Software Debate: Recurring Billing vs. Single Payment

| by

How do your receive payment for your software?

View Results

Loading ... Loading ...

Nature of Recurring Billing

Recurring billing, or subscription billing, is the cyclical process in which a client gets charged automatically for having access to a particular commodity for a period of time.

The underlined words define the essence of the term.

  1. It’s cyclical, i.e. charging occurs more than once, at even intervals.
  2. It’s automatic, happening without any action on the client’s side after the first payment.
  3. It is done in return for access. It is enough that the client has entered in agreement with the vendor and the commodity is made accessible; whether it is actually used is irrelevant. The access itself is commonly referred to as a service. One may have access to a rented car (product) or an online banking dashboard (service), in either case the access is the service subject to billing.
  4. The billing period is the unit for which price is defined – a day, a month, anything that makes sense.

In the software industry recurring billing is often associated with SaaS (software as a service). It is not impossible to implement for downloadable software products, especially ones that use a live internet connection and are updated automatically, but the risk of hacking and piracy is much greater with downloadable software. Below we are looking at the pros and cons of recurring billing versus a one-time payment with unlimited use.

Recurring Billing vs. Single Payment

From a vendor’s perspective:

  • Implementation and cost
    • A single payment is easier to process and less expensive.
  • Revenue
    • Recurring billing is generally thought to drive more revenue than one-time billing. This can be explained with:
      • The greater variety of service plans that can be offered. More choice and more flexible payment options mean more paying customers.
      • Automation. As soon as one cycle ends, the next one is being charged for, no gap in between.
  • Cash flow and analytics
    • Subscriptions lead to better distributed and more easily predictable cash flow. The shorter the cycles, the more accurate the stats about usage and payments.
    • On the other hand, single payments generate a larger sum of cash upfront.
  • Risk
    • If not implemented correctly, subscriptions provide short-term access to valuable resources (like an online database, for example) which can be exploited to a great extent by some consumers even before the end of the first billing cycle. Contrary to this, an unlimited plan has all risk covered in the price.
    • The buyer’s service expectations become elevated. They tend to think “if I’m continuing to pay you then I expect a continuously high level of service and support”.
    • Subscription billing tends to increase consumer discontent. There is always a portion of subscribers who consider the practice unethical, even illegal, and these subscribers often manage to make noise and undermine the vendor’s reputation.

From a consumer’s perspective:

  • Cost
    • Subscriptions are more cost-effective in the short-term. One can use the service for 5 months and when it is no longer needed, the subscription can be cancelled. Much better than paying for an unlimited plan. There is, of course, a cross-over point at which the sum total of the subscription payments exceed the upfront cost of a one-time payment.
  • Risk
    • In today’s world, end-user agreements are ubiquitous and overwhelming and consumers sometimes don’t realize they have agreed to pay on a recurrring basis. Even if they know about the billing method, they may forget to unsubscribe after they stop using the service. This can lead to ill-will and lower a vendor’s customer satisfaction ratings.

Which billing option do you think is more appropriate for a software business? Is there anything you’d like to add to the list of pros and cons? Please share your thoughts in the comment section below.

Share

5 comments on “Software Debate: Recurring Billing vs. Single Payment

  1. I think it would be interesting to see if the demographic variances of consumers who purchase using recurring billing versus single payment. My guess would be that the younger generation would be more apt to use single payment opposed to recurring. Anybody have any data on this?

  2. It really depends if we are talking about B2B or B2C.

    For B2B, something that is mentioned here is the cross-over point when a monthly recurring fee exceeds the 1-time purchase price. This is often true but not accurate in that typically around the 3-5 year mark, the customer has outgrown their application. On-premise software (1-time purchases) will often expire their support if companies are operating on an older version, forcing an upgrade (big costs!). I also do not believe that maintenance fees are captured here, which are recurring annually for the customer. So in addition to the 1-time purchase fee and implementation fee, you are incurring another recurring fee (or sacrifice maintenance which is often non-negotiable).

    Of the many benefits of SaaS, the pricing model is very attractive to companies as it provides them the opportunity to reduce operational expenses while completely eliminating maintenance fees, infrastructure costs and the threat of forced upgrades.

  3. I think there is a tendency for lower cost subscriptions to more tolerated as compared to higher cost subscriptions. For me anyway lower cost subscriptions are usually to ones that I keep…it’s like the monthly charges fly under the radar…my radar anyway :)

    Cheers,
    Tim

  4. I like demographic variance between recurring billing and single payment, and as we have seen nowadays, most organizations use these process for accuracy and flexible processing system.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>