Subscriptions, Free Trials & the Underlying Risk of Chargebacks

What is the Subscription Business Model?

The subscription business model, put simply, is a recurring revenue model. An arrangement between a business and a customer is made, whereby automatic payment is taken from the customer’s account either weekly, monthly or yearly in return for a constant flow of the goods or service they require.

Subscriptions are a very effective approach to business and are becoming increasingly popular worldwide. There are three types of subscription model; Replenishment, Curated and Access.

• Replenishment subscriptions ensure the continuous flow of the same specific items a customer requires on an ongoing basis
• Curated subscriptions offer new or personalised items on a regular basis
• Access subscriptions offer regular, highly discounted products and other perks to their members on different tiers

Newspapers & Periodicals

For those who wish to keep abreast with local and global news, as well as those who enjoy special interest information subscriptions to either physical or online newspapers and magazines ensures that the latest issue is delivered to a doorstep or inbox, without the need for the customer to repeatedly purchase the product on an ongoing basis. Popular subscriptions include The Times, The Guardian and the Daily Mirror, the Radio Times, and the National Geographic and Good Home magazines.

Software as a Service (SaaS)

Perhaps the most popular type of subscription is for Software-as-a-Service (SaaS). Customers pay a monthly fee for access to their chosen software. Regular improvements and updates to the software are automatically applied, meaning the customer does not need to repurchase the product every time a change is made. Among the most popular SaaS products are Google, Adobe, HubSpot and Webflow.

Content Streaming

Unlimited access to music, films, tv shows and podcasts is known as content streaming. In exchange for a subscription charge, companies offer vast libraries of online content, allowing customers to choose what they watch and listen to, and when they do so. Content streaming subscriptions include Netflix, Spotify and Amazon Prime, which have revolutionised the way media is consumed. 

Food & Drink

Food and drink subscriptions come under a category known as ‘subscription boxes’. Customers receive regular physical boxes delivered to their door, containing their favourite gourmet consumables. In some instances, the boxes are packed with the customer’s chosen items, in others, they leave it to the company to choose, creating an element of surprise and a chance to experience new products. Examples include Graze, The Gin Club, Hello Fresh, The Craft Coffee Club and the Cornish Fishmonger.

Beauty, Health & Wellbeing

Rather than having to adhere to regular gym schedules, subscriptions to health packages allow customers to workout in their own time, with access to online trainers, health diagnostics and other benefits. Others include subscription boxes packed with the latest wellbeing and beauty items. Examples include Fitbit, Yoga International and The Healing Box.

What are the Benefits of Subscriptions to Customers?

There are many benefits of subscriptions to the customer:

• Convenience – In the realm of ever increasingly busy lifestyles, subscriptions mean customers can enjoy the convenience of automatic renewal
• Less hassle – When a customer knows that they will need the product on an ongoing basis, a subscription takes away the burden of having to repurchase on a regular basis
• Trust – Customers build trust with the company with which they subscribe. They have an ‘on-going’ relationship and know what to expect, when to expect it and the quality of the goods or services they will receive
• Latest products, services & trends – Customers know that they will be supplied with the latest updates and products in a timely manner
• Peace of mind – Customers have the peace of mind that they can cancel their subscription at any given time

What are the Benefits of Subscriptions to Businesses?

The subscription business model is reshaping the ecommerce industry. While consumers are enjoying a wide range of benefits, businesses are also gaining highly significant advantages.

• Retention of customers – The retention of customers means businesses can focus on their customer base, and spend less time on trying to recruit new ones
• Increased customer loyalty – Customers become accustomed to working with a particular business. Trust is gained, loyalty is formed, and a business’s marketing costs may be reduced
• Predicted revenue – Businesses know when a customer is going to make a payment and for how much, allowing for easier incoming predicted revenue
• Engage customers with new products & Services – Businesses have a greater opportunity to promote or deliver new products and services to their customers, which might not otherwise be explored

Free Trials and the Option to Cancel at any Time

Many subscriptions offer free trials, allowing the customers the chance to ‘try-before-they-buy’. For digital subscriptions, this would usually be for a period of 7, 14 or 30 days, and for subscription boxes, this could be a free, one-off sample box.

In some cases, businesses will automatically enrol their customers at the end of their free trial. However, customers do have the opportunity to cancel at any time throughout the free trial time period and are not left out of pocket.

Customers also have the right to cancel a paid subscription at any given time. The rate of cancellations within a given time-period is known within the subscription business model as ‘churn’.

The churn rate gives businesses the chance to evaluate their level of customer retention and, if high, address reasons for concern. This could be the level of customer support or the quality of the product or service they are providing.

What are the Reasons for Subscription Chargebacks?

Chargebacks affect all types of businesses including ones that use the subscription model.  Here are three of the most common reasons customers might raise a chargeback for a subscription they initially agreed to sign up for.

• Convenience – This is in fact, one of the main reasons customers sign up for subscriptions in the first place. However, the convenience they enjoy, can also become the reason for a chargeback. Customers often forget about their subscription, and when they eventually see it on their bank statement, they don’t recognise it. As a response, they then file a chargeback through their bank.

• Forgetting to cancel – Customers often forget to cancel a subscription before the next billing date. This could be during the free trial period before an automatic enrolment, or during a payment cycle. Many businesses find that there are a higher number of chargebacks around the time of a new billing cycle.

• Difficult to cancel – Some customers find the process of cancelling a subscription complicated. As a result of this they simply make a call to their bank to open a chargeback.   

• Buyer’s remorse – This refers to the sense of regret after making a purchase. Often a customer thinks that the easiest and quickest way to reverse their decision is to call their bank and open a chargeback.

Top Tips on How to Prevent Chargebacks on Subscription Billing

Businesses can do a number of things to help prevent chargebacks on subscription billing. Here are some key strategies to help avoid chargebacks and protect valuable revenue.

• Good customer service – Create a good line of communication between the business and the customer. This will encourage customers to contact the business directly, rather than contacting their bank

• Clear billing descriptor – Ensure the billing descriptor is clear. This should match the name of the business so that when a customer sees this on their bank statement, they recognise it and are able to identify where the charge is from

• Pre-billing notification – A few days before billing a customer, businesses should notify customers that their card will be charged soon. This way, there is no shock element for the customer

• Transparency – Businesses should be as transparent as possible about free trials, whether or not customers will be automatically enrolled onto a subscription at the end of the trial, and when billing will occur

• Straightforward cancellations – Customers who think that cancelling a subscription is a complicated or lengthy process, are more likely to call their bank to create a chargeback. To avoid this, businesses should make their cancellation process as clear and straightforward as possible.

The subscription business model is revolutionising the ecommerce stage but is by no means immune to chargebacks. Therefore, as well as implementing the strategies listed above, the best way to deal with chargebacks is to create a comprehensive prevention plan through partnership with a chargeback specialist.