When customers make a one-time purchase, they pay upfront. The merchant then provides a product or service, and the transaction is complete. With subscriptions, merchants must consider what happens after the payment is processed. For instance, how often are customers billed? What will renewal and cancellations look like? Do you offer enough value for customers to justify recurring payments?

Successful providers understand the components of the subscription payment process and how to use it to their advantage, from sign-up and processing to renewals and cancellations. By optimizing each step of the process, you can cultivate a happier, stickier customer base and minimize churn. 

Key Components of the Subscription Payment Process

Sign-Up

The first step in any subscription is the sign-up process. Sign-up is like any other ecommerce payment, except the merchant stores the customer’s payment details. In this case, the customer authorizes the merchant to run their card for subscription renewals. 

From the customer’s perspective, there is little difference between signing up for a subscription and making a one-time purchase. For the merchant, however, sign-up requires an ecommerce platform with a shopping cart that can handle recurring payments. Fortunately, this is something the majority of online shopping cart systems today can do.

Payment Processing

Since most subscriptions are initiated online and paid with a credit card, an ecommerce payment gateway is a core part of all subscription businesses. Payment gateways enable the initial transaction upon sign-up. They also handle the periodic billing for the life of the subscription by using stored payment information. 

Integrating advanced payment processing systems streamlines the customer experience by enabling features like auto-renewals, automatic credit card updating, real-time billing updates, built-in fraud protection and more. The payment gateway allows the subscription model to function smoothly and efficiently.

Onboarding

In subscriptions, “onboarding” refers to the series of actions a new customer completes after signing up for a service. This process familiarizes users with the service, often using tutorials, guided walkthroughs or targeted content to showcase key features and functionalities.

Good onboarding streamlines the transition from a new sign-up to an engaged, active and (hopefully) long-term customer. Poorly executed onboarding, however, can lead to early cancellations, as frustrated customers may abandon a subscription if they can’t quickly see its value.

Billing Cycles

Billing cycles can have a significant impact on sign-ups, revenue and retention. A longer billing cycle—yearly, for instance—ensures that users are guaranteed to produce 12 months’ worth of revenue at a minimum. However, a mandatory year-long commitment is also more likely to turn off users just looking to sample a service. 

For balance, most subscription providers offer a monthly rate with a discount for users who pay for the entire year upfront.

It’s also common for subscription plans to offer pricing for one-month, three-month, six-month and year-long sign-ups, with the average monthly cost decreasing across each. Offering the right billing cycles and discounts is crucial to pricing strategy and should be data-driven.

Renewals

Renewals occur every time a customer’s subscription continues and a new payment is processed. There are two ways to process a renewal—manually or automatically. 

Manual: Manual renewals require the customer to approve the new payment or reenter their payment information to extend their service. 

Automatic: Automatic renewals use stored customer payment data to apply a new charge without the customer needing to do anything. 

In most situations, merchants and customers prefer automatic renewals. For instance, in cases like streaming subscriptions, it would be impractical and inconvenient if a customer had to manually reenter their payment details every month.

However, there is evidence that the convenience of automatic renewals comes at a cost to users. In a survey conducted in 2022, 42% of consumers admit to having paid for a subscription they forgot about. As more aspects of commerce become subscription-based, this forgetfulness will become more likely. While it’s currently boosting revenue by 14% to 200%, it may eventually be bad for business.

Cancellations

Cancellations are inevitable in a subscription business. A merchant’s cancellation process can affect customer perception and the likelihood of future re-engagement. Today’s subscribers expect cancellation to be fast and easy, so most subscription payment systems simplify the process. This fosters a positive last impression and leaves the door open for potential re-subscription. 

Most businesses view cancellations as a negative metric. However, they can provide valuable insights into customer satisfaction, features, benefits and pricing. Many companies also seize the opportunity to gather feedback during the cancellation process, using exit surveys or direct customer interactions to understand the reasons behind the decision. 

This data helps businesses identify potential areas for improvement and reduce future cancellations.

Making Subscription Commerce Work for You

Whether you are a software developer, payment facilitator or merchant services provider, understanding the nuances of each step in the subscription payment process will enable you to align your services with the goals and offerings of your merchants. With the help of an embedded payment partner like NMI, you can give your customers the tools they need for a lifetime of success.

Stay tuned for the final installment of our Subscription Payment 101 series to learn about the most common challenges subscription providers face and how to overcome them to make this growing model work for you. 

In the meantime, to learn more about how NMI can help you provide your merchants with everything they need to thrive in the subscription economy, reach out to a member of our team and schedule a free consultation.

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