilitates budgeting with spending breakdowns and other bells and whistles. There is virtually no way to collect subscriber payments other than payment processing for SaaS businesses. However, cookie-cutter subscription billing software like Stripe and Recurly are typically going to charge flat-rate fees.

One under-observed recurring billing challenge is scalability. Let’s say this is your startup. Once you move beyond 10,000 subscribers, do you really want to pay 2.90% + $0.30 per subscriber? If you ever hit one million subscribers, that’s throwing more than $30,000 per year away.

Subscription business payment solutions like those offered by ECS can tailor agreements based on your sales volume and even the cards your subscribers use. For SaaS companies, managing subscription payments should also integrate with analytic tools and subscription payment fraud prevention.

Of course, every kind of business wants to avoid fraud. But businesses with a remote and scattered subscriber base (like software) are particularly ripe fruit for fraudulent pickings. You want robust tools for detecting fraud and handling subscription chargebacks (by preventing them in the first place).

Conclusion For Subscription Payments

There are plenty of examples we didn’t cover, such as payment processing for membership sites, gyms, boutique boxes, and non-profits. Each business will have its own subscription business payment challenges. That’s why it’s important to work with a payment processor that can take the time to get to know you and your industry.

The bottom line: subscriptions are great automated sources of revenue. However, subscription payment retention strategies cannot be passive. Payment experiences should be smooth. Customers should be engaged with reminders and, ideally, “added value” content. Analytics can help you understand big-picture trends for subscription revenue optimization: how and when can you upsell products or tier upgrades to existing customers?

Learn more about how ECS can facilitate subscription payments. Let’s connect to discuss your unique business needs and set up a demo to showcase the robust features ECS can offer.

Frequently Asked Questions About Subscription Payments