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Many companies depend on payment processing companies to manage their online payments. However, completely relying on a third party can lead businesses to underestimate their payment gateway security risks and requirements, opening them up to data breaches and cybercrime. This issue only becomes magnified when companies undergo changes like expanding operations or migrating to a subscription billing model.

A study by PWC, Global Economic Crime and Fraud Survey 2022, found that 52% of companies with global annual revenues exceeding $10 billion experienced fraud in the past 24 months, with 18% losing over $50 million in their most disruptive incident. Among smaller companies earning less than $100 million annually, 38% experienced fraud; of those affected, 22% faced a total impact of over $1 million.

Therefore, online payment security must be a top priority to safeguard your business. Keep reading to discover five payment gateway security features every business needs to process transactions securely.

 

What is a payment gateway?

A payment gateway is an e-commerce merchant service that collects customers’ payment information to authorize a transaction, ensuring that the payment is legitimate. Payment gateways read, encrypt, and transmit data between the merchant’s website, the customer’s financial institution, and the merchant’s financial institution.

Further reading: Online payment gateways bring these 5 benefits 

 

Why is payment gateway security important?

Payment gateway security is vital to guarding your customers’ personal data and protecting your company. Security breaches, fraud, and compliance violations are all costly mistakes that not only sacrifice your hard-earned revenue but jeopardize your brand’s reputation.

Under the European Union General Data Protection Regulation (GDPR), breach or theft of cardholder data can result in penalties of up to €20 million or 4% of annual global turnover, whichever is greater.

Additionally, payment providers can fine companies who breach the Payment Card Industry Data Security Standard (PCI DSS) $5,000–$100,000 per month for non-compliance.

Therefore, as more customers embrace e-commerce for their purchasing needs, companies must be ready to provide a secure shopping experience.

 

Top 5 payment gateway security features

Continuous learning is foundational to creating a culture of data security, so it’s critical that your team remain updated on the latest safety strategies and regularly evaluate whether it’s time for an upgrade. Below you’ll find five payment gateway security features that are necessary in today’s business climate.

 

1. PCI DSS Compliance

Any company that processes credit or debit card purchases must comply with the international rules and regulations stated in the Payment Card Industry Data Security Standard (PCI DSS). The main role of the PCI DSS is to provide businesses with a standardized approach to rigorous, secure transaction processes while retaining a smooth customer experience.

Maintaining PCI compliance is essential to avoiding penalties and improves your reputation with payment brands, builds customer trust, and bolsters your systems to prevent data breaches and credit card fraud. The PCI DSS has 12 key requirements, further broken down into 78 base requirements and 400 test procedures. The 12 key requirements are outlined in the image below:

The 12 key requirements of PCI DSS compliance

Companies must adhere to different compliance levels based on their size. The PCI classifies businesses on a four-level scale by the number of transactions they process per year:

All legitimate processing providers are required to offer PCI-compliant services; however, it’s still worth investigating the PCI DSS as your business will be on the line for any non-compliance. When determining which payment processor to invest in, make sure it can manage credit card processing, transaction history, and credit card data management while complying with the PCI DSS.

 

2. SSL and TLS protocols

Secure Sockets Layer (SSL) and Transport Layer Security (TLS) protocols encrypt the online connection between the browser and the server, creating end-to-end protection for sensitive information. These security measures ensure the secure transmission of customer data collected by a payment gateway.

Here’s an overview of how the encryption process, nicknamed the “TLS/SSL handshake,” works:

If you’ve ever visited a website where the URL begins with HTTPS or has a padlock symbol next to it, then you’ve encountered TLS/SSL encryption. These hallmarks signify that the website is TLS/SSL certified and that your customers can trust your company with their payment information.

TLS SSL Handshake payment gateway security

 

3. 3D Secure

3D Secure (3-domain structure) or payer authentication, is a security feature that addresses issues of fraud in online debit or credit card transactions. Customers are required to complete an extra step of verification with their card issuer at checkout, engaging all three domains of payer authentication:

The most recent iteration, 3D Secure 2, allows for different methods of verification other than a password, including:

4. Tokenization

Tokenization secures customer payment details by replacing sensitive data with a string of randomly generated numbers, referred to as a ‘token.’ The PCI DSS promotes the adoption of payment tokenization with good reason.

Tokens provide one-to-one replacements for primary account numbers kept outside the merchant’s server. The merchant does not need to be responsible for storing sensitive information, protecting the merchant and customer against fraudulent activity.

This extra layer of protection renders confidential information meaningless and useless in a breach. If a hacker were to gain access to the tokens, their efforts would be wasted because they would have no way to decrypt them.

Tokenization

 

5. Address Verification Service

The address verification service (AVS) is another commonly used method to prevent credit card fraud. After a customer enters their billing address, AVS will check if it matches the one on file with the credit card provider. If it’s a match, then the transaction will be approved.

AVS can be an effective protocol for minimizing chargebacks. Verifying details about the cardholder provided during the purchasing process can help flag suspicious transactions and protect the company before fraud occurs.

Further reading: The ultimate checklist for the best recurring billing payment gateways 

MoxiWorks saves 80 days annually

Payment gateways present considerable benefits in a market where many finance teams need help managing exponential growth. Where they were once responsible for monitoring a manageable number of monthly payments, these days, many find themselves swamped with an ever-growing user base and face overwhelming workloads. It can become hard to track (particularly when dealing with varying billing frequencies), process, and promptly follow up on missed payments. Resulting in a perfect storm—causing many customers to jump ship and companies to leak considerable revenue.

As a result, payment gateways have become necessary for recurring revenue. They offer a window through which customers can securely manage their recurring billing and update details. Those investing in modern subscription billing must ensure all the puzzle pieces are in place to reap the benefits of their efforts. Below are five payment gateway benefits that will give your finance team peace of mind.

Let’s look at the 5 core payment gateways benefits

1. Safer, faster, smoother transactions that give customers peace of mind

The most significant advantage of a payment gateway is speedier, safer, and smoother transactions. From a customer experience point of view, this is a must. Nothing sews distrust faster than botched payments or a lack of transparency about where billing details are stored. Rather than subject your customers to the administrative backlog, payment gateways give peace of mind, giving users a straightforward, familiar interface to manage their billing without waiting for customer care or wondering when their payment will be processed.

Traditionally, many customers may have shared their payment details in person, over the phone, or through email. However, the modern customer may be receiving your services from anywhere. Physical proximity is no longer necessary, and with so many companies rolling out virtual services, they will likely be engaging clientele from different regions. Those without gateways risk bottlenecking payment processing and inundating teams with customer complaints as users try to get in touch to change account details, query discrepancies, and confirm receipt of payments.

 

2. Access to advanced tools and security as the payment landscape shifts

One can never overestimate the importance of security tools and fraud detection in today’s payment landscape. With cyber crimes on the rise, it’s critical to protect customers from data breaches. One of the key advantages of payment gateways is that the onus of payment security is on the provider.

They’ve entire teams dedicated to keeping their systems up to date with the most advanced features and security compliance. The best gateways are equipped with the most up-to-date security features, such as fraud detection tools, PCI-DSS compliance, and advanced data encryption.

 

3. Improves user experience, saves time, and empowers your customers

The simplification of every stage of the payment process means that both the customer and your finance team save a considerable amount of time. With phone lines no longer clogged, teams can focus on strategic planning and investigating discrepancies. By automating the process, you can meet customers’ expectations with ease. And with a portal through which they can easily access and update information, customers feel more in control and no longer must make time to resolve simple issues.

It’s no surprise that a frustrating billing process can lead recurring customers to leave, as it’s simply not worth the ongoing hassle. Gateways can reduce customer churn, as those who regularly interact with your payments department no longer face the usual frustrations. Instead, by giving them the tools they need to manage payments with just a few clicks, you will improve their experience, and they will be more likely to base their loyalty on the quality of your products and services.

The complete guide to subscription management
4. Reduces declined payments with real time transactions

Declined transactions and missed payments are a considerable strain on resources. If you add up the hours spent chasing down card details and trying to implement effective dunning processes, you might be surprised at how much energy your team could spend elsewhere. Payment gateways automate this process, checking the availability of funds in real time and reducing the likelihood of a build-up of failed payments that your team needs to follow up on.

It is also possible to automate notifications for missed or declined payments if the gateway integrates with your recurring billing system, so that customers can log on to the gateway and quickly update their information.

5. Enables you to accept multiple payment types and cards securely

Customers are no longer confined to purchasing products and services within their market, and it’s common for users to shop online until they find the best possible deal. This means you may have users who use different payment methods than the most common ones available in your region. Payment gateways enable you to accept a much more comprehensive array of payment types and cards. They also allow your customers to pay in the currency of their preference. As a result, you can quickly grow your market share in international markets.

MoxiWorks saves 80 days annually

 

When managing complex recurring billing payments, many focus on the nuts and bolts of invoicing and give little thought to the importance of payment gateways or portals. Companies need to streamline the billing process from head to toe, including payments. Giving your clients secure access to their payment information is essential to a successful strategy.

Ignoring the importance of payment gateways may not impact teams immediately, but most will eventually feel the pressure. As the number of users grows, finance teams need to manage more than a handful of clients, a previously serviceable customer base can quickly become unmanageable. Standards start to slip. Human errors creep in, dunning rises, and coordinating billing becomes increasingly tricky.

It’s not uncommon for overwhelmed teams to send out late or incorrect invoices and fail to update billing information. But how can a payment gateway change that? The answer is simple: by giving clients access to a secure, trusted platform where they can update their payment information, you encourage them to take ownership of the payment process.

There will always be exceptions, but gateways and portals, significantly reduce the time teams need to spend chasing down monthly payments, freeing up your team to focus on more strategic initiatives or to assist customers who might need assistance. If you’re serious about implementing modern pricing models, then payment gateways are critical to your go-to-market strategy.

 

Why do I need a payment gateway for recurring billing?

In a world where customers are used to logging their details in various portals and automating payments, companies that do not offer an adequate gateway or portal may seem obsolete, low-tech, or old-fashioned. It can lead to customer frustration as they need to call or email you directly to update information, and it can increase the stress for a finance team that is ill-equipped to deal with calls and emails from a growing user base. Most customers are also inclined to feel more secure sharing payment details in a trusted portal than over email or phone.

The pushback we often hear about implementing payment gateways is that it’s a lot of bother when teams can call up or email customers directly about billing. This attitude fails to account for the pressures of scaling operations and the preferences of many users. In essence, it’s an attitude that dismisses the importance of serving the customer first.

 

A checklist for choosing your payment gateway

1. Integrates with comprehensive recurring billing capabilities

Your payment gateway must offer you and your users the ability to manage recurring billing in all its complexity. The software used to manage billing processes needs to link directly to the payment gateway to avoid bottlenecks; this is called an integrated payment gateway. It’s better to avoid hosted payment gateways where finance teams must transfer data between multiple systems as they’re separate. As you can imagine, this quickly leads to problems and errors over time.

Users may only see the gateway, but the background engines must be in tune to ensure that billing is accurate across all systems. That way, payments can be safely automated once the invoice is sent out (weekly, monthly or annually, depending on the billing frequency) without having to double- and triple-check details between systems.

5 most common billing frequencies

2. Accounts for a variety of payment cards and methods

Companies must consider the kinds of cards a payment gateway supports, particularly for cross-border customers. Supporting Amex, Visa, and Mastercard transactions is the bare minimum, and it’s worth investigating what payment types are most common where you do business.

It’s essential that recurring billing is as convenient as possible for your users. For instance, do customers in a territory frequently use a debit or prepaid card? What other kinds of payments are common? Though it might only be possible to service some payment methods or cards, companies should seek to strike a balance by at least covering the more popular options in a region.

3. Merchant account where payments are stored for approval

A merchant account is a temporary retailer account where payments are stored pending approval. Most payment gateways will use this security measure before transferring the payment to the final bank account. This gives the customer’s bank time to run any checks for unusual payments and helps banks cancel out errors like accidental double payments. It’s a payment portal feature that provides an extra level of security. Some gateways process payments immediately, and this can lead to a higher processing fee.

The complete guide to subscription management

4. Supports multiple currencies

Even if you do not do business internationally, you need to know who your customers might be. Many companies may receive cross-border payments even if they do not necessarily sell into other markets. We live in a world where many people live and work away from their home countries; many of these people end up paying for services and products in their home countries—whether that’s trying to cover medical bills for a loved one or sending a birthday gift.

Your payment gateway or portal should support various currencies so that users can understand their bills quickly and without any hidden surprises. It could be shocking for users in other countries to see the final payment if they thought the currency was their own. This is particularly true for Canadians shopping on US sites that appear to be in dollars. They may assume that these are Canadian dollars if they don’t check. They might leave the payment gateway once they realize the actual cost or cancel the subscription. This is partly because of anchoring or referencing, a concept in pricing psychology, which means that the perceived value of your product has been assigned to the initial assumed cost, and they’re no longer willing to pay more. It’s easy to avoid this by simply displaying the correct currency throughout the payment process.

The anchoring effect greatly influences buyers’ reference prices

5. Offers comprehensive 24/7 customer support

Some payment gateways offer little customer support, which means your users don’t get the customer care they need when they most need it. Users are often anxious when trying to sort payment errors, so you need to make sure there’s a team on hand that will be ready to help when issues arise. Sending emails or submitting support tickets can add a layer of frustration when customers are already stressed. Look for gateways that offer meaningful technical support, such as 24/7 chat or a helpline, so your users can resolve any issues that might arise.

6. Clean UX is critical as recurring payments mean recurring usage

If you plan to invest in a recurring billing payment gateway, you must consider each option’s usability. The more frequently a customer needs to access your payment gateway, the more likely it is that any failures in UX will become an ongoing frustration. We all know the pain of trying to make payments on systems that are not up to industry standards, and if we had to do so frequently, we might likely abandon ship and find a new service provider. Retaining happy subscribers means you need to pay more for better functionality. For instance, double check it’s easy to download invoices or change billing information.

7. Clear and transparent communication around vendor fees

Providing a payment gateway for your customers will cost, but there should be no hidden fees or charges. Any vendor you partner with should be open and transparent about all expenses that might arise, and you should receive a clear overview of the costs you will incur by investing.

The standard fees you should expect are interchange fees and transaction fees. Other expected costs may include everything from flat fees to chargebacks and IRS reports fees to non-sufficient funds (NFS). If you’re unfamiliar with payment processing charges, this could become an overwhelming list, so it’s essential to communicate directly with your vendor and get clear answers about costs and fees.

 

MoxiWorks saves 80 days annually

Deferred revenue is an essential accounting practice for any scenario where a customer prepays for goods or services. Any team operating a subscription-based business needs to understand its nuances.  Whether you’re an established SaaS enterprise or migrating your business to a subscription-billing model, you must understand how to navigate complex revenue recognition while maintaining compliance with accounting standards. Deferred revenue is a critical piece of that puzzle, and this blog clarifies what it is and why it’s reported as a liability.

What is deferred revenue?

Deferred revenue refers to advance payments made by a customer for goods and services the company will provide in the future. It’s also known as unearned revenue; since the obligation has yet to be delivered, the payment hasn’t been ‘earned. Deferring revenue appropriately is a key component of revenue recognition for subscription billing.

When do you need to defer revenue?

Following US GAAP guidelines for accounting conservatism, companies must defer revenue anytime there is a delay between when the customer pays and when the obligation is fulfilled. If the good or service is then undelivered or cancelled, the company may owe the money back to the customer.

It’s best practice to recognize revenue as it’s earned and track customer behaviour with a customer aging report. When customers pay in advance, it’s particularly important to keep accurate reports of unearned revenue, so that your company does not invest or use more of its resources than are strictly available.

What is the difference between deferred revenue and accrued expenses?

Deferred revenue and accrued expenses both appear under liabilities on a company’s balance sheet. While deferred revenue refers to money that the business has received in advance of providing goods and services, accrued expenses are money the business owes for goods and services it has already received. One way to think of it is that the two are inverses of each other.

What types of businesses record deferred revenue?

Deferred revenue is commonly held by any business where customers pay in advance for goods and services. Popular examples of businesses with deferred revenue include:

Further reading: The complete guide to 8 SaaS pricing models to grow subscriptions 

Common sources of deferred revenue

Why is deferred revenue reported as a liability?

According to the US GAAP standards regarding revenue recognition, when customers pay for products or services in advance, companies must record the income as a liability on their balance sheet rather than revenue on their income statement. This accounting treatment demonstrates that the company still owes the customer and protects the company from overstating its value.

In the event that the order is cancelled or cannot be delivered according to the original plan (ex. natural disaster, supply chain shortages, bankruptcy), the company must repay the customer their prepayment. Revenue is also taxed in the same period that it’s recognized, so if there’s even a slight chance you’ll have to repay the customer, it’s best to defer the revenue until the goods/services are delivered.

Is deferred revenue recorded as a debit or credit on the balance sheet?

Deferred revenue is a liability until the products or services are delivered, so you will make an initial credit entry under current or long-term liability, depending on whether the sale is under twelve months. You will debit the sales account and credit the deferred revenue account as you earn the revenue.

This process may seem simple, but it can become complex when applied to recurring revenue. If you’re looking for more information, our blog also covers best practices for recognizing revenue under ASC 606 and IFRS 15 and has a special primer for SaaS companies on ASC 606.

Example | How to account for deferred revenue from an annual subscription

Assigning a specific adjustment account to track deferred revenue enables you to record unearned income as a liability and accurately recognize revenue as you fulfil the performance obligation(s) in your contract.

For this example, let’s assume that you’ve secured an annual subscription with a client at a flat rate of $18000. The client pays the full amount upfront; however, you cannot recognize the full $18000 until the service has been provided. You must evenly divide the total across one year, which is the duration of the contract, and recognize the revenue in increments.

For the first month, you recognize $1500 and defer the remaining $16500 to an adjustment account. For each month after that, you’ll credit the deferred revenue account and debit the sales account $1500.

Using an adjustment account for flat-rate annual subscription

Introducing Subscription Billing Suite

Complex revenue recognition is unavoidable in any business model that employs subscription billing, but it doesn’t have to be complicated. A robust subscription management solution like Subscription Billing Suite can simplify the process by automating deferred revenue and enabling you to remain compliant with accounting guidelines such as ASC 606 and IFRS 15. Your accounting team can focus less on repetitive, mundane tasks and redirect their attention to what matters.

 

Premium pricing strategies pair well with many of the common subscription billing models and are most often used to establish a perception of higher quality in the marketplace. Traditionally, luxury brands tend to opt for this pricing strategy; however, these days, it’s used in every industry to denote better quality services and products. SaaS companies that have built a solid brand reputation often use this pricing approach in the advanced tiers that offer access to the most features.

Those hoping to implement premium pricing will want to evaluate their market position and make an informed decision by weighing the pros and cons. This blog breaks down the advantages and disadvantages, offering examples of the strategy in action, so you can make an informed decision about whether it will work for you.

 

The advantages and disadvantages of premium pricing strategies

The pros

The cons

 

Check out our complete guide to subscription management

 

When should a brand consider premium pricing?

Premium pricing is best used where there is brand recognition, and a company has garnered a reputation for high quality in a specific market. Newer brands might start with lower pricing, implementing higher price points as reputation grows, and there’s a strong foundation of social clout, reviews, recommendations, and recognition. It may be premature to implement higher price points without first developing a demand for your products and services.

Premium pricing strategies can also be used effectively in tiered offerings to help increase the perceived value of more affordable tiers. It’s well-known in pricing psychology that many customers will gravitate towards mid-tiers, and higher price points on the final tier can make mid-level options more attractive. At the end of the day, choosing whether premium pricing is the way to go will require comprehensive market research, a close analysis of subscriber churn metrics, and a solid understanding of your costs. You can learn more about choosing the right strategy for your company here.

Before you implement premium pricing

 

Examples of successful premium pricing strategies by industry

Microsoft sets itself apart in the SaaS industry with Xbox Series X

The SaaS industry is a notoriously competitive market, but one in which Microsoft has built an incredible reputation. There’s no question that most of us can quickly recognize the brand. They offer numerous affordable options, and the level of service and quality associated with Microsoft means they can implement premium pricing on select services and products. For instance, Xbox Series X builds on Microsoft’s reputation, giving gamers access to the console they know and the games they’ve come to love at a premium monthly rate. Alternatively, users can buy the console outright, but they will not have access to the Xbox Game Pass.

Canada Goose synonymous with quality in the retail industry with premium pricing

The retail industry is a place where premium pricing is associated with high-quality brands. Canada Goose prices its coats above the average cost, confident in the reputation and recognition it’s built over the years. It’s an interesting example as many of the premium-priced retail brands are designer options, but the pricing here is based on the known warmth and durability of the products. These coats are everywhere in colder North American cities, with consumers happy to pay more for the perceived value.

Fairmont Hotels and Resorts use premium pricing to signal luxury in the hospitality industry

Nowhere does premium pricing come with higher expectations than in the hospitality industry. Brands like Fairmont invest in exceeding standards at every level of their offering. The entire experience caters to premium tastes, from luxury suites to fine dining. Customers expect to be whisked away from the real world into the lap of luxury.

 

Bolster your premium pricing strategy with a subscription billing solution

Successfully implementing premium pricing strategies will require flexibility in your accounting department. Teams may need to run multiple pricing experiments and require a subscription billing solution that can effectively handle the complexity of pricing models, billing frequencies, and deferral schedules. Get the basics right by investing in a solution that automates even the most complex billing schedules and empowers you to conduct as many pricing experiments as you like without causing unnecessary work for the accounting team.

MoxiWorks saves 80 days annually

With the advent of SaaS migration taking the world by storm, it’s no surprise that many companies are asking questions about handling recurring payments better. Many accounting teams are struggling to keep up with the increased usage of subscription billing models, failing to put in place the software and best practices they need to handle the sheer volume of invoices generated by offering a variety of billing cycles.

The management of recurring payments requires a firm grounding in compliance standards, the automation of time-sensitive and repetitive tasks, and a solid understanding of revenue recognition and deferral schedules. It’s a lot to master. The complexity of introducing a new payment strategy is simply part of keeping up with evolving customer expectations.

The growth of SaaS migration and billing options across industries means that few companies can afford not to put the right tools and best practices in place. Below you’ll learn nine best practices to help you manage recurring payments.

 

The 9 best practices to help you manage recurring payments

 

1. Understand the nuances of revenue recognition for recurring billing

Modern billing models can introduce different revenue streams at varying frequencies. Some customers may pay for a year upfront, requiring you to defer the recognition of that revenue until you earn it. In contrast, others may spread the cost of their subscription over time so that you earn and recognize revenue in synch.

Flexibility is the key to success. Chances are that the more options you offer, the more users you will be able to sign up. However, it’s worth noting that introducing various options can strain the accounting department. Brief the entire team on revenue recognition for subscription billing to optimize their efforts and reduce manual labour.

 

2. Invest in security to protect sensitive customer data and payment information

With the rise of cyber-attacks, companies cannot underestimate the importance of protecting customers’ information (particularly regarding payments and billing) from any threat. Nobody is immune, so it would be remiss not to invest in security measures enabling you to collect and store billing information for recurring payments while maintaining your data integrity.

Many savvy customers will check the ratings of the payment portals and systems you implement, so be sure to consider the reputation of your partners. Partnering with established brands that customers recognize makes it easier for them to entrust their payment information to your system. Users will differ in their prioritization of this measure, but many will never sign up if the early stages of the payment cycle do not feel secure.

recurring payments and deferral account case study

 

3. Establish transparent payment processes to increase customer confidence

Have you ever signed up for a subscription service, only to find yourself wondering about a few things later? Maybe you aren’t sure about the service and want to double-check the cancellation terms, or you’re not entirely sure how refunds work, or perhaps you need to update your credit card information. Chances are the payment policies you ticked when you signed up covered all this, but you didn’t have time to read through them thoroughly.

It’s best practice to make payment terms and processes transparent on your website. The reality of today’s world is that there aren’t always enough customer agents on hand to answer all our customers’ questions. Building out knowledge bases, particularly around critical information like payments, will reduce the workload on your team by making most of the information customers require transparent. Measures like this help build customer confidence because they don’t have to suffer long wait times or engage with a defective chatbot.

4. Invest in clear communication at every stage of the billing cycle

Often, there’s a disconnect when communicating effectively with our customers concerning minor changes. With so much automation at the heart of SaaS migration best practices, it can sometimes be easy to forget the human aspect of things.

Significant shifts will occur as you hone your SaaS pricing strategies and respond to outside forces such as inflation. Every time there’s any billing or payment process change, you must invest in clearly communicating this to your user base. Inform them of tweaks regardless of how “inconsequential” you think these might be, for instance, security improvements, cancellation policy updates, new billing options, or a change of payment processor.

 

5. Reduce revenue leakage with a solid dunning strategy

Failed payments are a fact of doing business. Whether the case is expired cards or a technical error, it still impacts your bottom line. Particularly with subscriptions, it’s critical to recoup as much revenue leakage as possible to bolster monthly recurring revenue (MRR). An effective dunning strategy enables your team to protect against revenue losses more effectively.

Modern billing requires effective dunning management to boost revenue and prevent involuntary subscriber churn. Solid strategies should include pre-dunning communications strategies to remind customers that upcoming payments might fail due to expiring cards. Check out this guide to mastering dunning management for a thorough breakdown of how it prevents revenue leakage and helps bolster your subscriber base against churn.

When is pre-dunning appropriate?

 

6. Monitor subscriber churn metrics with real-time reporting

Effective reporting is a crucial component of successfully collecting recurring payments. With extensive user bases, it’s easy to lose track of subscriber churn, so companies should invest in software that automatically generates reports that reflect key churn metrics.

These numbers are essential for understanding growth and financial health and can be valuable tools for customer acquisition and retention. It’s possible but time-consuming to report on these metrics manually, although, for scaling companies, it may not be feasible to keep track this way. Are you seeing a sharp increase in churns after your free trial? Get curious and find out why. Chances are the churn rate is pointing to something your team has the power to fix.

 

7. Allow customers to choose their preferred billing frequency and day

One of the most significant improvements most companies need to make to their recurring payments is increasing the flexibility around billing frequency. Users will often be subject to different restrictions in terms of cash flow. For instance, smaller companies or individuals might struggle to pay an annual fee upfront, preferring to spread the payment over the year. More prominent companies might work with a fixed quarterly or yearly budget and choose to pay upfront.

The point is that your customers not only like but expect to choose. Offering flexible payment terms and frequencies allows customers to decide which day their payments occur. It is as much about reducing failed payments as it is about increasing customer satisfaction. It is also one of the best ways to ensure customers have enough funds available when the bill arrives.

 

8. Monitor deferred vs earned revenue to comply with GAAP accounting guidelines

Compliance with GAAP is one of the main concerns of most accountants. The introduction of ASC 606 and IFRS 15 concerning revenue recognition for recurring revenue may make some companies reluctant to take the plunge. Critical to achieving success is keeping track of earned and deferred revenue, and plenty of guidelines are available to ease your team into the transition. With transparent, auditable reporting in place, compliance doesn’t have to be complicated. Check out this guide to ASC 606 for a primer on the expectations for recurring payments.  

 

9. Master recurring payments with subscription management software

It’s almost impossible to keep pace with modern billing without implementing subscription management software. Even the most agile teams will struggle to meet month ends if they stick to older accounting processes and systems. Your software should allow customers to pause payments easily, update billing information or upgrade to a different tier of services. All this functionality must integrate with the backend to update accounts automatically without causing unnecessary confusion.

Look for solutions that speak to the nuances of frequent recurring billing. Make sure you invest in software that enables dunning, streamlined reporting, flexibility around payment frequency, and automation of time-consuming processes that slow your team down. Check out the essential features to look for in subscription management software here.

 

The complete guide to subscription management

In recent years, the hospitality industry has weathered massive disruptions. To stay afloat, businesses leapt into the subscription economy and adopted recurring billing strategies. Welcoming these innovations introduced a fundamental shift to relational business models, which allowed organizations to retain a steady stream of income even during lean months.

The hospitality industry is comprised of four different sectors: lodging, food and beverage, recreation, and travel and tourism. The most successful businesses centre on novel subscriptions that serve a specific niche within their sector and are taking full advantage of the benefits of a subscription business model, including increased customer lifetime value (LTV) and greater return on customer acquisition costs (CAC).

This blog explores the creative ways leading companies have incorporated hospitality subscription services by analyzing a modern-day example from each of the four sectors.

Interested in a specific sector of hospitality? Click on the example below to skip ahead. 

1. Lodging sector caters to digital nomads

When you think of hospitality, lodging is likely the first sector to come to mind. From hotels to vacation rentals, overnight accommodations for guests are an integral part of the industry. However, a lesser-known fact about this sector is that the pool of potential customers is expanding.

With the increasing prevalence of work-from-home options, some telecommuters have transitioned to a nomadic lifestyle. These “digital nomads” work remotely out of a new city every few weeks to months, necessitating frequent temporary accommodations. Extended stay hotels and multi-location hotel subscriptions are increasingly in demand.

Example: Inspirato luxury travel club

Inspirato is a luxury travel club and one of a few emerging companies that are designed with the digital nomad in mind. The Inspirato Pass allows customers to choose a hotel from over 100 locations and stay for up to two months, replacing nightly hotel rates, taxes, and extra fees with the subscription fee of $2,500/month. Founded in 2010, the enterprise’s estimated value is $1.1 billion and boasts over 13,000 subscribers with 18% growth in the past year alone.

Inspirato is a luxury travel club that offers multi-location extended stay hotels for a subscription fee

2. Food and beverage sector closes out the competition with pricing psychology

Often confused with the food services industry, the main components of the food and beverage sector include the preparation, transportation, and service of food or beverage to customers. These businesses tend to be some of the most successful and are frequently categorized into the overlapping industries of franchising and retail.

Hotel breakfast bars, catering companies, fast food establishments, cafes, pubs, and five-star restaurants all fit within this sector; however, paired with this ample opportunity is abundant competition. Panera’s coffee subscription is a notable success story within the food and beverage sector.

Example: Panera coffee subscription

For context, Burger King attempted to get a leg up on other fast-food giants, like McDonald’s and Starbucks, by offering a daily small, hot coffee for $5/month. Unlike its one-cent whopper strategy, this one completely backfired, and the company discontinued the service shortly after it was introduced in 2019.

So, expectations were low when Panera launched its coffee subscription service for $8.99/month one year later, in 2020. However, Panera’s subscription included hot drip coffee, iced coffee, and hot tea once every two hours with unlimited refills while customers were in the cafe.

These bold differences expertly applied principles of pricing psychology, yielding wildly successful results. In May 2022, Panera unveiled a second subscription service, the Unlimited Sip Club, that offers an expanded variety of beverages for $10.99/month.

Panera’s coffee subscription expertly used pricing psychology to achieve success

3. Recreation sector appeals to locals

The recreation sector is key to the hospitality industry. Local attractions and entertainment play a vital role in providing memorable customer experiences and contributing to the region’s culture. The most common businesses in this sector include amusement parks, museums, art exhibits, zoos, and campgrounds.

These companies rely on admission tickets, merchandise, and concessions sales to generate revenue, which can be a tricky balancing act to pull off through the wax and wane of tourists. Therefore, many of these businesses offer hybrid subscriptions to bolster their income from locals, returning visitors, or guests who want to explore multi-location establishments.

Example: Universal Orlando annual pass

Universal Orlando’s annual amusement park passes start at $23/month after down payment. These subscriptions cover admission and, depending on the tier, a benefits package that includes perks like preferred parking, merchandise and concessions discounts, and early park admission. Florida residents can also benefit from reduced rates for all tiers of annual passes.

Amusement Park Universal Orlando offers tiered annual passes with discounted rates for locals

4. Travel and tourism sector bundles the best deals

Travel and tourism allow customers to experience destinations beyond their hometowns. This sector has the most crossover with its counterparts because it encompasses the entire experience of the trip, not just the transportation to get there.

Travel agencies are one of the most well-known organizations within this sector, often taking on the logistics and reservations for everything from booking flights to choosing a hotel to scheduling business meetings. The endurance of these businesses is attributed to a fact all too familiar to frequent flyers: coordinating travel plans can quickly become an arduous task.

Example: Tripadvisor Plus membership

Hotels that partner with Tripadvisor have the opportunity to tap into new customer bases and potentially increase their bookings. For $99/month, travellers can enrol as a member with Tripadvisor Plus and gain access to an array of bundled savings on hotels, food and beverages, and experiences. According to their website, customers save on average $350 the first time they use their membership.

Tripadvisor Plus bundles the best deals for frequent flyers

Manage subscriptions seamlessly with Subscription Billing Suite

Managing a subscription service can quickly get out of hand without the proper tools in place to handle huge amounts of data, adjustments to complex pricing strategies, and data-driven reporting. Unless you invest in the appropriate technological foundation, it will be nearly impossible to meet the goals of your growth journey. A robust subscription management solution, like Subscription Billing Suite, takes care of the nitty-gritty, freeing up your team to strategize. It’s available as an embedded extension in Microsoft Dynamics 365 Finance, Business Central, and GP.

The complete guide to subscription management

The recent boom in subscription-based businesses led the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) to develop new accounting standards, ASC 606 and IFRS 15, to regulate and standardize revenue recognition.

Companies must now follow a five-step approach:
1. Identify the contracts with a customer.
2. Identify the performance obligations in the contracts.
3. Determine the transaction price.
4. Allocate the transaction price to the contract’s obligations.
5. Recognize revenue as you satisfy the relevant obligations.

It seems simple enough, but translating these accounting practices to a recurring billing model can become complicated quickly. This blog will walk you through five best practices that enable compliance with ASC 606 and IFRS 15, so you can expertly handle revenue recognition without the headache.

If you’d like an introduction to the topic or want to refresh your memory, check out our previous blog on revenue recognition for subscription billing before continuing. The following advice will help you tackle some of the more advanced aspects of accrual accounting.

Interested in a specific best practice for maintaining compliance with ASC 606 and IFRS 15? Skip ahead by clicking on the topic below. 

1. Create a deferred revenue adjustment account

One of the most important aspects of the five-step approach to revenue recognition is always to recognize revenue after satisfying the contract’s performance obligation(s). Recognizing the entire contract amount upfront before you’ve delivered the service counts as claiming unearned income.

If you claim unearned income, you could face hefty penalties for non-compliance and tricky situations if customers decide to complain, cancel their subscription, or ask for refunds. Maintaining an accurate revenue deferral schedule via an adjustment account is ideal for mitigating this risk.

What is an adjustment account?

An adjustment account is a summary account in the general ledger that records internal events rather than business transactions.

Why do you need a deferred revenue adjustment account?

Creating an adjustment account to track deferred revenue allows you to accurately recognize revenue as you fulfil the performance obligation(s) and treat unearned income as a liability.

Example: Using an adjustment account for flat-rate annual subscription 

Company A has secured an annual subscription with a client at a flat rate of $18000, and that the client will pay the total upfront. Company A cannot recognize the full $18000 until the service has been provided, so the amount must be evenly divided across the term of the contract: one year.

For the first month, Company A can only recognize $1500 and the remaining $16500 must be booked in the deferred revenue account. For each subsequent month, Company A must credit the deferred revenue account and debit the sales account $1500.

Using an adjustment account for flat-rate annual subscription

 

2. Allocate variable consideration using an estimate

Subscription services often implement pricing models where the quantity or price will fluctuate. Usage-based billing and bundling are particularly common pricing models that require SaaS companies to account for variable consideration.

How to estimate the value of variable consideration

To maintain compliance with ASC 606 and IFRS 15, you’ll need to record an estimate of the amount considered. At the end of each reporting period, you must revise the estimates and adjust any resulting changes to the transaction price. Detailed below are two methods commonly used for estimating the value of consideration.

Method 1: Expected value

The transaction price is determined by summing the probability-weighted amounts of a range of possible outcomes. This method is most appropriate when the reporting entity has many contracts with similar characteristics, such as when a company implements the portfolio method of aggregating customer contracts.

However, companies are not obligated to use the portfolio practical expedient. Management is responsible for making reasonable estimates and applying them to numerous similar contracts such that the aggregate value of revenue must equal the sum of the expected amounts from the individual contracts.

Method 2: Most likely amount

The transaction price is decided as the most likely amount to be received. The best use case for this method is when there are only two possible outcomes because the expected value method is likely to return a significantly different value than the possible outcomes.

Example: Estimating variable consideration for usage-based subscription pricing model 

Company B offers a support plan with three usage tiers. They charge $1000 if a customer uses under 10 hours of support, $2000 if the customer uses 10–20 hours, and $3000 if the customer uses over 20 hours of support over the contract term.

Company Y is interested in purchasing this support plan. Company B has worked with Company Y for many years and knows that they have a 10% chance of using under 10 hours, a 60% chance of using 10–20 hours, and a 30% chance of using over 20 hours. By summing the probability weighted amounts, they determine the expected value of the contract will be $2,200.

calculating estimated variable consideration using expected value method for usage-based billing

What is the constraint on variable consideration?

The value of the estimated consideration can only be included in the transaction price “to the extent that it is probable that significant reversal … will not occur” (606-10-32-11).

Determining whether the estimate must be constrained involves significant judgement and must include assessment of the likelihood and magnitude of revenue reversal. Many companies will consider this constraint while calculating the estimated variable consideration.

Recommended reading: What you need to know about ASC 606 for SaaS companies 

3. Offset bad debts on revenue recognition schedule

There are many reasons why customers are unable to pay for goods and services, even after the due date. Bankruptcy, trade disputes, and fraud are a few cases where the amount owed is irrecoverable. So, what do you do if a customer doesn’t pay?

When a customer has not paid even after repeated dunning letters, the amount is deemed uncollectible and written off as bad debt. The amount is adjusted against your monthly recognized revenue during reporting to ensure that your receivables are not overstated in the financial statements.

Example: Full write-off for unpaid subscription 

You have entered an annual contract of $24,000 with a customer for a subscription service in the month of January. Unfortunately, in May it is determined that the customer cannot pay the amount despite repeated dunning requests.

In your financial statement, you will add a credit entry that zeroes out the receivables balance and a debit entry to ensure that the irrecoverable revenue is not recognized in the income statement.

Revenue recognition for full write-off of unpaid subscription account

4. Perform routine revenue analysis

Performing routine revenue analysis will provide you with a deeper understanding of the distribution of earned and deferred revenue across different channels, allowing you to make data-driven decisions and maintain accurate accounts.

Especially in a transaction with multiple deliverables, it’s vital that you implement tools, like multiple element revenue allocation (MERA), to separately track and evaluate each revenue stream.

What is included in a typical revenue analysis?

A typical revenue analysis for a subscription business breaks down revenue sources into three channels; subscription revenue, revenue share from partnerships, and referrals. Within subscription revenue, you can further classify data based on a metered or fixed rate by subscription, customer, and plan.

Recommended reading: Calculating subscriber churn metrics for SaaS companies (with examples) 

5. Satisfy disclosure requirements

Financial statement disclosures are more rigorous under ASC 606 and IFRS 15 than under previous revenue standards. The image below outlines the different annual revenue disclosure requirements for public companies.

Required annual disclosures under ASC 606 and IFRS 15 for public entities

Why do companies need to submit disclosures?

To bring transparency and clarity to your financial statements, disclosure requirements entail gathering additional explanatory information that covers the amount, uncertainty, timing, and overall nature of cash flow associated with contracts with customers.

What are private companies exempt from disclosing?

Private companies are not obligated to provide certain disclosures, and the requirements for interim periods are significantly pared down.

It is not mandatory for private companies to disclose:  

Maintain compliance with Subscription Billing Suite

No matter which subscription pricing model you implement or how frequently your bill your customers, a robust subscription management solution can make all the difference when handling complex revenue recognition.

Keeping track of deferral schedules and appropriately handling revenue allocation can become increasingly difficult if you’re relying on manual processes. Subscription Billing Suite ensures that your accounts are accurate, and your invoices delivered on time.

 Booklet | Revenue reporting and recognition with ASC 606 and IFRS 15

 

 

SaaS product pricing is one of the essential questions presented by digital disruption. As companies migrate operations to the cloud, pricing has only grown in complexity. Regardless of industry or location, it’s challenging to effectively transform products or services into reliable recurring revenue streams that enable scalable growth.

The options are almost endless, so teams must take a nuanced approach when considering the value of what’s for sale and their go-to-market strategies. No two plans will be the same. Unlike traditional pricing methods, a competitive analysis will only get you so far, particularly in industries where SaaS pricing disrupts customer expectations. The old rules no longer apply, and pricing should differentiate you from the competition rather than match the market.

Profitability will depend on your ability to understand the value of your offering and add value where it matters most. SaaS product pricing is as much about services as software, so most companies need to rethink how they approach everything from sales incentives to market research and even customer service.

SaaS migration is a complex process that requires strategic insights and flexibility. There are no one-size-fits-all solutions. The content below explores essential factors for getting the price right, but it’s not a template. Instead, companies should use these as guidelines for a deeper conversation around product pricing.

1. Consider the pros and cons of the top 8 pricing models

One of the core tenets of effective SaaS product pricing are the SaaS pricing models. Although the finer details of your pricing strategy will come later, it’s wise to familiarize your team with the most popular strategies up front so that you can make an informed decision about which models might be effective for your products and services. Fully understanding the pros and cons of each strategy should help you decide which one suits your needs, and it can be easier to consider the many other factors involved in pricing once you’ve an idea of the kind of billing model you want to implement.

 

Rather than simply copying what your competitors offer, consider the customer first. Would they prefer monthly or annual billing? Or perhaps a mixture of both? Does it make sense to charge them based on usage and do you think you could cost-effectively run a free trial? It’s hard to really understand the implications of each of these strategies without first briefing yourself on the common pricing models, which is why we’ve included a guide to each one below. Step one should be to brief your team on the strategies that align best with your products and services, so you can start narrowing down your options and making some decisions about pricing and billing structure.

Consider these pricing model guides to help with your SaaS product pricing

2. Let perceived customer value be your north star using buyer personas

One of the core components of any effective SaaS pricing strategy is perceived customer value. It doesn’t matter what you think your services are worth if your customers don’t also see the value in what you’re offering. Even more so than in traditional models, the perceived value of your products and services must be central to any conversation around price. It should be a higher priority than your billing model, the features, and competitor pricing.

Conduct a deep dive on your target customers and build buyer personas to guide your subscription strategy decisions. At all times, you need to advocate for these personas and understand what they get when they pay for your services, i.e. what pain points do you remove and the core benefits of your product. Understanding how much customers gain in measurable value from your services will make it easier to narrow your price range to something that best fits the target personas.

3. Understand Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC)

Several churn metrics will be part of your SaaS product pricing journey, particularly as you tweak pricing over time. However, it’s wise to focus on just two in the initial phase: Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC).

Even rough estimates will influence your sales strategy, and knowing the projected value of a new customer over time will impact the amount you can spend on customer acquisition. LTV needs to be substantially higher than CAC for your pricing to be effective. As common sense might dictate, you need to make more from a customer over time than you spend on acquiring them.

Those used to more traditional sales may want to create awareness that customers often spend minimal amounts upfront for their subscriptions in the SaaS world. Sometimes revenue and acquisition costs won’t align in the first months of a new product launch, and finance teams need to focus on the long-term projected revenue. Otherwise, they risk setting too high entry-level prices to attract a substantial market share.

4. Boost conversions with SaaS pricing psychology methods

SaaS product pricing page psychology: median tier is critical to high conversions

When deciding how to price SaaS products, it’s essential to understand the role psychology will play in the customer journey. Whatever pricing you decide on, convincing customers of the value and getting them through the sales funnel will require effective implementation of UX and pricing psychology tricks. Not all these methods work for every strategy, but some combination will likely help you successfully launch your SaaS product pages.

5. Consider sales models and incentivization carefully

It’s also worth spending time considering the transformation for sales. Pricing often directly correlates to bonuses and incentivization programs in traditional pricing models, and with SaaS products, this may have to shift. People are the heart of organizations, and you need to include them in pricing conversations, particularly in departments like sales that the transition will directly impact. It’s better to have sales teams in these conversations and work together to reimagine how SaaS migration will transform roles and payment structures.

6. Understand the cost of delivering customer service from day one

Companies default to pricing based on features or product descriptions, often forgetting one of the most valuable components of their offering—people. If you intend to offer customer support and training, you need to include these services as a product feature when calculating how much you can charge. You’d be surprised how valuable the service side is over time. Chat support, knowledge bases, learning centres, and implementation managers are all resources customers will value.

Before you set the price of your product, ask yourself how you’re charging for support and maintenance. Question whether or not you’ve conveyed the value of the service side on your product pages. Excellent customer service may end up being what differentiates you from your competitors.

7.  Long-term impact of discounts should be carefully weighed

Pros of freemium pricing

It’s best to exercise caution when experimenting with freemium pricing or significant discounting. Sometimes these can be good techniques to secure market saturation or as part of a market penetration strategy. However, these strategies run the risk of creating a lower perceived value for your product and services. It can also be challenging to service a large influx of new customers if you estimate conversions inaccurately and find that more people are taking advantage of free or heavily discounted services than you intended.

Being wary of too many new customers might seem counterintuitive. Yet, if users do not receive the right quality of service or training, you may find higher than anticipated churn rates. It will be much more challenging to chase leads who’ve already trialed your service and had a bad experience. It’s much better to think about pricing from the ideal customer’s perspective (presumably someone who pays for your services and products) and limit discounts and free trials.

8. Hit the sweet spot by trialing hybrid strategies and tweaking approach

It’s relatively common in the history of companies to copy competitors. Yet, this approach lacks the strategic edge required to handle the levels of disruption industries are seeing today. It’s not that you shouldn’t take inspiration from what others have done before, but there’s wisdom in looking in unlikely places for ideas that might help you differentiate your SaaS product from all the rest. A hybrid approach to pricing allows you to mix and match between different billing models, frequencies, and psychological tactics, adopting a tailored strategy that best first your product and services.

Implementing the right SaaS product pricing

Once you’ve decided on a price or a range of prices, it’s time to determine how to implement your new strategy. You will need to build out collateral and product landing pages, but there’s also the back-end to consider. You will need the right tools to make the most of your pricing tactics and partner with a company that has experience handling more complicated pricing and billing models.

Subscription Billing Suite allows you to handle the complication of SaaS pricing models for revenue recognition and deferrals. So, whether you want to bill your customers monthly, quarterly, or annually, it may just be the solution for you. Why not find out more in the case study below.

MoxiWorks saves 80 days annually

 

As expectations continue to rise, companies will continue to undertake projects aimed at building relationships with subscribers and adding value to the user experience like creating personalized onboarding tutorials and videos, optimizing the mobile experience, and introducing advanced platform feature notifications. SaaS solutions that empower other businesses to create tailored tools and content can tap into a segment of the market that will likely yield an incredible level of interest, engagement, and revenue growth.

While evolutions in technology open the door for companies to adopt shiny new features and embrace the latest gizmos and gadgets, the beating heart of SaaS remains the loyal subscribers. From innovators to laggards, the point of all these trends and advancements is to make things easier for customers. Above all else, you must keep a clear head and advocate for innovations that will maximize subscriber retention and minimize churn.

Tips for improving subscriber retention

Partner with companies that can support your SaaS growth journey

Modern SaaS companies rely on subscription management software to offer complex pricing models and ensure that their business runs smoothly; however, it’s not always easy to determine which partners will be a good fit. It’s critical that you look for teams and consultants that understand the nuances of the SaaS landscape and prioritize subscriber retention.

Once you are connected, they’ll be able to make relevant recommendations and it will be evident whether their solutions can support your growth. Even if they can’t share the names of companies they work with, they will be able to provide relevant information based on their industry experience. Speaking with others about their experience partnering with the company should also be possible.

Questions to ask potential SaaS transformation partners

Read our recent blog to learn more about the pros and cons of SaaS migration and download our whitepaper for tips to navigate the future of the rapidly evolving SaaS industry.