Strategy & Best Practices

How to Evaluate a Recurring Payment Solution

By Ideas @ AppDirect / July 25, 2016

Blog Paymentsolution

12 Tips for Evaluating Recurring Payment Solutions

The expectations of today’s cloud software buyers are higher than ever before. They want a user-friendly experience, one that offers a streamlined shopping and purchase process combined with almost instantaneous provisioning. Billing sits at the heart of these expectations, and the payment process must go seamlessly or you run the risk of making your customers unhappy, a key factor in driving churn. But with so many different options, how can you be certain that a recurring payment solution is the best choice for your business—and your customers?

Recurring Payment Solutions: Building In-House or Working with a Third Party

When selecting a payment solution, you have a variety of different options. You can opt for an in-house billing system, which gives you complete control but may limit your flexibility, since this approach is time-intensive and requires many engineering hours. Plus, a separate entity, usually a third-party company, still has to process credit card authorizations. Because of these complexities, many SaaS providers opt for a third-party recurring payment solution instead.

Third-party recurring payment solutions handle all of the complications that surround payments. These solutions can process purchases regardless of location and offer a high level of security. However, the most compelling aspect of these solutions may be the lower cost when compared with building the infrastructure internally. Whether on premise or in the cloud, there are a few important factors to keep in mind when deciding which recurring payment solution to choose. Here are some tips to help make the evaluation process more effective:

1. Define the Types of Charges Processed

What types of payments does your company process? Do you only process recurring charges, or are there times when you need to charge a one-time fee? For example, perhaps there’s an upfront setup fee or other single payment that won’t occur again. Not all recurring payment solutions handle both types of transactions, so be sure to make sure you select the right type of solution.

2. Ensure All Countries and Currencies Are Covered

Where are your customers located? Do your plans include expanding into new countries? If so, these factors play into which recurring payment solution is right for your business. For example, a billing system may support transactions in South America, but it may not accept payments in the local currency of a particular country. This becomes a challenge for your potential customers and may even create barriers to purchase.

Aside from PayPal, there are no payment gateways that support every single, but when you define the specific countries you serve (or hope to serve), you will find one that’s right for your business.

3. Understand the Parts of the Billing Process

There are three basic aspects involved in the SaaS recurring billing process: subscription management, payment gateway, and merchant account. Given this, it’s important to ask which elements are covered by the new service you’re considering. As a result, you can determine whether one solution will handle everything, or if you’ll need multiple solutions. Here’s a breakdown:

  • Subscription management platform. This manages the logic of the payment plans, covers the management and processing of discounts and coupons, and integrates with the appropriate payment gateways. Essentially it handles most of the “heavy lifting” of facilitating pricing tiers, discounts, and upgrades and downgrades of service.
  • Payment gateway. The payment gateway must be payment card industry-compliant (PCI), which basically means that if you store, process or transmit credit cards, a PCI-compliant hosting provider is required. Review each recurring payment solution option and ensure that it meets these requirements.
  • Merchant account. And finally, there is the merchant account, which offers a secure gateway for data. You will always need this type of solution to receive customer payments. But some solutions offer a “built in” version, which is more convenient. If a merchant account isn’t offered, you will be required to create an external account.

4. Take a Fee Inventory

Billing comes in many different varieties with a range of fees which could impact your bottom line. Fees usually include one or more of the following:

  • Monthly subscription fees. The provider charges a monthly fee for using all features. This model can be ideal if you process a high volume of transactions, whereas the “per transaction” model could get very expensive.
  • Setup fees. Some providers will charge a setup fee when establishing your account. Find out whether prospective companies charge this fee, and if so, what it will cost to get started.
  • Transaction fees. This model, where a small fee is charges for every transaction, is very common with recurring payment options. Additionally, a percentage of the total transaction may be charged as well. This is the structure that PayPal uses, charging a 2.9 percent transaction fee plus $0.30 per transaction. For example, the fee for $100 would be $3.20 ($2.90 + $0.30).

One final tip on recurring payment fees. If your provider uses a transaction-based model, your costs will trend higher as your transactional volume grows. When you hit this milestone, you can reduce expenses by negotiating fees with your recurring payment provider. SaaS providers that process high dollar amounts probably aren’t paying all the fees listed on the pricing page, and you can see some savings here, too.

5. Evaluate Your Features: Which Are Most Important?

There are many items to consider when comparing recurring payment options, and features can be among the most important.

For example, perhaps you manually generate and send monthly invoices to your customers. Handling this task, especially as your business grows, is time-consuming and unrealistic. For this reason, finding a recurring payment solution that will produce and send the appropriate invoices would be a top priority. Here are a few more features to consider:

  • Subscription tiers. Do you offer multiple subscription tiers? If so, look for a solution that allows you to easily manage and handle these different options.
  • Coupons. Do you offer coupons to existing or prospective customers? If the answer is yes, your solution will need features that make it easy for you to create, manage, and expire multiple coupon codes.
  • Trial periods. Perhaps you offer different trial periods or offers based on the product or client type. In this case, you will need a billing system that can seamlessly transition from free trials to paid subscriptions when the trial offer period ends.

6. Verify the Ability to Easily Modify Customer Preferences

For customers, one of the biggest benefits that SaaS offers is its flexibility. This means that customers can easily upgrade (or downgrade) their services, add additional seats, and more. While great for the customer experience, the ability to make changes like these can create billing headaches for SaaS providers. For example, without a self-serve method for upgrading built into a recurring payment solution, team members may have to field requests from customers via email and complete each change manually.

To avoid this, be sure to determine whether there is a simple way to add new billing tiers and features to the billing platform. This will help you avoid time-consuming tasks and keep things running smoothly for your business.

7. Understand Customers Through Analytics

Many businesses spend a large amount of money and time acquiring new customers. When these customers churn, your growth can be seriously impacted and you must work to catch up and recover that lost revenue. Once customers are on board, it’s important to keep them engaged, happy, and satisfied with your company so they don’t churn.

However, you can’t fix what you don’t understand, which is why the analytics features built into your recurring payment solution can be a huge asset. These tools can help you better understand your billing and ask important questions that include:

  • What percentage of first-time customers became ongoing customers after a free trial?
  • How long are customers with the service before churning?
  • What is the overall percentage of our customers who are churning?

Depending on the analytics tools available, the answers to these questions and many others can empower you to revise and improve your strategies.

8. Understand and Maximize Integrations

Depending on the other solutions that you use, your recurring payment solution may need some integration capabilities. For example, you may need an integration that allows you to send messages to customers directly through the billing platform to streamline communications. Understand which integrations work with existing solutions, and which new ones are available.

9. Look for Mobile Support

We’ve passed the tipping point for mobile technology; smartphones are ubiquitous and the time people spend consuming digital content on their mobile devices now exceeds the time they spend on the desktop, 51 to 42 percent.

Given this, creating an optimal experience for your customers probably means that your solution should support mobile payments. Even if your offering is not optimized for mobile today, it will probably be on your roadmap in the near future. With a flexible, mobile-optimized billing solution, you can lay the groundwork for future product developments.

10. Plan for Capability Issues

Unfortunately, some businesses discover payment compatibility issues after signing up with a new provider. Here’s one scenario: You may want to accept prepaid debit cards, but then learn that some providers can’t process this payment method. Even if this type of payment may be only a small percentage of your overall revenue, it can still have an adverse effect on the customer experience. Avoid this challenge by outlining all the types of payments that you want to accept, now and in the future, before selecting a provider.

11. Plan for Credit Card Expirations

A business with recurring payments is excellent for stability, but there are times when funds stop flowing because of credit card closures. While new cards are issued for a variety of reasons, including unauthorized use, they are also set to expire every few years for security reasons, a fact that presents an opportunity to be proactive about reminding customers to keep their payment information up to date.

For example, you can create a system for sending emails or reminders—or, even better, notices anticipating expiration dates—to keep payments moving smoothly. Partner with your recurring payment provider to understand integrations and recommendations for handling this critical portion of the billing lifecycle.

12. Get Assurances Regarding Downtime

And finally, we can’t discuss the evaluation of recurring payment solutions without addressing downtime. In fact, the overall cost of downtime is staggering, with the average midsize company losing about $1 million every year due to service outages. Be sure not to overlook this critical factor when choosing a payments solution.

Recurring Payments: Creating a Positive Customer Experience

A large part of what has made subscription billing so successful is that it provides recurring revenue in a seamless, low-touch way that is easy for customers to manage. When customers have positive experiences with your business, especially when it comes to the perceived value they get for their spend, it will positively affect how they feel about your company, products, and brand.

Without a solid billing solution in place, customers may encounter problems and fume about the payment process, putting them at risk for churn or negative word of mouth. In contrast, reliable, user-friendly, and accurate payment systems will help customers feel great about your company.

AppDirect’s subscription billing service enables companies around the world to drive sales by empower them with a comprehensive subscription management services. Our suite of services prioritizes a simple design that is flexible to each product as well as high-touch customer service designed to engage customers and reduce churn.

Ideas @ AppDirect is a leading source for trends, statistics, and other information shaping the cloud service commerce industry.