Reviewing Membership Business Model with Automated Payments
Various obstacles may arise on the way to successful payment, especially when it comes to card processing, where too many factors contribute to the final result, which you see in approval ratio. One way to partially address this issue is subscription-based payments — automatic billing. In this case, situations where your client makes errors in card data input, incorrectly enters 3DS code, or accidentally closes payment window can never happen. All these situations are practically impossible if payment is processed automatically without customer manual interaction.
Moreover, such payment method can be very beneficial for customers themselves, as it removes entire need to constantly remember making regular payments. Subscription payments have been around for quite some time and have already gained loyal followers, but there is also plenty of negative vibes surrounding them. So, what exactly is a “subscription payment,” and why is this payment method so appealing to businesses?
Let's explore this together with the experts at Monoup.
What are Recurring Payments
Subscriptions or recurring payments have become a way for businesses to ensure regular payments from customers over a specified period. Model “by subscription” provides a long-term or permanent service that typically needs to be renewed, most often monthly. Google, Figma, Spotify, and many other digital apps operate on a subscription basis, and many people can't imagine their daily lives without them.
From a payment perspective, subscription is a customer's authorization to debit funds from their card or account on a specified date or upon meeting certain conditions (e.g., when the balance reaches specific point). If a customer subscribes to a service, they must provide their card details (as the source of funds) and consent to regular recurring payments. Convenience of this system is really undeniable. It allows users to avoid constantly thinking about recurring expenses and saves time by eliminating the need to manually enter card details for repeated payments. Subscriptions to internet or utility services are very convenient for many people.
At the same time, other industries have also become interested in this payment model because it allows them to receive a steady stream of deposits automatically, without relying on customer's willingness to make a manual payment on their website at any given moment. Although subscriptions themselves are generally harmless, they can lead to a negative experience for many customers if they encounter a dishonest service.
Fraudulent or too “tricky” merchants may include subscriptions in their services without notifying the user, and user, after making a one-time payment, may not realize that their card will continue to be charged regularly. Additionally, if the service becomes not appealing, it can sometimes be extremely difficult to unsubscribe, as merchant does everything possible to prevent this. This includes aggressive marketing, hiding details about subscription, refusing to cancel it, and offering persistent discounts and bonuses. Due to the abundance of such situations in online businesses, many users tend to feel negative about subscriptions and are not always willing to use them. Nevertheless, overall logic of planned recurring payments in banking system is considered a good solution and is used quite frequently.
Business Model of Subscription Services
Subscriptions are primarily used by online services in the SaaS (Software as a Service) sector and consumer goods. If we break it down with examples, the subscription model is typical for:
- Fitness services, such as calorie-counting apps, gyms, yoga studios, and other regular activities related to health.
- Streaming services, such as Netflix or Apple TV. A subscription to these apps keeps them accessible, and as soon as the subscription period ends or fails to renew, the user loses access to videos.
- SaaS for B2B and B2C sectors, such as Jira, Slack, and Figma. These tools are used by businesses, freelancers, and regular users who seek ways to manage their time, create designs, and use ready-made templates.
- Educational services in various fields. Subscriptions to Udemy or similar sites provide access to study materials and keep users continuously engaged in learning. The information on these portals is constantly updated, making it beneficial for customers to maintain live access.
- Magazines and online newspapers that publish particularly valuable materials for their subscribers or are only available by subscription, without free versions. There are many such publications in professional medias, and their customers are people working in a specific field who aim to stay updated on industry developments. By the way, our MonoTalks is an example of such a magazine, however it is available to everyone for free.
What do all these products have in common, and why are they compelled or willing to use subscription payment model?
Firstly, this business model assumes that the service is only available during the paid period. When a user purchases some product, they receive it once and for all for a fixed price; with subscriptions, the situation is slightly different: user does not purchase the product but rather access to it for a specified period. You can pay for a Figma subscription, but that does not make Figma yours, whereas a purchased mobile phone or clothing automatically changes ownership after payment. Renting a service requires the user to constantly keep it active, which means there can be no unpaid periods. Subscriptions help ensure that payments are not forgotten and that service accessibility is always maintained automatically.
Which Payment Gateways Support Subscriptions?
Technically, subscription process is quite simple and consists of the following steps:
- Customer selects a recurring payment from the list of available payment options on the merchant's website.
- Customer accepts the terms of subscription during checkout. At this stage, they must agree to the amount, payment schedule, and expiration date (if any) of the recurring payments.
- Customer enters their payment data and agrees to save them for future billing and processing of automatic payments.
- To execute the recurring payment, payment processor must connect with the acquiring bank, the customer's credit card network, and the issuing bank — just like in a regular credit card transaction. After all, three parties approve the transaction, funds are deposited into the seller's account. The payment process “behind the scenes” is exactly the same as usual; the only difference is that customer does not need to manually participate in it.
- Each time the business processes such payments according to the agreed schedule, the customer receives an invoice informing them that their payment has been successfully processed.
Among the main providers of such services are Stripe, GoCardless, Braintree, and Checkout. These are established payment systems that have been operating in the industry for a long time and serve many large services, including Uber, Lyft, and even Google. When connecting a payment system for a subscription-based business, it is important to choose an experienced provider that can ensure a high level of transaction security and can be trusted with your customers' card data. Otherwise, the collaboration may pose significant risks.
Additionally, automatic payment model is typically not available for high-risk businesses, as it involves process, which can only be offered to trusted products. Automatic payments to gaming or gambling portals contradict the rules of most payment systems and, to some extent, business model itself. For such businesses, ensuring customer willingness to make purchases on the platform means everything and goes via improving retention and working with the audience. IT services, on the other hand, work well with this model and show good results.
