As business models got disrupted and customers started focusing on outcomes rather than products or services, a new type of economy was born – the subscription economy. Subscription business sales have grown substantially faster than two key public benchmarks — S&P 500 sales and US retail sales. The Subscription Economy Index (SEI) has grown nine times faster than S&P 500 sales over the past five years (15.1% versus 1.7%) and four times faster than US retail sales (15.1% versus 3.6%).
Gartner predicts that by 2020, more than 80% of software providers will have shifted to subscription-based business models. The SEI report summarizes that “Recurring revenue-based business models are not new, but they have exploded in recent years owing to cloud-enabled, pay-as-you-go services. Subscription-based businesses have benefited from stable and predictable revenue projections, data-driven insights from direct consumer relationships, and large economies of scale owing to relatively small fixed costs.”
In the old world, the focus was more on products or transactions supported by one-time billing, but in this new economy, it has shifted to building and retaining customer relationships supported by subscriptions and recurring revenue. Think of Netflix, Amazon Prime or LinkedIn in the B2C (Business-to-consumer) space or Salesforce and WorkDay in the B2B (Business-to-business) space – these are representative of the changing buying behavior and patterns. The subscription economy led to the emergence of SaaS Software-as-a-Service (SaaS) free trial merchants, who would give free trials for a limited amount of time with the aim of giving the customer a full experience of their services, eventually leading to these customers subscribing to these services. Of course, conversion of free trials to paid customers is the biggest challenge faced by the SaaS merchants.
Challenges of being a SaaS free trial merchant
SaaS free trial merchants are always thinking about the length of the free trial – what time period is enough to provide a full-scale customer experience. The answer could be different for different industries but most free trials last from 7 to 30 days and could even go on for a few months in a few exceptional cases. From a payment processing perspective, the SaaS merchants run into challenges related to failed payments because the card in use may have expired or bank accounts may be deficient in funds. The chargebacks are also a huge problem in subscription billing primarily due to the fact that lot of times customers do not understand the full terms of the agreement including cancellation policies. Customers ideally want self-service options where the control button to upgrade or downgrade their services is in their hands.
Payments processors for SaaS free trial merchants
With these unique problems faced by the SaaS (or recurring billing) merchants, they need a payments processor who understands these business problems and provides payment solutions accordingly. A payment processor, who is a true partner and advisor caters to the SaaS merchants in the following ways:
- Helps convert free trial customers into recurring subscribers by providing easy and convenient options to sign up. In some cases, sign-up may be automatic and it will be important to give easy options to opt out. This is important from a customer satisfaction perspective.
- Provides a user-friendly dashboard to track subscriptions (including upgrades and degrades) and manage customer refunds and chargebacks. This not only ensures regular cash flow but also helps in making business decisions in segmenting customers and providing priority to the premier customers.
- Provides a solution that takes care of missed payments and chargebacks through timely alerts.
- Becomes a cost-effective partner by customizing the processing fees to a time-period (monthly/quarterly/annual) as opposed to charging per transaction. They can also make it even more cost effective by removing any setup fees or application fees.
- Tracks and delivers incentives like free trials and discounts to the subscribers. This will help push sales with current subscribers.
- Provide a high-secure environment to process payments as this category would fall in high-risk merchants.
- Responds promptly to any issues arising out of “free trials” including card declines and chargebacks. This will require significantly higher levels of customer service and account management from the payment processor.
In a subscription economy, it is important that SaaS free trial merchants partner with a payments processor who understands their specific business challenges and aligns the payment solutions to their needs. As the subscription economy scales and their business models evolve, the payment processors will also need to continuously innovate and keep pace with the business challenges.