How do subscriptions work?
A business or vendor provides customers access to their product or service and charges a payment in exchange. The payment is often recurring in nature and is automatically charged. When payments are automatically charged on a recurring basis then that also means that there is a schedule behind them.
The schedule and amount of payment to be charged depends on the subscription plan and duration. Subscriptions payments are also commonly known as recurring payments, and the two terms are used interchangeably (the difference between the two is discussed later in this article).
Subscription payments can be charged until the customer withdraws permission or cancels the subscriptions.
Setup of a subscription business
The setup of a subscription-based rental business is quite similar to a regular sales-based eCommerce business.
Frontend (what the customer sees and experiences)
There is an online shop where your customer sees the products and a rental-optimised checkout page where they finalise their purchase.
Backend (what you see and manage)
The checkout page collects the information the customer adds in the input field and stores it in your connected systems as a record. The record indicates whether the order is a subscription or a sales order and processes it accordingly.
Collecting payments online
Accepting online payments is a sensitive and delicate process since financial institutions, and customers’ financial records are involved. But offering online payments and collecting these online payments is crucial for the success of any business.
Luckily there are enough solutions out there that make payment collection quick, simple, secure and easy for both the customer and the vendor.
The most common methods for making online payments are credit/debit card payments and Direct Debit. If you choose to make payment methods like Direct Debit, Credit Card, or Debit Card directly available in-house, you’ll need to go through a complex and lengthy application process.
Additionally, you’ll need a payment gateway to authorise and process the payment, a merchant account to accept payments and a payment processor to act as a mediator between the bank and the merchant.
So as you can see, it’s not the case of this vs that. To successfully manage and process payments you need to include all elements.
Alternatively, you can decide to work with Payment Service Providers (payment processors) if you want the benefit of different payment methods (like Direct Debit, Credit Card or Debit Card) without the need to deal with the requirements of getting access to these payment methods.
Payment Service Providers provide both a merchant account and a payment gateway.
It’s important to note that since there is no official documentation for defining payment terms, different people and organisations use these terms interchangeably.
Are recurring payments the same as subscription payments?
Recurring payments are only a part of subscription payments.
In recurring payments, a customer authorises the vendor to deduct payment at an agreed frequency on an ongoing basis.
On the other hand, subscription payments are payments when subscription management sits on top of payment solutions (like Stripe, Adyen, Braintree, Paypal etc.) and support automated recurring payments when a customer signs up for a product and selects a frequency for the recurring payment (daily, weekly, monthly or yearly).
When Subscription management sits on top of payment solutions, recurring payments can be stopped, cancelled, or altered. Doing so is important to deal with customer-related issues and to increase customer retention.
Why does subscription management matter while collecting recurring payments?
Subscription management covers the entire customer lifecycle, while recurring payments only cover the part when a prospect becomes a customer and payment needs to be collected from that customer.
Here are a few areas in the customer lifecycle where subscription management plays a role:
- Signing up - by adding subscription management to recurring payments, vendors can provide discounts and vouchers to customers who often make decisions based on price. Additionally, a subscription management solution makes it easier to offer free trials, which according to studies, is a great way to pull customers to try out a product. Technically this means delaying recurring payments and not charging a payment when an order is processed through the checkout page (a subscription management solution passes this information to a PSP and prevents the PSP from charging payments until instructed to do so). Free trials can be further extended by delaying the payment even further
- During the “subscription active” stage: subscription management covers important processes like subscription upgrades, downgrades and plan changes. All these processes have price implications meaning that as the customer changes aspects of an ongoing subscription, the price of their subscription also changes. Subscription management makes it possible for PSP to understand this information and change the recurring payment amounts accordingly.
- Post-purchase customisations - subscription management makes customer retention easy by allowing the vendor to offer price customisations to the customer. For example, products that are tied to seasonal usage, such as grills, are often at risk of being returned when the customer does not need them. But giving the customer the possibility to stop the subscription helps the vendor retain the customer and also avoids operational costs arising from the logistics of getting the product back.
What is a Payment Service Provider?
A Payment Service Provider (PSP) is a third-party company or tool that acts as a middleman between you, a vendor and a bank and is used by businesses (typically eCommerce) to collect payments online via various payment methods such as online banking, credit cards, debit cards, e-wallets, cash cards, and more. A PSP ensures that the transaction goes from point A to B safely and securely. In short, PSPs work with acquiring banks and manage the entire transaction from start to finish.
A PSP provides both a merchant account and a payment gateway so that, as a vendor, you can easily collect and manage payments.
Additionally, by using a PSP you can reduce the burden of PCI compliance since you will never directly access any sensitive financial information.
What are the benefits of using a PSP?
The benefits of using a PSP are:
- PSPs take care of the entire payment process since they provide both a merchant account and a payment gateway.
- The burden of PCI compliance is reduced since you’ll never touch any sensitive financial information.
- You can focus on your core business instead of worrying about payment collection.
- PSP often include multiple payment methods and provides more possibilities for collecting payments and accepting customers.
- PSPs offer a high standard of security so that, as a vendor, you can be assured of the security of your customer's financial data.
- PSPs also facilitate cross-border payments and can support you in global expansion.
What are the limitations of using a PSP for subscription and recurring payments?
As explained above, recurring payments are only a part of subscription payments. While recurring payments are about deducting a fixed amount at an agreed frequency for an ongoing basis, subscription payments are about having and providing flexibility in recurring payments in a subscription business that collects recurring payments.
So while PSPs are capable of collecting recurring payments, they do not offer the flexibility and customisation subscription businesses need in collecting recuring payments.
Important note: Not all subscription businesses need the same amount of flexibility and customisation.
If your subscription business does not include plan change, upgrades/downgrade, altering the price, stopping/pausing a subscription or charging one-time transactions, then a PSP is enough.
Which are some commonly used PSPs that can facilitate recurring payments?
While there are a number of PSPs available on the market, our list of PSPs includes PSPs most commonly used by product subscription companies.
Which payment methods support recurring payments?
The infographic given below mentions all the payment methods that support recurring payments. The infographic also contains information about the Payment Service Providers supported by circuly.