Subscription Based Businesses
Do you have a Netflix account? What about a gym membership? Maybe you have a meal delivery service. Most Americans have one if not all the above. Subscription based businesses have exploded recently. Everything from gyms, streaming services and socks to car washes and education. Consumers are enjoying the convenience these services bring, and merchants are enjoying the monthly revenue stream they bring. There are definite advantages to a subscription model for both businesses and consumers.
The concept of a subscription isn’t new. Remember when you used to subscribe to magazines? As technology has evolved and consumers tastes have changed, the goods and services up for grabs as part of a subscription have changed to keep current with consumer preference. But what makes the subscription business model so popular for customers and businesses alike?
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Benefits of a Subscription Based Model
Customer Convenience: There’s no doubt that subscriptions are convenient. Who doesn’t love the convenience of watching what you want, when you want? Or getting a new outfit or box of produce delivered to your door each month? Subscriptions make life easier for consumers. If you can get what you want, when you want it, with minimal effort, that’s a win.
Better Customer Relationships: Customers often sign up for a subscriptions service because of the convenience it provides along with options to personalize the product. Many subscription services offer consumers the option to customize their product or upgrade to different tiers as they grow with the product.
Revenue Forecasting: Business owners love subscription models too because subscriptions are guaranteed revenue (barring cancellations). Having a subscription model allows businesses to accurately predict revenue period over period which in turn allows them to have a better grasp on how to budget that revenue.
While there are undoubtedly benefits to both the merchant and consumer when it comes to subscription-based businesses, when it comes to payments, what are the rules and options around subscription-based businesses? The rules around subscription based billing have evolved over the years as banks and card brands have changed the requirements on subscription merchants, but we can break subscription billing into a few different models:
Trial with a negative option
In this model, the merchant offers a discounted “trial”, at the end of which, if the cardholder doesn’t return the merchandise or cancel, they’re automatically charged full price. This could be 2, standalone transactions or can then be followed by a recurring monthly subscription which remains in effect until the cardholder cancels.
Signature does not support this model for physical goods and most digital goods with some exceptions due to high opportunity for disputes and customer dissatisfaction.
Trial with an affirmative option
This scenario is the same as the negative option with one major difference: prior to being billed at the end of the trial, the cardholder is notified and must re-authorize the full price charge.
Signature can entertain this model in certain instances for physical and digital goods products.
In this model, which is typically month to month, the cardholder agrees to be billed at recurring intervals at a set price point with no specified end date until they cancel. Think gym memberships, streaming services, dating services, etc. This model is acceptable for most digital goods with some stipulations. Signature can entertain this billing model for physical goods as an exception in certain instances.
Subscription billing can be used interchangeably with recurring billing with the distinction that subscriptions typically have an end date (e.g. monthly subscription where cardholder needs to confirm the renewal annually).
No matter which model a merchant decides on, there are some standard best practices that should be followed.
- Merchants should have clear and detailed cancellation and refund policies as well as multiple methods of contact (phone, email, etc.).
- For negative option merchants, having an email notification sent to customers prior to their scheduled billing may be helpful in preventing disputes.
- Descriptors should be clear and obvious.
- Fraud prevention tools such as 3D Secure (on initial transactions), dispute alerts, etc. should be utilized.
In April of 2020, Visa updated its conditions for subscriptions using introduction trials. Click here to view an infographic with the updated conditions. No doubt consumers will continue to pay for the convenience that subscription services offer but time will tell what the subscription landscape will look like as we all get back to pre-COVID habits.