Last editedApr 20236 min read
An introduction to invoicing and subscription billing
Invoicing has traditionally been the most popular and widespread method for small to medium sized businesses to bill their clients for goods and services. In the days of cheques and bank deposits it made sense to send an invoice to customers and wait for them to pay. Invoices fulfilled multiple requirements: as well as being demands for payment they also helped a company maintain accurate accounting records.
However, this situation has been changing for decades, and the pace of change is increasing. As payment methods have become more advanced, automated and streamlined, the traditional approach to collecting payment has been losing its appeal. Invoices can sometimes be mislaid – either through conventional post or by email – and they require action on the part of the customer to make payment.
It's the payment aspect that's the biggest disadvantage of using invoices. Even with tight payment terms, most businesses will experience late invoice payment. Delays may range from a day or two to several weeks over the agreed payment term. That can be a serious problem because it directly affects cash flow, and poor cash flow has caused the demise of many businesses.
For some businesses there are now better options. If you regularly sell goods or services to the same customers, it may be worth switching away from invoicing to a subscription model and recurring billing.
A subscription model means that your customers sign up to receive regular goods or services, for example on a monthly basis. Recurring billing means that they agree to pay you for those goods and services on the same regular basis – and often in advance. Payment is usually automatic and fast, with money taken directly from the customers' bank accounts within a few days. Subscription billing:
Gives you a more predictable cash flow because you know how much – and when – you will be paid
Allows you to bill people up-front rather than waiting for them to pay you in arrears
Lets you price your products based on value rather than time
Reduces the risk of late payments from customers
Helps you keep existing customers and reduce churn
Finding recurring revenue opportunities
Though many traditional services businesses have the scope to introduce subscription billing, it’s something that the majority are yet to take advantage of. Here are some examples of recurring revenue opportunities that might apply to your business:
PR and marketing services
Accountancy and other professional services
Monthly rental of goods, premises or services
Internet provision, e-commerce solutions and web hosting
Energy supply and other utilities
In short, if you currently bill your regular customers on a weekly, monthly or quarterly basis, there is opportunity to take advantage of subscription billing and bring more predictable, recurring revenue to your business.
How to move from invoicing to subscription billing in five steps
1. Develop a winning pricing strategy
There are several points to consider when thinking about the pricing strategy to adopt when you move to subscription billing.
Price to entice - It's usually not a good idea to try to force your customers from invoicing to subscription billing. It's much better to encourage them to use the new billing method – the carrot is more effective than the stick. One way to achieve this is to price the subscription billing option a little lower than your usual invoiced option – in other words, give your customers a discount for using subscription billing. You will almost certainly make up this discount through improved cash flow and lower churn rates, and there's nothing to stop you increasing your prices at a later date.
Check out the competition - Take a look at what your competitors are doing, if any of them use subscription billing. It may be unwise to copy them exactly or try to match them price-for-price, especially if your goods and services are differentiated on value or quality, but they can still be useful as a guide.
Package your offerings - You can be flexible with what you sell via subscription billing and how you sell it. Now is a good time to revisit your existing product/service bundles and refresh them for new and existing customers. Think about the structure of each plan, whether to have a free or reduced price trial period, how often to bill (and on what days), what subscription add-ons you can offer your customers, the duration of the subscription (infinite or fixed term), payment terms, volume discounts and so on.
2. Choose the right billing system
You may already be using cloud accounting software, such as Xero, to send out your invoices. This type of software has considerable advantages over conventional software in that it allows to you access your accounts from any device with a browser. For smaller businesses this can be particularly useful, since it allows you or your staff to update your accounts while out of the office.
Cloud accounting software becomes even more useful when moving from invoicing to subscription billing. In fact it's essential, because the software is always kept up to date, every time you use it. This makes it easier to manage the subscriptions, even if your clients pay by different payment methods or on different days of the month.
Cloud billing also reduces the risk of human error. Once you've created your packages of goods or services and priced them, as above, the details of those packages can be entered into the billing system. From this point on, the entire process can be automated. Customers can sign up, choose a payment method, accept your terms and be registered in your subscription billing system without you having to lift a finger.
3. Optimise the cash collection process
The big benefit of subscription billing is that it allows you to get paid faster, which in turn improves your cash flow. In order to take full advantage of this, you'll need a payment method that makes it as quick and easy as possible for your customers to pay you.
The majority of payment methods require some action on the part of your customers to make payment. These – including credit and debit cards, bank transfers and similar methods – are known as 'push' payment methods because they require the customer to 'push' the money from their bank account into yours.
For subscription billing, the better option is a 'pull' payment method, which allows you to take the money from your customer’s bank account each time a payment is due. The most efficient pull payment method is Direct Debit. All this requires is for your customers to complete a simple mandate that authorises all following payments.
Direct Debit is very flexible. It's possible to vary the amount of money taken and the frequency of the payment. Customers are covered by a strong guarantee that gives them peace of mind. Churn rates are therefore very low, and payment is usually received within a few days.
It's a good idea to give your customers some flexibility when they complete their mandate form. Let them choose the billing date if you can, as this helps customers who are paid on a certain date each month. Choose a Direct Debit provider like GoCardless that make it easy to adjust the payment amounts as required. This allows you to sell subscription add-ons to your customers at any time without them having to complete a new mandate.
4. Build your customer relationships
Subscription billing doesn't remove the need to build strong relationships with your customers - in fact it makes it even more important. The ongoing nature of the subscription model means that building and retaining those relationships is crucial.
To really build good customer relationships you need to talk to your customers. What are their goals? What are their needs? What matters to them, specifically in relation to the goods or services that you're providing? How can you improve your service to them? What other products might you offer to them? Are there things that they don't like about the way you interact with them? What are the areas in which you could improve?
No doubt you already have customer feedback systems in place to help you discover this sort of information. Make use of them as you move from invoicing to subscription billing, because your customers' needs may have changed and now is the perfect time to learn how and why. By doing so you'll be able to focus on retaining your existing customers as well as acquiring new ones, both of which are vital for a healthy business.
5. Measure and optimise
Good data makes for good business. By keeping careful track of all interactions with your customers, you can fine-tune your strategy and tactics to do more of what works and less of what doesn't. It will be a learning process because your market and customer base are always changing. Three metrics worth focusing on are churn, customer lifetime value and monthly recurring revenue.
Churn is a measure of how quickly (as a percentage over a certain period) a company loses regular, subscribing customers. It consists of two parts. The first is involuntary churn, as described above, in which a payment method fails due to an expired or cancelled credit card, for example. The second is voluntary churn, in which a customer decides to stop using your business. For some payment methods, involuntary churn can account for over a third of total churn, which is why it makes sense to choose a 'pull' payment method such as Direct Debit.
Customer lifetime value, or LTV, is the amount of revenue generated per customer, on average, over the total time that they use your business. It's a helpful measure because it guides you in deciding how much you can afford to spend in attracting new customers. Subscription billing can help increase LTV by reducing churn rates.
Monthly recurring revenue, or MRR, represents your total monthly revenue from subscription billing, excluding any one-off payments received from customers. It's a useful baseline measure that can help you with cash flow calculations.
How GoCardless can help you move from invoicing to subscription billing
The best way to set up subscription billing with Direct Debit is to use GoCardless to handle customer payments for you. GoCardless simplifies the customer sign-up process using a secure online mandate form that takes just minutes to complete. The GoCardless platform is optimised for recurring payments and can be used to offer whatever flexible pricing plans you decide are most appropriate for your customers.
GoCardless integrates seamlessly with more than 200 software platforms, including Xero and QuickBooks, making it easy to manage the whole billing process from one place. You can then automatically collect recurring and one-off payments for goods and services. You can also vary the payment amounts – for example, for subscription add-ons – and set the dates of customer payments.