The rise of subscription payments and billing

March 2, 2022

In today’s shifting business landscape, recurring revenue is akin to the holy grail. That’s why it’s no surprise that more and more businesses are adopting subscription-based payment models. In fact, Zuora’s Subscription Economy Index report reveals that the subscription economy grew by more than 435% in almost a decade.

By most accounts, that growth is set to continue. The stop-start recovery from the coronavirus pandemic has only made customers more eager for subscription-based models, which offer them more flexibility, less fixed commitments, and more opportunities for customisation (from product to payments and beyond). Meanwhile, businesses continue to reap the rewards that come with having subscribers, including having a more predictable future revenue stream, delivering better customer experiences, and being able to gather rich customer data and insights.

Subscription services now come in many forms, including curated boxes designed to delight consumers with specialist products, replenishment services that offer maximum convenience for high-use items, and an access model that allows consumers to use something without owning it. As a result of all this, UBS Wealth Management and Bernstein estimate that the subscription economy will be worth $1.5 trillion by 2025.

So, now that subscription-based payments have become a powerhouse in the digital economy, it’s worth taking another look at the sector today. In this article we’ll examine how subscriptions have changed, assess whether their growth will continue, and investigate how subscription-based companies can stay successful in a quickly changing landscape.

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The subscription economy – it’s not all about software anymore

In the early days of the subscription economy, software ruled the day. Services like Spotify paved the way for the idea of “access over ownership,” and the seamlessness of a recurring digital transaction naturally lended itself to intangible software services.

Nowadays, the subscription landscape is increasingly physical. In fact, market analyst Juniper predicts that 45% of all recurring revenue transactions will be for hard goods by the end of 2022. Supply chain disruptions – the bane of every consumer and retailer in the post-pandemic landscape – have largely driven this. Rather than finding empty shelves in a brick-and-mortar store again, people want the reliability that comes with having a subscription for their favourite products.

Physical subscriptions are becoming more popular in all sorts of industries, including beauty products, pet food, and pharmaceuticals. The tide seems to be turning even when it comes to automobiles, an industry that has historically been the most resistant to online sales. Companies like Cazoo and FINN are finding success by offering subscription-based models, aided by a hyper-competitive used car market in a landscape changed by the pandemic.

Subscription payments: the churn problem

One of the supposed benefits of a subscription model is lower customer acquisition costs over time. After all, in theory gaining a new customer in January means you’ve then got one for the rest of the year as well. That requires a lot less work and marketing spend than trying to attract a new customer during each month of the year. At least, that’s how the conventional wisdom goes.

However as the subscription trend matures it’s clear there are some limitations to that way of thinking. Customer churn is perhaps the single biggest pitfall for subscription-based companies. The popular strategy of getting your customers onboard with free trials, special introductory offers, and too-good-to-be-true discounts may seem like a no-brainer and an easy way to rapidly scale. However, that strategy will quickly fall short if a high percentage of those customers drop their subscription once the non-discounted cost kicks in.

Investors have become wary of this too, realising that a high churn rate means customer acquisition costs don’t deliver consistent revenue over time. These days, smart subscription-based companies know that it’s not enough to acquire lots of customers quickly; they also have to adopt a product pricing model that keeps customers loyal once the shiny promotional period is over. That means some companies may scale back special offers and adapt pricing to attract a more realistic, sustainable customer – one that will stick around for months or even years to come.

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Why the right payments strategy is crucial

What else should subscription-based business be looking out for as the market progresses? Like subscriptions, another trend that has grown rapidly over the last decade is the increased amount of online payment methods. From digital wallets and more region-specific payment solutions (such as iDEAL or Bancontact) to buy now, pay later – gone are the days of asking your customer for their PayPal account or charging foreign transaction fees on their credit card.

Competition is fierce, so if you want to attract as many subscription customers as possible you have to offer the payment methods they prefer. As well as major payment methods, that means also providing the locally preferred payment methods in different markets. This kind of cross-border, seamless payment functionality will be crucial for any subscription based business that is looking to scale in the future.

Grow your way with Mollie

At Mollie, we provide effortless payments to help online businesses grow. Easily integrate Mollie with your website and access a range of integrations that offer subscription management and billing with exceptional service and support, including our advanced Chargebee integration.

Looking for support to find the right subscription model for your business? Sign up for a free consultation with a Mollie expert today.