Recurring Billing – Financial Heaven, Technical Hell?

This next guest blog is from Mark McDermott,co-founder of digital agency & app development company Codegent, based in London and Bangkok.

You may think from the length of the below blog that recurring billing is Mark’s favourite subject, you’d be wrong. He told us his favourite subject is actually sports. So now you know!

But once we got him writing on the subject, he had so many valuable insights to share, we just let him go for it!

Comments as always are welcome below. Take it away, Mark…

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 are 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.

Security

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.

You might remember the Sony PlayStation scandal in April 2011 when it’s 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.

Technology

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
• Payment failures 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, making 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, 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 in advance. 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 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 up-sell 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 alerting you when you are due to bill. These guys sit above payment providers such as Sage Pay and do all the hard work so you don’t have to.

Chargify, CheddarGetter and Recurly, are some of the major players in the space.

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!

Mark McDermott

Santa finds Sage Pay’s Business of the Month!

At Sage Pay we like to think we know our customers.  But with 27,000 of them, it’s pretty challenging for us to get to know them all.

In the run up to Christmas, I set the rest of the Sage Pay staff a challenge.  I asked them to buy their secret santa gifts from websites that use Sage Pay as their payment service provider (PSP).  And while they were at it, complete a quick survey about their shopping experience.

Our staff are a seasoned bunch of online shoppers and pretty hard to please, but here’s what they had to say…..

Though they hunted high and low, 46% of our staff were unable to find a security policy anywhere on the sites they were using and on top of that 38% were only able to find the security information tucked away in the far corners of the website.  One of my colleagues did find a great example of how to subtly include the security element on their site- Blissett Photo Books.

We were pleased to find that over 50% of the sites we used had 3D Secure set up as an additional fraud prevention method on their payment pages.  These lucky people are probably benefiting from lower rates with their merchant bank.  It also means that if they are defrauded, there’s a good chance the banks would take liability for those particular transactions too.  Read more about 3D Secure here

What I didn’t tell people was that they were helping me search for our very first Business of the Month.  After we pulled together all of the results, we realised there was a clear winner in terms of customer experience.  So we are pleased to announce that Henleys have been chosen to kick off Sage Pay’s Business of the Month!

Our staff were really impressed by the usability of Henleys site.  Being able to narrow down a search by price or filter products by colour makes their website extremely easy to use.  Our Marketing manager Charlotte said “Their checkout process was seamless and the best bit was….free next day delivery!”

When we told Lynsey Emersic, Henleys e-Commerce manager of their award here’s what she had to say…

“We are really pleased to be voted the first Business of the Month by Sage Pay.  The success of the Henleys Clothing website is largely down to the ease and usabililty of our site.  That said, usability is something that we are always looking to improve upon to ensure that our customers get the best experience whilst shopping for clothing on the site.  Having Sage Pay integrated into the basket page of the site helps us to provide as smooth a transaction as possible for the Henleys customer, which is the most important thing to us.”

Well done Henleys….and I wonder who will be our March Business of the Month…