G

The
Complete
Guide to
Subscription
Billing
 Companies exploring
subscription billing solutions
should look beyond their
immediate needs to ensure
they choose a platform that
meets their long-term needs.
This guide will walk through
the wide range of features
required to automate your
recurring billing, subscription
management and payment
process.

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 Contents
1. Overview 4

2. Pricing and Packaging 5

2.1 One-Time Charges
2.2 Recurring Charges
2.2.1 Fixed Recurring Charges
2.2.2 Volume Based Recurring Charges
2.3 Usage-Based Charges
2.4 Timing of Usage-Based Charges
2.5 Free Trials
2.6 Promotions and Coupons 7
2.7 Usage Processing
2.7.1 Overview
2.7.2 Metering
2.7.3 Usage Collection and Integration

3. Rating and Billing 8

3.1 Creating Invoices
3.2 Adjustments
3.3 Billing Automation
3.4 Multi-Channel Delivery

4. Payments 9
4.1 Multiple Payment Types
4.2 Ad-hoc Payments
4.3 Scheduled Payment Runs
4.4 Payment Gateway Integration
4.5 PCI Compliance
4.6 Failed Payments
4.7 Overpayments and Credit Balance
4.8 Refunds and Chargebacks

5. Account Management 12
5.1 Overview
5.2 Customer Account Creation
5.3 Free Trial Accounts
5.4 Customer Account Maintenance
5.5 Updating Credit Cards
5.6 Cancelling Accounts

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6. Subscription Management 14
6.1 Creating a Subscription
6.2 Creating Multiple Subscriptions
6.3 Adding Products to Subscriptions
6.4 Removing Products from Subscriptions
6.5 Updating Products in Subscriptions
6.6 Changing Subscription Terms and Conditions
5.7 Suspending Subscriptions
5.8 Cancelling Subscriptions

7. Web Self-Service 15
7.1 Account Creation and Initial Purchase
7.2 Viewing Information
7.3 Updating Information

8. Reporting and Metrics 16

9. Accounting System Integration 17

9.1 Integration Options
9.2 Accounting Close Process
9.3 Revenue Recognition

10. Taxation 18

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1 Overview
The increasing use of subscription billing creates significant challenges for back-office
systems. Billing systems and processes need to respond to a shift from one-time
transactional charges, to ongoing recurring charges and subscription management.

This document is intended to help you assess the range of features required in your
systems, for metering, pricing, billing and collecting.

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 2 Pricing and Packaging
The ability to rapidly define and introduce new price packages is key, and many companies
stagnate in the market when the billing system becomes a bottleneck to creating new
plans. Whether your goals are to better segment customers, improve cash flow, up-sell
additional offerings, or prevent abuse, pricing and packaging is an effective strategic
enabler. This section outlines a variety of pricing and packaging approaches that your billing
system should support.

Price plans are built from three kinds of charges: one-time, recurring and usage
based charges.

2.1 One- Time Charges

Most often used for a ‘setup’ fee, one-time charges are also frequently used during the
customer life-cycle for professional services, training, access to support teams, etc.
One- time charges are typically optional.

2.2 Recurring Charges

Recurring charges are charged based on a defined time interval. Different time intervals
for the recurring charges, such as weekly, monthly, quarterly, or yearly, should be
supported. Your system should also support additional complexities, such as when the
recurring charges are calculated (e.g., 1st of the month vs. anniversary date) and what
proration rules apply (e.g., for partial months).

Typically, recurring charges for a time period are charged in advance. Different types
of recurring charges must be supported.

2.2.1 Fixed Recurring Charges

Recurring charges might be fixed—a flat fee that gets charged each month to customers.
This is commonly seen in consumer applications, for example, charging $10 per month.

2.2.2 Volume-Based Recurring Charges

Recurring charges might also be variable - a charge calculated by multiplying units
purchased (e.g., application users) by a set price, with the purchase volume determining
the unit price. The unit price may also vary with volume (see below).

These pricing structures are commonly seen in B2B applications in which volume pricing is
negotiated when a contract is established.

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2.3 Usage-Based Charges
Usage-based charges are calculated based on the use or consumption of a service, and
can vary each month depending on actual usage.

Generally, price plans include an allocation for usage, with incremental charges for usage
above the allocation.

There are four typical variations of usage charges:

1. Standard: uses a set price per unit of usage, which does not vary with volume.
2. Tiered: the incremental unit price is set per range of usage
(e.g., 1-20 = $2; 21-40 =$1)
3. Stairstep: The unit price for all usage is determined by the overall volume; typically used
for volume purchases.
4. Volume: Provides a range of usage for a fixed price
(e.g., up to 10 users allowed for $100).

2.4 Timing of Usage-Based Charges

Usage - based charges are typically charged in arrears, with rating and billing at the end
of the period when usage is known. Account level credit limits should be used to limit
exposure to credit risk or fraud.

Pay-as-you-go charging, which charges the account as usage is incurred, is commonly used
to limit exposure to credit risk. To avoid small, frequent charges to a credit card, a ‘billing
threshold’ account setting should be used to accumulate charges until the threshold is
reached.

Top-Up charging models require the customer to purchase an allocation of usage in

advance; the account is recharged when actual usage consumes all or most of this initial
purchase. This approach avoids any credit risk.
Volume plans can also be charged in advance.

2.5 Free Trials

Particularly in SaaS (software-as-a-service) cloud businesses, you may offer customers a
free trial to evaluate your service prior to converting to a paying account. Some
configurations that your commerce system should support are:
 Whether a credit card or other method of payment must be provided before the free
trial can begin
 Customization of the free trial duration
 Reminder notifications as the free trial is about to expire.

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2.6 Promotions and Coupons
To help convert prospects to customers, you may also choose to offer marketing
promotions, which can be time-based (e.g., 50% discount for the first 3 months), volume-
based (e.g., tiered pricing, whereby additional units become progressively cheaper), or
both.

2.7 Usage Processing

2.7.1 Overview
With your usage-based pricing models, your commerce system will need to be able to
meter actual usage as it occurs to track what has been consumed and by whom.

2.7.2 Metering
Your business must be able to track what has been consumed and by whom. Typically, this
information can be obtained from the monitoring software of your underlying infrastructure,
but you will need to structure usage records in a consistent manner for your commerce
system. Each usage record should minimally have the following:

• Date and Time: When did this usage occur?

• Unique Customer ID: Who consumed the service?
• Unit of Measure: What was consumed?
• Amount: How much was used?

Your commerce system must own the aggregation of all usage data across your multiple
infrastructure systems, as well as the billing of customers against that data. In that way, your
infrastructure stack need only measure and record the above usage data, rather than being
burdened with additional commerce complexity.

2.7.3 Usage Collection and Integration

Your commerce system will need to integrate with your infrastructure layer to pull the
underlying usage data. Initially, a small scale manual integration process can be used but
later automation is key to avoid errors and bottlenecks.

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3 Rating and Billing
Rating refers to the process of translating metering data into invoice items for a customer,
based upon the chosen pricing plan. Your system will need to provide a rating engine that
can calculate these charges based upon usage data over time. In some instances, you may
need your system to be configurable as to how the rating calculations are performed.

Billing is the process of creating an invoice for customers on a recurring basis according to
the pricing plan they have selected, their usage during that time period, and any discounts
that may apply. This section outlines the key requirements for a cloud-based billing system.

3.1 Creating Invoices

Your commerce system will need to generate invoices for customers, indicating the
payment that is due. Invoices should be itemized to show one-time charges, recurring
charges, and line-by-line usage-based charges. In some situations, you may decide not to
present an invoice to certain customers, particularly ones that are billed automatically
each month via credit card. Even for such customers, it is important to create an invoice for
your records, to present to customers if requested, and for legal requirements in some
countries.

3.2 Adjustments
Your system should permit you to adjust invoices. There are two types of adjustments
that you will typically make:

• Invoice-level adjustments: allow you to credit (e.g., for customer service reasons)
or debit (e.g., for added late fees) an invoice after it has been created.
• Line item-level adjustments: allow you to credit or debit against a specific line item
charge on an invoice (e.g., to reverse out a charge that was not incurred).

3.3 Billing Automation

Revenue leakage occurs in manual systems when recurring charges get missed – for
example, when an annual service charge is not applied properly. Automating invoicing
and billing makes this an ‘always on’ process which automates account charging,
communication and collections on a pre-determined cycle.

3.4 Multi-Channel Delivery

Invoices need to be delivered to customers by email, and posted to a web self-service
portal. They also need to be readily available to support agents who deal with customer
inquiries.

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4 Payments
This section outlines the key items your commerce system will need to accommodate in
order to process payments and accelerate your cash collection.

4.1 Multiple Payment Types

Your customers will likely request to pay in different ways, so it is important that your
commerce system support the key payment types:

 Electronic: These payments are typically electronic bank transfers (e.g., ACH) or credit card
transactions that are made with a direct connection between your billing system and the
electronic payment processor.
 External: These payments, such as paper checks or wire transfers, are processed outside
of your commerce engine and must be recorded against an invoice back in the billing
system.

4.2 Ad-Hoc Payments

Generally, customers remit an invoiced amount on a regular basis. However, your system
should still support the processing of ad-hoc payments that customers may make. For
example, if a customer did not pay you the full invoice amount in a previous statement
period, you may need to process an ad-hoc payment to cover the outstanding balance.

4.3 Scheduled Payment Runs

For customers that pay electronically, your system should accommodate the scheduling of
automated payment runs that charge their accounts or credit cards at a regular, recurring
time interval.

4.4 Payment Gateway Integration

To accept credit cards and electronic checks, you will need a relationship with
a payment gateway (e.g., PayPal, Authorize.net, Moneris) to authorize transactions. Your
commerce system must be able to integrate with the payment gateway you have selected
to automatically charge the credit cards of your customers on a recurring basis. Your
commerce system should also allow you to change gateways seamlessly, so your end
customers do not need to re-enter their credit card information when you add or change a
gateway contract.

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4.5 PCI Compliance
If you intend to process credit cards as a method of payment, best practices will dictate that
your commerce system be PCI compliant, thereby achieving a level of security that meets
the standards of the Payment Card Industry (PCI) and giving your customers comfort that
their credit card information is protected.

PCI compliance involves network and system security approaches, as well as rigorous
adherence to process.

4.6 Failed Payments

When you schedule automated payment runs, your system should allow you to define how
many times you want to retry failed transactions on a specific credit card. For example, you
may define up to three additional attempts, and designate that a specific amount of time
(e.g., 12 or 24 hours) must pass between retry attempts. In addition, your system should
provide you and your customer with automated notifications should all retry attempts
ultimately fail.

4.7 Overpayments and Credit Balance

Customers will sometimes overpay the amount due, for example, by rounding up a check or
erroneously paying more than the current invoice amount. In these situations, your
commerce system should allow you to accept these overpayments and hold them as
credits for the customer that can be automatically applied against future usage of your
service. With support for credit balances, your business can avoid many time-consuming
refund processes.

4.8 Refunds and Chargebacks

Customer refunds are needed – for example, for overpayments or perhaps for unmet
service level agreements. In addition, your system should be able to support chargebacks,
which are funds to be returned to customers for contested charges. Customers typically
request chargebacks for fraudulent purchases made on their credit cards, clerical errors
(e.g., duplicate billing), or services purchased but never received.

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5 Account Management
5.1 Overview
This section discusses key system requirements regarding the creation and maintenance of
customer accounts.

5.2 Customer Account Creation

When creating a new customer account, your system should only collect information you
absolutely need to keep the process short and minimize customer abandonment.
Information typically required will be: name, password, key contact and billing information,
and payment information.

5.3 Free Trial Accounts

If your business offers a free trial period, you will need to decide whether your system will
collect credit card information prior to starting the free trial. Prior collection of credit card
information will likely lower your free trial customer acquisition rate but increase your
conversion rate from free to paying customers downstream. Testing both approaches is
a good way to measure which approach works best for your business, and so your system
should accommodate such experimentation

5.4 Customer Account Maintenance

Your system should allow your service agents and customers to access a customer account
and modify its details. In addition to the information entered during account creation, your
system should also likely allow for the editing of the following customer account details:

• Locale: information about the customer’s time zone and date format preferences
• Currency: the currency that is used to charge the customer
• Tax Exemption: a customer’s tax exemption status (typically not editable directly
by a customer)
• Payment Terms: you may want flexibility to offer both net 15 or net 30 terms
(typically not editable directly by a customer)
• Payment Methods: your system should ideally support entry of multiple payment
methods, in addition to selection of one default payment method
• Additional Contacts: for example, you may want to store different “bill to” and
“sold to” contacts for a particular customer.

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5.5 Updating Credit Cards
Subscription charges typically require that a credit card be maintained on file for the
duration of a subscription. Once a credit card is on file, there is the possibility that the
credit card will expire or the cardholder will cancel her credit card. Proactive notifications
to customers via e-mail and alerts on your web portal are needed when their credit
cards are about to expire. This proactive, automated approach will reduce the number of
failed payments and ultimately improve your cash flow.

5.6 Cancelling Accounts

Your system will need to support cancellation of customer accounts. Customers should be
able to cancel accounts in a self-service manner, and your support representatives should
also be able to cancel accounts, either at a customer’s request or for other business
reasons such as non-payment or fraudulent use.

To reduce revenue leakage, you should ensure:

• Before canceling an account, your system should cancel all the customer’s
subscriptions and verify that all due invoices have been paid or adjusted.
• The system should prohibit further subscriptions from being added to a cancelled
account.
• The system must ensure that any remaining usage prior to account cancellation gets
billed to the customer in the next billing cycle. Optionally, you may consider having your
system cancel all of a customer’s subscriptions but keep the customer account active, so
the customer can re-engage without friction later, with her existing account information
still intact.

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6 Subscription Management
When a customer purchases one of your cloud offerings, your system will need to create a
subscription for that customer, defining what has been purchased, by whom, over what
time period, and at what pricing rate. This section outlines the various requirements your
commerce system will need to support both in creating subscriptions and in managing
changes against it throughout a customer’s lifecycle with you.

6.1 Creating a Subscription

Your commerce system should create a subscription when a customer makes a purchase
from you. Some key information that should be captured in a subscription includes:

• Customer Name and ID: identifying the customer who made the purchase
• Initial Term: the duration for the subscription
• Start Date: the date that the subscription begins
• Auto Renew: whether the subscription should automatically renew at the end of the term
• Renewal Term: the duration for a subscription renewal
• Products Purchased: the products that comprise the subscription
• Product Pricing: the amount to be charged for each product purchased, which can
include one-time fees, recurring fees, and usage-based fees
• Billing Interval: the interval (e.g., monthly, quarterly, etc.) over which recurring charges are
billed.

6.2 Creating Multiple Subscriptions

As your business grows, you may want to offer an additional product line to your existing
customers. It is important that your commerce system allows you to create multiple
subscriptions for an account so you can, for example, allow your customers to try out the
new offering without impacting their existing service.

6.3 Adding Products to Subscriptions

To upsell more products or services to a customer later, your system should support the
addition of those items to an existing customer subscription.

6.4 Removing Products from Subscriptions

If a customer decides to downgrade from what he originally purchased (e.g., remove a
promotional product after its “teaser rate” has expired), your system should support the
removal of specific products from that customer’s subscription.

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6.5 Updating Products in Subscriptions
Your system should allow you to make changes to a product within a subscription if you
wish to alter the price charged to the customer for that product.

6.6 Changing Subscription Terms and Conditions

In some cases, your system may need to support the ability to change the terms and
conditions outlined in a customer’s original contract. For example, rather than issuing a
refund to a customer, you may both agree to simply provide that customer with a credit
extending the length of her contract by three months.

6.7 Suspending Subscriptions

Your commerce system may need to permit a customer to suspend his subscription to your
service for a certain period; this is common for seasonal businesses and services.

6.8 Cancelling Subscriptions

Your system must allow customers to cancel subscriptions to services that are no longer
needed. For example, a customer may cancel the trial subscription at the end of the free
promotional period, without converting into a paying customer. Since a customer can have
more than one subscription, your system must allow a customer to cancel one subscription
while keeping others active.

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7 Web Self-Service
A web presence allows customers to place initial orders, and reduces your lifecycle costs
by providing self-service capability to customers.

7.1 Account Creation and Initial Purchase

Your web storefront should allow a new customer to create an account and make an initial
purchase online.

The storefront should be:

• Configurable, to rapidly add new price packages and offerings without coding;
• Brandable, to match the rest of your website;
• Secure and PCI Compliant.

7.2 Viewing Information

Returning customers should be provided with a login and password to access your web
self-service portal. From the web, a customer should be able to view the following
information:

• Account Profile: customer’s contact and billing information

• Payment Method: the payment method used for any recurring billing. For credit card
• details, only the last four digits and the expiration date should be
displayed for security purposes.
• Subscription Details: information related to the products and services that a customer has
purchased from you, along with their corresponding rate plans
• Invoices: a record of the invoices you’ve generated for that customer
• Payments and Adjustments: the history of payments that a customer has made and any
billing adjustments you have made for the account

7.3 Updating Information

Your system should also allow customers to make changes to their accounts from your web
self-service portal, thereby saving you from significant customer support costs. Common
self-service updates that your system should support are:

• Changing account user name and password

• Changing contact information for that account
• Updating the payment information for an account (e.g., adding a different credit card or
changing a card’s expiration date)
• Adding, removing, or updating products in a subscription
• Creating, suspending, or cancelling a subscription

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8 Reporting and Metrics
Your system s h o u l d provide you with real time access to reports and subscription
metrics. appropriate for the cloud. Some important metrics to consider include:

• Total Customer Value (TCV)

• Monthly Recurring Revenue (MRR)
• Cash Flow
• Churn
• Customer Lifetime value
• Customer acquisition rates
• Product / Subscription sales
• Earned Revenues

Reports should be readily exportable.

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9 Accounting System Integration
9.1 Integration Options
Your commerce system will need to integrate with an accounting system to create your
company’s financial statements. There are two common approaches to integrating billing
data:

• GL Integration: The benefit of this approach is to unburden the accounting system.

Customer accounts, usage, invoices, and A/R are managed in the commerce system,
and a summarization of this data by GL accounting code is loaded into the accounting
system as journal entries.
• Invoice Integration: This approach passes customer information, invoice line details,
payments, and adjustments to the accounting system. The accounting system then
aggregates the information into the General Ledger.

9.2 Accounting Close Process

Regardless of the accounting integration approach, your commerce system should have the
ability to lock down the data therein as part of an accounting close process. Your commerce
system should allow for extensive flexibility to create invoices, payments, and other financial
transactions during the month. When the accounting books are closed, however, there
should be no ability to change transactions or create new ones in the closed period.

9.3 Revenue Recognition

The driving force behind revenue recognition is that you can only earn revenue as the
service is delivered. With arrears-based usage models where you invoice after the service is
used, revenue recognition is not a challenge. However, if your pricing model includes cycle-
forward billing where you bill ahead for a specified period (e.g., a quarter or a year), you will
need to need to recognize this revenue as it is earned. Your commerce system should have
the ability to invoice charges and trigger revenue recognition at a different time.

For instance, you may want to invoice a one-time setup fee as soon as the contract is
signed, but not start revenue recognition until the service is activated. Another common
complication for cloud businesses is in recognizing a one-time charge over the length of
a contract, or even the average customer lifetime. The commerce system will need to
be able to invoice for these one-time charges, but enable revenue to be recognized over
these longer service periods.

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10. Taxation
Applied taxes vary depending on geography (yours, and the customer’s) and type of
product or service. Each charge in your bundle of pricing may have different tax rules.
For instance, some states charge taxes on professional services but not on Internet
access, so your commerce system will need the ability to apply taxes differently for
each type of product that you offer.

Federal and state level taxes may apply, with variations for European Value Added Tax and
Canadian Provincial taxes.

Some of your customers, such as charities or churches, will be exempt from taxes. These
customers will need to provide proof of their tax exemption, and your commerce system
will need the ability to not apply taxes on a customer-by-customer basis.

About Fusebill

Fusebill automates invoicing, billing and collections for subscription based companies. Ideal
for both B2B and B2C businesses, our customers span many industry sectors, including
software as a service, digital media, and communications. Our customers rely on Fusebill to
reduce their costs, speed their cash collections, and extend their customer life cycles.

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Email: [email protected]
Twitter: @fusebill

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