FAQs on Basics of Subscription Management

Q. What is subscription management?

Subscription management is handling customer lifecycle operations like onboarding subscribers, providing trials, managing plan upgrades and downgrades, issuing credits and refunds, and controlling billing actions. In a subscription business, items are sold periodically (weekly, monthly, or yearly) in different rate plans. The billing system is automated to receive the payments recurrently at scheduled intervals.

Q. What is dunning management?

Dunning management is a process which allows a business to recover payment that would otherwise be lost due to online payment failures and declines. If an online payment failure occurs, the dunning mechanism will automatically initiate the payment recovery process by notifying the customer of the payment failure and will retry charging their credit card or bank account to recover the due amount. This automated mechanism saves time, reduces involuntary churn due to payment failures, and streamlines revenue flow. 

Q. What is metered billing?

Metered billing is when customers are charged based on their usage. It is also called usage-based billing.

Typically, with metered billing, a customer is charged a standard amount for a specified amount of usage of the product or service. If the usage exceeds that specified limit, additional charges are applied.

For example, a business provides cloud storage. With the Basic plan, a customer can use up to 10 GB of cloud storage and will be charged $5. If the storage usage exceeds 10 GB, the customer has to pay extra amount (overage price) based on their additional usage. 

Q. What is proration?

Proration is the adjustment made to a customer's invoice to reflect subscription plan changes (upgrade or downgrade) in the middle of the billing cycle.Typically, a customer subscribes to a product or a service and agrees to pay a particular amount at regular intervals. The billing period and amount is based on the plan which the customer has subscribed to. Their bill is generated at set intervals to charge the customer recurrently.

However, when the customer decides to migrate to a new plan in the middle of the billing cycle, the bill amount has to be adjusted accordingly, to charge the customers only for the days they have the product using each plan. This adjustment process in billing is called proration.

Q. How are prorated charges calculated?

If a customer moves between different pricing plans in the middle of a billing cycle, they will be charged only for the number of days they have used the product or service with each plan.

Let's look at an example to illustrated how proration charges are calculated.

Imagine you own a subscription business. You sell your products under two subscription plans, plan A at $200/month and plan B at $500/month.

A customer purchased your service with plan B on January 1. But, on January 15, your customer migrates (downgrading) from plan B to plan A. Here, the plan A amount will be prorated from January 15 to the next billing date.

($500/31)*17 = $274.193

The credit note will be raised for the amount $274.193

Then, the amount to be charged will be calculated as,

(200/31) * 17 = $109.677

The credit is applied to the downgraded event, such that the amount

$274.193 - $109.677 = $164.516 will still be left as credits for the customer.

Q. What is the tiered pricing model?

Tiered pricing is a pricing strategy where you set price per unit within a specified range. Once a customer uses up the quantity in one tier, they move up to the next tier. They will be billed based on the quantity used in each tier.
For example, you charge your customers based on the following tiers:

Tier        Quantity      Cost per unit

1              1-30              $100

2             31-50             $50

3             51-100           $30

A customer wants to buy 70 units of your product.

With tiered pricing, the first 30 units will cost $100 each, the next 20 units will cost $50 each, and the final 20 units will cost $30 each. You will bill your customer according to the following calculation:

$100*30 + $50*20 + $30*20 = $4,600

Q. What is volume-based pricing?

Volume-based pricing is defined as the price for all the units within a specific range. Here, as the quantity purchased by the customers increases, the unit price will decrease.

In volume pricing, as soon as the volume reaches a particular threshold, all units will be charged at the rate for that volume, unlike tiered pricing where pricing changes as you fill each tier.

For example, your customer bought 70 units of a particular product with the following pricing:

Quantity      Cost per unit

1-30               $100

31-50             $50

51-100           $30

70 units falls under the quantity range 51-100. The cost associated with this tier is considered for calculating the total value:

$30 (Cost per unit in the 51-100 range) * 70 (total units purchased) = $2,100.

Q. What is unit pricing?

Unit price is the price of a single unit of a product. This pricing gives you the cost per pound, piece, or any other unit of weight or volume.

For example, customer purchases four units of a product that costs $5 per unit.

The total value of the purchased products will be: $5*4 = $20.

Q. What is bundle pricing?

Bundle pricing is a popular pricing strategy where different products or services are bundled together and sold at a lower price than when sold individually. Despite the products being sold at a discount, bundle pricing results in increased sales and customer involvement.

For example, combo offers at restaurants combine two to three food products for a lower price than the sum of their individual prices. These offers are bought more frequently, since customers get more value from each single purchase. From a business perspective, it increases sales, revenue, and above all, positive customer engagement and experience. Its a win-win situation for both customers and business owners.

Q. How is bundle pricing classified?

Bundled pricing is classified into two types based on the way the products are bundled together:

• Pure bundling

• Mixed bundling

Q. What is pure bundling?

Pure bundling is one of the types of bundle pricing where specific products are bundled together and only available as a package. Those products are not sold individually. Customers can choose to purchase the whole bundle or not buy at all.

For example, cable television operators provide purely bundled channels. Customers can't choose just the channels they want, instead they have to choose from the channel packages that the cable service provides.

Pure bundling is further categorized into two types:

• Joint bundling

• Leader bundling

Q. What is joint bundling?

Joint bundling is a type of pure bundling. In joint bundling, two products are bundled and offered at the price of one bundled product.

For example, a software provider offers software applications bundled together for a single price. Customers have to buy the entire bundle even if they only need one particular software product that is included in the bundle, because the software products are not sold separately.

Q. What is leader bundling?

Leader bundling is a type of pure bundling. In leader bundling, one or more products are bundled along with a product which has more value than other products. The product that has the most value is the leader product. If the customer wants to purchase a leader product, it can only be bought as a bundle. It is not available as an individual product.

Q. What is mixed bundling?

Mixed bundling is a type of bundling where the customer can purchase the items as a bundle or separately. If the products are purchased as a bundle, the price is lower than the sum of their individual prices.

For example, a restaurant provides a meal with several food items like sandwich, soda, and fries bundled together at a single price. Customers can purchase each food item separately as well as in a discounted bundle.

Q. What is grandfathering?

Grandfathering is a pricing strategy where you let your existing customers continue to pay the same price when you change the price of your product or service for new customers. This pricing strategy is used to maintain the loyalty and trust of existing customers, increasing customer retention rates and revenue.

Q. What is freemium?

Freemium is a business model where customers can use a product with basic features free of charge but need to pay for additional or advanced features. For example, Spotify allows users to use some of its main features free like creating a playlist and saving songs. However, the user can only access shuffled playback and must pay for a subscription to access advertisement-free, high quality audio, and other features.

Q. What is a free trial?

A free trial is an acquisition model where customers can try a product or service for free, for a limited period. At the end of that time period, the customer must pay to continue using the product or service. In this model, prospects can use and understand the value of the product or service before starting to pay for it.

Q. What is volume discounting?

Volume discounting is a sales strategy where customers can get discounts when they purchase products in bulk or in large quantities. This encourages customers to make bulk purchases, which can help increase the sales of the business.

For example, a customer wants to buy five units of a product. But there is a discount available when more than five units are purchased. If the customer buys seven units, then the customer has to pay the actual price for the first five units and for the remaining two units, the discounted price will be charged.

Q. What is limited time discounting?

Limited time discounting is a reduction in price offered to customers for a limited period. This increases the likelihood that customers will make a purchase during that period.

An example of limited time discounting is a business offering its products for half their usual price as part of a stock clearing sale.