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Key Takeaways

Subscriptions Boost Valuation: A reliable subscription model can significantly increase a business's valuation, sometimes up to 8 times more than businesses without subscription revenue.

Ecommerce Jumps Aboard: Ecommerce businesses are adopting the subscription model to boost their revenue and potential selling price, catching up with the SaaS industry's longstanding approach.

Missed Opportunities for Sales: Many ecommerce brands are not fully utilizing subscription payments to enhance their sales, missing out on a lucrative revenue stream.

Managing Recurring Revenue: The guide addresses challenges ecommerce business owners face, such as managing and optimizing recurring subscription payments and tackling failed payments.

Happy Customers, Happy Bottom Line: Optimizing ecommerce subscription payment processing is key to improving the bottom line while ensuring customer satisfaction.

SaaS businesses have been using a subscription model for years now, and for good reason.

A brand with reliable recurring revenue (i.e., subscriptions) can often be valued up to 8 times that of a business without.

Ecommerce businesses are now catching up, with many brands now using subscriptions to increase their revenue and get a bigger asking price if and when they decide to sell their business.

Subscription payments offer opportunities to increase sales that many ecommerce brands are missing out on.

But subscriptions also raise questions for ecommerce business owners, such as how to manage these recurring payments or how to deal with failed payments.

In this guide, we will look at how you can optimize your ecommerce subscription payment processing to improve your bottom line and leave your customers happier, so let’s jump in. 

What is Subscription Payment Processing?

Subscription payment processing is an online payment method where businesses take payments at regular intervals, such as weekly, monthly or annually. 

Ecommerce subscription businesses send customers products on a regular basis and charge their card automatic recurring payments for the products.

Some charge a monthly fee, whereas others offer a discount for recurring payments.

The most common ecommerce subscription models are gift boxes such as TheraBox, hobby kits such as Mix Box, or consumables such as Dollar Shave Club.

dollar shave club subscription brand payment processing
One of the classic subscription programs, Dollar Shave Club gives a solid value for the convenience offered.

However, many different types of ecommerce brands now offer subscriptions, including fashion brands such as Rent the Runway.

Each of these brands will have a payment processing system that takes payments automatically on a regular basis, without the need to send invoices or reminders to pay.

This makes it very efficient to take regular payments, leaving you to concentrate on business-critical activities such as marketing.

Types of Recurring Payments

The central feature and allure of a subscription for retailers is the recurring payment aspect.

It erases the possibility of abandoned carts for these lovely customers and the automated nature of it means merchants can spend their time wooing other potential or returning customers.

And, it isn’t a singular thing. Recurring payments come in many forms that you’ll likely know. Let’s look at these billing models, starting with the one we all know.

  • Fixed recurring payments. The customer is charged the same rate at a regular frequency (monthly, quarterly, annually). You see this in subscriptions for coffee, magazines, streaming services, etc. Examples: Dollar Shave Club and FabFitFun.
  • Usage-based subscriptions. This variable payment plan has customers only paying for what they use on a regular basis. This is seen more with things like cloud storage, so ecommerce brands don’t really need to worry about it. Examples: Dropbox and Amazon Web Services.
  • Hybrid subscription payments. Taking the two payment types above and combining them gives you a hybrid subscription, where there’s both a regular fixed cost plus a variable usage-based cost. Phone plans can work this way when data usage goes beyond the plan’s limit. Again, not often seen in ecommerce models. Example: Adobe Creative Cloud.
  • Tiered subscriptions. With tiered subscriptions, customers choose a level of access based on their budget. This is most common in SaaS models where customers can choose between something like Basic, Plus, and Pro plans. For ecommerce brands, you can use this model for subscription boxes. Examples: Birchbox and Scribd.
  • Freemium subscriptions. Another popular model with SaaS brands, freemium gives customers free access to a certain set of product features in an effort to drive them into upgrading. Examples: Audible and Grammarly.

How Does Subscription Payment Processing Work?

Now that you have some idea of what subscription payments look like in their various forms, let’s get into how the process works.

  1. Discovery and sign-up
    • Customers discover and sign up for a subscription that aligns with their needs and interests.
    • This process often involves enticing offers, such as discounted introductory prices or free trial periods, to incentivize potential customers to subscribe.
  2. Plan selection and payment method
    • Customers select their desired subscription plan and frequency (e.g., weekly, monthly, or annually).
    • They then choose their preferred payment method, which can include credit/debit cards, digital wallets like PayPal, or direct debit.
  3. Secure payment processing
    • Ensuring secure payment processing is crucial, as customers entrust businesses with sensitive financial information.
    • Ecommerce platforms and payment processors must comply with relevant regulations, such as the Payment Card Industry Data Security Standard (PCI-DSS), to protect customer data and maintain trust.
  4. Automated workflows and fulfillment
    • After providing payment details and agreeing to terms and conditions (including authorization for recurring charges from your billing software), customers' information is securely stored.
    • This triggers the creation of automated workflows within the order management system (OMS) and order fulfillment system, facilitating seamless recurring billing and product/service delivery.
  5. Subscription management
    • Effective subscription management practices allow customers to update their payment information, skip or pause deliveries, or cancel their subscription, accommodating changing preferences and circumstances.
    • Customers get regular payment reminders, letting them know that it will automatically happen on a certain date.
  6. System Integration
    • Payment processing integrates with various systems, such as the OMS, customer relationship management (CRM), and inventory management, to ensure smooth operations across the entire subscription lifecycle.
    • This integration enables businesses to track customer data, monitor inventory levels, and optimize fulfillment processes, ultimately enhancing the overall customer experience.

Top 5 Benefits of Subscription Payment Processing

The most important benefit of subscription payment processing is you get regular payments and the customer gets their products on time, but there are some less obvious benefits of having a good recurring payment processing system.

1. Turn subscriptions into an upselling opportunity

Customers will often welcome the chance to change their single purchase into a subscription.

Amazon does this really well on product pages and during checkout.

One of my products on Amazon has around 5% of the customers buying the products on a ‘subscribe and save’ basis.

Amazon is obviously a massive company, but you can create a similar experience in Shopify, Woocommerce, or most of the major enterprise payment processing software solutions.

copper cow coffee subscribe and save
Copper Cow Coffee prominently offers a 'subscribe and save' option for their Vietnamese coffee products.

By including a subscription widget on your product pages touting the option to ‘subscribe and save‘, customers will be more likely to take the savings and convenience that goes with it.

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2. Improve cash flow

Recurring payments are great for cash flow, as you can predict more easily how many sales you will have in the next period, and plan for any outgoings such as inventory purchases or marketing spend.

A great payment processor will encourage more sign-ups to your subscription service.

3. Great customer experience

A good payment processing solution for subscriptions will fit into your current systems without any issues. A seamless payment process will make these recurring purchases super easy for your customer, too.

Not only that, but since they don’t need to think about purchasing that product each month, you’ve simplified their life.

We all have so much to think about these days that we can all appreciate when someone relieves us of one of those things.

Improve your conversion rate to subscriptions by delivering a baseline great customer experience, and you will have that additional cash flow coming in, improving your bottom line and your business valuation. 

4. No more invoices!

Invoices are a pain. They are time-consuming, and they remind the customer that they have to part with money, giving them the opportunity to back out.

Subscriptions do experience customer churn, but the rate is much lower than one-time invoiced payments.

This customer churn rate is one of the main KPIs to track.

By having a subscription payment processing system, you can take automatic payments with saved payment information and provide the customer with an excellent experience.

Most payment gateways accept subscription payments, so it is easy to set up recurring billing for the customers.

5. Predictable revenue

The usual ecommerce business model works great, but you need to consistently lure customers back with retargeting campaigns, drip email sequences, and social media marketing.

A subscription model means that you have a tranche of customers that don’t need much tending to keep buying.

So, you can spend that marketing budget elsewhere to grow your overall customer base.

Plus, along with an improved cash flow, you also can predict what you’ll make each month from these sales.

13 Tips For Optimizing Your Subscription Payment Processing

Recurring payment processing makes it easy to set up subscriptions, but if you don’t optimize your system you could be missing out on other upsides.

Let’s have a look at some easy ways you can optimize your subscription-based payment system.

1. Design a streamlined signup process

A customer-friendly interface with minimal steps can reduce friction and increase conversion rates.

Mattress brand Time4Sleep increased their overall conversion by 19% by implementing a new UX for their mobile store.

While they aren’t selling a subscription, it shows the power of great customer experiences for driving conversions.

Translating these results to subscriptions means your brand could see a huge uptick in overall revenue by delivering a friction-free signup process. 

Shopify has easy-to-use plugins and in-built tools to help you build a smooth subscription signup process. As mentioned above, Amazon has a good example of a streamlined process too.

2. Offer multiple payment options

Offer multiple payment methods, including credit cards, debit cards, digital wallets, and ACH bank transfers, to cater to a wide range of customer preferences.

Customers love having multiple options, especially on mobile devices. Apple Pay, for example, has increased the conversion rate for Stripe payments by 250%!

Which makes sense as the whole payment process is so easy to use. 

You should also consider whether you need to accept multiple currencies, payment plans or bank account transfers.

Many small businesses and retailers now choose to have multiple payment platforms in the checkout flow, so the customer can choose the best option for them.

3. Leverage smart automated renewals

Automatic renewal systems for subscriptions are a must. There shouldn’t be hiccups for you or your customers here.

This ensures the customer will get their orders on time and also helps you to ensure you get paid regularly.

All subscription payment providers will allow you to set up automated recurring payments, and the best tools will allow you to preset what payments will be taken and when.

This is particularly helpful when the subscription changes on a regular basis. 

4. Present transparent policies and pricing 

Make sure all costs, including recurring charges, one-time fees, and any potential additional costs are completely transparent to the customer either on the product page or the FAQ section.

Transparency builds trust and reduces customer complaints and cancellations.

We previously looked at how important transparency is for your returns policy and the exact same principle applies to your subscription policies and pricing.

It is also very important to make the subscription billing policy clear to the customer, including when the billing cycle starts and how often payments are taken.

5. Optimize for mobile commerce

Mobile commerce now prevails over desktop in the US, so you must optimize the payment journey for mobile.

Not only do you want to reach the most amount of customers, but mobile shoppers are also more likely to impulse buy, which you want to be there for.

Choose a payment provider that’s optimized for mobile shopping, including using mobile payment service providers such as Stripe, Square, Apple Pay and Paypal.

Mobile optimization becomes even more important if you have a mobile app for online shopping.

6. Offer customizable subscription plans

Some platforms offer customizable subscriptions, which allow you to pay based on different factors such as delivery regularity, order size, or product preferences.

Some subscription payment services have services like this as add-ons.

Offering different options to the customer can be a good way to increase conversion, but it can also confuse customers. 

If you are going to offer customizable subscription plans, make sure your products would suit that service.

For example, food delivery services such as HelloFresh need to offer customizable options such as family size or dietary requirements, whereas a subscription for a simple product such as a magazine doesn’t need these features.

A great way to offer customizable subscription plans is to have a subscription management system that customers can access easily.

7. Communicate effectively

Most subscription payment systems allow you to set up when messages are sent to the customer and what the content of those communications say.

Use the communications to tell the customers about upcoming events such as payments or delivery notifications.

These messages are a great opportunity to tell the customer about your business, so make them personal and on brand.

athletic greens restock subscription communication
Athletic Greens keeps it on-brand, reminding the customer of the value of this restock. Source: Really Good Emails.

Any communications need to link up to your customer services systems so the team can see what messages have been sent to the customer, and provide excellent support. 

It is also important to make sure you communicate when things don’t work, such as a failed delivery, or if you need to retry a failed payment (also known as dunning).

Communication is the most important factor in reducing custom churn. 

8. Monitor data analytics and reporting

You can’t understand success without looking at the right numbers. It goes beyond simple revenue-number-goes-up data, though. To understand how your subscriptions are performing, you need to look at a few other metrics.

The most important KPI metrics to track are:

  • Monthly/Annual/Set Period Recurring Revenue (MRR, ARR)
  • Average Revenue Per Customer
  • Customer Lifetime Value (CLV)
  • Customer Acquisition Cost (CAC)
  • Churn Rate and Customer Retention

Most software will have these data points available inbuilt, but check that the reporting tools work for your business. 

9. Make it easy to cancel

Make sure the cancellation process is straightforward and hassle-free. A customer that’s unable to easily cancel a subscription is a bad enemy to make.

A positive cancellation experience can leave the door open for future sales and loyalty. A bad cancellation process means they will give you bad reviews and tell all their friends to stay away.

Not worth it.

I always recommend making it clear to the user on the purchase page and in the communications to the customer. Customers are more likely to sign up if they know that a subscription is easy to cancel.

10. Ensure your integrations play nice

It is important that the subscription tool you use integrates with your current systems.

Most tools integrate with all the major ecommerce platforms via API, which will allow you to keep your current workflows and communications.

Shopify and BigCommerce, for instance, have subscription apps to choose from in their app stores, enabling seamless integration with your day-to-day backend operations.

This is especially important if you already have good systems set up such as a CRM, accounting software, or email marketing software, as you don’t want to re-work all your old workflows.

11. Stay compliant wherever you operate

The laws relating to subscriptions and recurring payments vary from country to country.

The best payment solutions will have these terms and conditions as templates for different countries.

This means you can make sure all your payments are compliant with the laws of the customers’ countries.

Of course, it’s up to you to ensure your payments accord with the regulations of the countries, provinces, and states you operate within.

12. Personalize the subscription user experience

The best platforms allow customers to personalize their subscription plans with self-service tools.

For example, the customer might want to adjust how frequently they receive their products or increase the amount of product they receive.

This self-service aspect allows them control over their purchases and reduces any need for unnecessary and cumbersome customer support intervention.

This leaves your customer service team to focus on the more important tickets. It also reduces churn rate, as customers stay satisfied with the service.

13. Use subscriptions for upselling and cross-selling

The subscription journey is a great time to add an upsell. As the customer reaches the checkout page, you can present other products to add or an upgraded product to switch to.

For example, you could upsell to an additional product, or give a better rate for a longer subscription.

The coffee subscription brand Pact does this by offering superior coffee in the basket page, encouraging sign-ups to the higher payment option.

Subscribe to a Recurring Payments Model To Grow Sales

Subscriptions are a great way to increase your ecommerce income (and your valuation if you ever want to sell).

But, it isn’t just a lever you flip on. At its core, a subscription is a complex payment system with regularly planned shipments.

Processing payments is the most important part of the whole subscription journey, so it is important to make sure you are picking a solution that works for your business, integrates with your systems, and can create upsells for your products.

Find the best payment provider for your brand and create a stellar experience for these regular customers by following the tips in this post.

Keep up with other ecommerce software reviews, news, and tips by subscribing to the Ecomm Manager newsletter.

Subscription Payment Processing FAQs

Before we sign off, here are some final questions with quick answers to wrap up this topic.

How can businesses minimize failed payments and involuntary churn?

The key is implementing smart payment retry logic, also known as dunning management. Basically, you set up automated retry attempts when an initial payment fails, reaching out to customers with reminders and alternate payment options.

Additionally, offering multiple payment methods like digital wallets can help reduce friction. Don’t underestimate the power of clear communication—send payment reminders well in advance to give customers a heads up.

How can businesses optimize their subscription billing cycles?

Flexibility is crucial here. While monthly billing is common, offering options like weekly, quarterly, or annual cycles can cater to different customer preferences.

You can even incentivize annual prepayment with discounts. Another smart tactic is aligning billing dates with customer behavior—for example, billing gym memberships at the start of each month when resolutions are fresh.

And don’t shy away from testing and analyzing what works best for your business.

What are the best practices for handling refunds and cancellations?

Transparency and a customer-centric approach are essential here. Clearly communicate your refund and cancellation policies upfront, so there are no surprises.

For mid-cycle cancellations, be prepared to offer partial refunds on a prorated basis. And make the cancellation process as smooth as possible, whether it’s a self-service option or dedicated support channels.

A little empathy can go a long way in retaining goodwill, even when a customer decides to cancel.

How do subscription businesses handle tax compliance across different states or countries?

It’s a complex challenge, no doubt. First, you need to stay up-to-date with the ever-changing tax laws and regulations in each jurisdiction you operate in.

This might mean registering for sales tax permits, collecting the appropriate taxes, and remitting them to the relevant authorities. Additionally, you’ll need to consider factors like tax nexus laws, which determine where you’re obligated to collect taxes based on your business presence.

Leveraging tax compliance software or working with experts can be a lifesaver in navigating this intricate landscape.

By Teddy Smith

Teddy Smith is an ecommerce brand founder and a former Senior Ecommerce Consultant for Accenture. He is also an independent ecommerce consultant, specializing in selling on Amazon and marketplaces. Teddy has 13 years of experience working with both enterprise and small scale ecommerce brands, and has provided over 3,000 hours of independent ecommerce consulting sessions.