Last editedJul 20222 min read
The choice of whether to offer a prepaid subscription plan to your customers will be driven by the nature of your business. Any business which offers a regular service or a regular supply of goods – such as a monthly magazine delivery – might find it advantageous to offer a prepaid subscription option to customers. Those who sell goods on a one-off basis won’t find the prepaid subscription model useful, even if they deal with multiple returning customers.
What are prepaid subscriptions?
Generally speaking, a subscription means that a customer pays a regular set amount – usually a monthly charge – for services they wish to receive. Streaming platforms such as Netflix and Disney+ are probably the most widely utilised subscription-based services currently available. Subscriptions of this kind can be prepaid, which is the model we’re looking at here, or post-paid, which means that the services are paid for after they’ve been used. The prepaid subscription model involves customers paying for the services they use in advance.
The advantages of prepaid subscriptions
When considering the advantages offered by prepaid subscriptions, look at them from the point of view of the customer and the business. As a business, you need to sell the option to customers, so understand what they get out of it. For customers, the main advantage is that once the payment has been made, they get to have unrestricted access to the service, without having to remember to make multiple repeated payments. For your business, the advantages of subscription payments include the following:
Valuable, committed customers
Predictable revenue stream
The fact that subscription payments are made in advance and are on-going means that your business can easily predict cash flow going forward. A steady stream of income guaranteed for a specific period of time makes it easier to plan future investment and make accurate financial forecasts.
When a customer commits to taking out a prepaid subscription with your business, they are doing more than simply making a purchase. Instead, they are committing themselves to engaging with your business on a long-term basis. This makes them more valuable in simple monetary terms, and it also means that they give you a stream of customer data which can be analysed to hone and maximise your offering.
Predictable revenue stream
The more customers you have locked into prepaid subscription contracts – therefore delivering high value over the longer term – the more predictable your revenue stream is. In turn, this enables your business to focus on investing in a better experience such as providing improved customer service and using feedback from your subscription holders to tailor your product or service to be even more successful in the future.
The disadvantages of prepaid subscriptions
One of the disadvantages of the prepaid subscription model is that it places a greater demand on your ability to budget correctly. This is because you have a larger tranche of your income entering the business in one payment. Some prepaid subscription models involve the customer making 12 months’ worth of payments up front, for example, and it would be tempting to invest as much as possible into product development and long-term planning at once. If your calculations are wrong, however, this could lead you with too little cash left over for the day-to-day running of the business.
Another disadvantage of the prepaid subscription model is that these high-value customers may be more difficult to attract, requiring greater levels of marketing and a mature and highly developed product or service. Prepaid subscriptions are very unlikely to be impulse purchases, for example.
Recap: disadvantages of prepaid subscriptions
Greater requirement that your business budgets accurately
Larger and less frequent customer payments
Higher value customers may be harder to attract
Product must be well marketed and highly developed
GoCardless and prepaid subscriptions
If you do opt to offer the prepaid subscription model to your customers, working with GoCardless to collect payments via Direct Debit helps to make the process as smooth as possible. We remove the effort and manual processing traditionally involved in creating Direct Debits, making it easy to guarantee regular payments on a set date.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.