Subscription-Based Merchants: Best Practices for Managing Recurring Payments

An expanding niche that shows no signs of slowing down, the online subscription market is estimated to be worth $2.3 trillion by 2028.

This tactic is also proving to be a popular one for Shopify merchants. In 2023, $1.84 billion worth of revenue was drawn in through Shopify Subscription Solutions, meaning that the integrated subscription capabilities of Shopify stores are regularly being used.

The benefits of subscriptions in terms of building a loyal customer base are evidently attractive. Of course, this model isn’t all sunshine and steady revenue streams. There are also some challenges to deal with.

From the pros and cons of this model to actionable recommendations, we’ll cover everything subscription-based merchants need to know about handling recurring payments in this blog post.

Subscriptions—they’re everywhere you look. From meal delivery services to SaaS subscriptions, it’s clear this model is far from a fad.

Benefits of offering subscription-based merchants

Growing a customer base and raising revenue are at the top of most businesses agendas. 70% of businesses identify subscriptions as being key to attracting prospects in the future. Subscription-based merchants often opt for the model because of the steady, sustainable revenue stream potential.

Steady revenue stream

Cash flow that you can rely on is sure to be attractive to any business. Successful subscription businesses can create customers for life. Think of how many subscription payments leave your bank each month. Each of those businesses have secured steady, reliable revenue rather than relying on a high volume of one-off purchases. This reliability of income makes sales forecasting and inventory planning much more efficient, providing plenty of room to invest in further growth.

A loyal customer base

By offering true value, you can build a rock solid customer base that identifies with your service. Lifetime value (LTV) is one of the key metrics to track. This measures an average of the revenue you can expect to receive during the typical individual customer lifespan.

Once the subscriptions are rolling in, the customer relationships they create inherently increase this value. In fact, subscriptions can increase LTV by as much as 230%, showing how loyalty is a cheat code when it comes to growth.

Lower customer acquisition costs (CAC)

Marketing to new customers can be as costly as it is time consuming. To maximize the value, retention is crucial. In today’s market, the cost of acquiring customers can be between 5 and 20 times greater than the costs of retaining existing customers. The subscription model depends on recurring customers. Once established, retention is equally aa important than acquisition, as it naturally lowers associated costs.

Ample upselling opportunities

A knock-on effect of the customer loyalty garnered through subscriptions, repeat customers will be more receptive to additional purchases. The value in loyal customers is clear. Existing customer are 50% more likely to convert than new customers, meaning that there are big rewards for providing a useful subscription service.

Best practices for subscription businesses

Building a profitable subscription business will allow you to reap the rewards of these benefits. To grow a business and retain long-term customers, there are some best practices to apply along the way. Whether you’re just starting out or running an established brand, these factors are important to consider.

Set clear payment terms

Trust is everything in commerce. The more transparent you are, the better your chances of a long-lasting customer relationship. Customers should see clear payment terms at every step of the process. Measures have been put in place to combat subscription traps, and it’s important to differentiate your subscription from this unethical practice.

Make sure customers know all the ins and outs straight away. Clearly outline your billing cycle, whether it’s monthly, quarterly, or annual. Specify how renewals work and whether payments are automatic. These details should be easy to find on the website and in collateral, such as confirmation emails.

Don’t forget to include refund and cancellation information. Similarly, explain how to cancel and make it as simple a process as possible. Customers are more likely to subscribe and stick around when they’re fully informed and being treated fairly.

>> Read more: Top 14+ Profitable Subscription Business Ideas Worth Considering

Track key metrics and optimize

Keeping tabs on key numbers is important. They give you an indication of how you’re performing and point toward areas for improvement. By monitoring these, you’ll spot new trends, avoid pitfalls, and know exactly when to pivot or improve. For example, 49% of US-based subscription companies experienced increased customer churn in 2023. Noticing an increase in churn as it’s happening should spring you into action to find the pain points and correct them.

These are the most important metrics for subscription businesses to follow.

• Monthly recurring revenue (MRR) – The total monthly revenue generated by active subscriptions
• Annual recurring revenue (ARR) – The total annual revenue generated by active subscriptions
• Churn rate – The rate at which customers are terminating their subscriptions
• Average revenue per user (ARPU) – The monetary contribution of each subscriber. Determines how many customers come from expensive tiers compared to cheaper/free ones
• Customer acquisition cost (CAC) – The cost it takes through marketing channels to bring in new customers
• Lifetime value (LTV) – The total revenue each customer would bring across the lifespan of their subscription
• Trial conversion rate – The rate which those who sign up for a trial convert into paid customers. Only suitable for those who offer a free trial

Minimize failed payments

Failed payments are a real obstacle to growth. They can make you lose customers just as quickly as you bring them onto your site. Online merchants lose 62% of customers who experience a failed transaction, severely hindering any customer acquisition tactics. This poses a huge threat to subscription businesses. In fact, payment failure is attributed to between 20% to 40% of customer churn in subscription services. Managing issues proactively can help recover and retain customers.

Payments fail for a number of reasons, but a common culprit is expired or invalid payment information. Keep customers in the loop and give them a nudge with automatic reminders when the expiry date is approaching. Offering multiple payment options can also help mitigate this issue and ensure the payment goes through smoothly.

When payments do fail, implement a smart retries system that attempts to reprocess around optimal times. Couple this with clear communication. A quick, friendly notification can save the relationship, giving them a chance to resolve issues before their service gets interrupted.

Simplify the signup process

Nobody wants to jump through too many hoops when signing up for a service. Hitting a maze of forms and needless questions can make potential customers hit the cancel button. A clean and intuitive signup form which only requires the essential information can help increase acquisition rates. Your marketing efforts have done the heavy lifting—don’t drop the ball at the last hurdle.

If the signup process includes some multiple choice options, like choosing a tier or frequency, make the options clear and easy to understand. Avoid overwhelming customers with too many choices and make the interface as visual as possible. Each step should feel intuitive. This approach shows respect for the time of customers and ensures you’re starting off on the right foot.

>> You should read: How to Start a Subscription Business: Step-by-Step Instructions

Make it a personalized experience

No one wants to feel like a number. A simple touch of personalization goes a long way. Use customer data to personalize their entire subscription lifespan, including curated content, personalized communications, and special one-offs based on their preferences.

To take it a step further, marking big milestones like birthdays or subscription anniversaries can make customers feel truly valued. Even small gestures, like heartfelt messages and freebies, humanize the brand and help to solidify that all-important relationship.

Automate your invoices

Automated invoicing is essential for subscription-based merchants. Just imagine having to invoice manually for each subscriber. There’s bound to be delays and errors.

With the helping hand of automation, you can send invoices at regular intervals. This includes setting up payment reminders, which reduces the hefty workload associated with manual invoicing.

Choose an invoicing solution that integrates with Shopify. Sufio does this directly, offering automated invoices, credit notes, and other important documents.

Common recurring payment issues and solutions

Recurring payment models are fantastic for steady revenue when they’re working as they should be. When they’re not, payment hiccups can be costly and extremely detrimental. Keeping on top of any issues is crucial to keeping the payments flowing in. These are the most common you’re likely to encounter.

Expired payment cards

If you’re seeing a surge in failed payments, expired cards are often to blame. It’s not uncommon for customers to lose track of these dates, with many not knowing until a payment has failed. It’s a simple human error that you can mitigate by staying organized.

Get ahead of the curve by tracking card expiry dates and reaching out to customers with a friendly nudge to update their details. Utilize automated email remainders to give them a polite reminder of the upcoming expiration date to prevent any snags or interruption to their service.

Account holds and fraud protection

Banks have (quite rightly) put measures in place to keep fraud at bay. Anything that looks suspicious could be blocked. Billing descriptors are hugely important to circumnavigating this, but getting them wrong can be detrimental. Bad billing descriptors lose the transaction, can lead to chargeback fees, and repeat offenses can mark you as high-risk. With a study finding 47% of merchants pay no attention to their descriptors, this is a concern you’ll want to avoid.

First and foremost, make sure your business name is clear on the descriptor. You don’t want to write War and Peace here, but ensure key identifiers are in there. Anything too vague could run the risk of being pushed back.

Insufficient funds

Whatever the reason for failed payments caused by insufficient funds, it can be a headache for your business. Having to chase these up can have a domino effect on both customer relations and revenue. To minimize this risk, there’s a few steps you can take.

Setting up smart payment retries are a user-friendly way of retrieving the revenue. By retrying a few days later rather than straight away, it gives the customer a chance to move money across and prevents them feeling under pressure.

Ensure you’re also sending pre-payment reminders so there’s no surprises. Also be sure to communicate and offer flexible payment options or grace periods if needed. Most customers are more than willing to resolve issues. Provide solutions rather than taking an aggressive approach.

Human error

We’re a forgetful species at times. A subscription might’ve slipped a customers mind or they might have forgotten about an automatic renewal. While at first glance this might not seem like an issue to the business, it can cause customers to dispute the charge as unauthorized. Communication is key to avoiding this.

Send reminder emails in the run up to renewal and billing dates to ensure customers have a clear picture of what to expect. This also covers you for any potential disputes down the line. Similarly, it’s important to make all of the terms around renewals and cancellations as clear as you can.

Failed payments due to cross-border transactions

Between exchange rate discrepancies and technical glitches, cross-border transactions can cause problems. When managing global customers, it’s important to give them as smooth a payment experience as possible. Otherwise, they may choose to go elsewhere.

To prevent the risk of failed international payments, offer a wide variety of payment options and ensure they cater to global customers. By providing diversity of options, there’s certain to be a solution that works for everyone.

Sufio’s cross-border features make global transactions as easy as you like. They allow merchants to automatically generate invoices that comply with local tax laws, helping to prevent blockers with currency conversion and regulatory issues across different countries. This automation of tax compliance is crucial for businesses selling in regions with varying tax rules.

How invoicing apps support subscription-based merchants with automated invoicing

Invoicing apps aren’t just a nice-to-have—they’re a must for subscription businesses. By automating invoicing, you reduce errors, improve efficiency, and give customers a smooth, professional experience every time they pay.

You should watch this video to find out more: https://youtu.be/dvKWyiyTY5I?si=XIuEg6FYWg0Y3-QF

Invoicing apps like Sufio take the manual labor out of invoicing, reducing the chance of payment delays and cash flow issues. With features for localization and personalized branding, automated invoicing isn’t just about function; it’s a way to reinforce your brand’s identity globally.

For subscription businesses on Shopify, tools like Sufio are essential. With multi-currency support and a comprehensive suite of features, these apps allow you to focus on delivering value to customers.

>> Discover: Top 7+ Best Shopify Subscription Apps to Stay Ahead in ECommerce

Choose the best extensions for your subscription business

Your subscription business needs top-tier support. From Shopify apps to advanced analytics tools, the right integrations can supercharge your subscription model.

If you’re looking to elevate your business, consider partnering with BSS Commerce. With a range of extensions, apps, and expert services, BSS Commerce provides the toolkit you need to scale and optimize your business.