What are prepaid subscriptions?

On this page, we’ll explain everything you need to know about prepaid subscriptions, including their pros and cons, and how your business can implement them into your model.

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November 16, 2023
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What are prepaid subscriptions?

Prepaid subscriptions can help your business improve cash flow, lower acquisition costs, and create a better customer experience. Meanwhile, prepaid customers are substantially more valuable, committing to long-term subscriptions instead of monthly payments. But how do prepaid subscriptions work?

On this page, we’ll explain everything you need to know about prepaid subscriptions, including their pros and cons, and how your business can implement them into your model.

What are prepaid subscriptions?

A prepaid subscription allows customers to make a lump-sum payment in advance for goods or services that’ll be delivered on a recurring basis. For instance, the customer pays $600 upfront to receive a monthly subscription box for an entire year, which is billed annually.

Prepaid subscriptions are particularly beneficial for quarterly and yearly billing cycles, and usually come with a higher discount to encourage customers to commit to the deal. Prepaid subscriptions differ from the traditional subscription model, where customers are billed on a regular (usually monthly) basis.

Another example is when customers make an annual payment for access to software, where the yearly prepaid subscription may renew automatically on an annual basis.

How Prepaid Subscription Plans Work

Within the prepaid subscription framework, you’ll typically offer subscription plans lasting from one to twelve months, usually with a discount to incentivize customers to commit to the arrangement. You can also offer quarterly subscription plans.

Once the prepaid period is over, your customers have the option to either renew their subscription or not.

With annual prepaid subscriptions, the customer pays upfront for 12 months of goods or services and gets a delivery every month. Your business would set the delivery frequency to every month, and the billing cycle to every 12 months. For SaaS

(Software as a Service) subscriptions, the customer would pay upfront for 12 months’ access to your product, usually at a discount. 

For quarterly prepaid subscriptions, customers pay upfront for the quarter, which is three months, and get a delivery every month. Similarly, you’d set the delivery frequency to each month and the billing cycle to every three months. Again, for software subscriptions, the customer prepays for three months’ access, and gets billed every three months.

What are the benefits of prepaid subscriptions?

There are many reasons why your business should consider offering prepaid subscriptions, including:

Prepay customers are more valuable

When a customer chooses a prepaid subscription with your business, they're not just making a purchase – they're dedicating themselves to a long-term engagement with your brand. This not only increases their value in terms of revenue but also gives you a steady stream of customer data that can be analyzed to refine and optimize your offerings.

It's logical that prepaid customers hold greater value. These are individuals committed to receiving at least three shipments, in contrast to monthly subscription customers who might cancel after receiving the first box.

Predictable revenue

The advance and ongoing nature of prepaid subscriptions enables your business to accurately predict future cash flow, offering more stability. Because this consistent income stream is guaranteed for a defined period, it makes it easier to plan for future investments and make precise financial projections.

When you can collect six or twelve months' worth of revenue in advance, your investments in inventory and other fixed costs become safer bets.

Enables improved customer service

As we mentioned, the more customers you have committed to prepaid subscription contracts, which deliver substantial value over a long period, the more reliable your revenue becomes. 

This empowers your business to prioritize investments that improve customer experiences. With a customer-centric business approach and pricing model, you can center your efforts on product development. 

For instance, you can use feedback from prepaid subscription holders to offer better customer service, or to fine-tune your product or service for even greater success in the future.

Fosters customer loyalty

Long-term subscribers tend to be loyal customers. And one of the most effective ways to build trust and loyalty among your customers is by providing them with choices, i.e., the choice to sign up for one, six or twelve months. Shoppers prefer flexibility to binding agreements with your business.

By offering options such as prepaid selling plans, you empower customers to take charge of their own experience. They have clear visibility of their costs upfront and know what to anticipate in terms of deliveries. They also have the freedom to decide whether to extend or renew their subscription with your business.

Simplifies and improves customer acquisition

Prepaid subscription plans offer your business the chance to lower the hurdle for acquiring new customers. In some cases, particularly when there’s no discount, a traditional subscription may seem like a substantial commitment for a customer. Choosing a shorter subscription duration, especially when trying out a new product, can be a more comfortable choice.

Moreover, a prepaid plan allows your business to enjoy a long period with a new customer, with no immediate concern about customer churn. This means the focus can shift towards fostering customer loyalty and long-term revenue.

Ideal for gift-giving seasons

Prepaid subscriptions are popular gifts, especially over Christmas. When a customer buys a subscription-based gift for someone else, they often opt for a longer-term commitment than they would for themselves. If your subscription-based business doesn’t provide a prepaid option during the holiday season, you’re likely missing out on potential revenue.

What are the disadvantages of prepaid subscriptions?

Like any business model, there are some potential drawbacks to prepaid subscriptions that you need to consider:

Demands precise budgeting

With prepaid subscriptions, a substantial portion of your revenue comes from large, single payments. This requires precise budgeting. Even though your business will have access to six or twelve months' worth of prepaid revenue right away, it's important to remember that this money needs to cover all the expenses related to serving that customer, such as software development, and buying and shipping the product. 

Inaccurate budgeting could result in insufficient cash flow for the day-to-day operations of your business. If the revenue ends up being used for long-term investments or taken as profit instead, it could seriously harm your business.

However, you can easily overcome the budgeting challenges of prepaid subscriptions by keeping good financial records, or using a real-time account updater. Remember to plan for future product expenses when deciding how to handle a sudden increase in cash flow.

Prepaid (i.e., higher value) customers may be harder to attract

Another downside of the prepaid subscription model is that it can be harder to bring in these valuable customers. It takes more marketing effort and a well-established, top-quality product or service. Prepaid subscriptions are rarely something people decide on a whim, for instance.

What’s the difference between a prepaid and monthly subscription?

In a prepaid subscription, customers pay in advance for a set number of months, typically 6 to 12 months. If the customer signs up for 12 months, they pay a single figure every 12 months. This is different from monthly subscription models where customers are billed on a monthly basis. With prepaid subscriptions, most businesses offer a discount to incentivize customers to sign up for long-term agreements.

How to offer prepaid subscriptions

  1. Choose a payment service provider (PSP): Find a company that helps businesses process payments online, such as Checkout.com. 
  2. Set up an account with the PSP: Sign up with the chosen PSP who’ll guide you through the process, explaining how you can start selling subscriptions.
  3. Select a subscription model: Decide on the type of subscription you want to offer, which could be for a specific product or service that customers pay for in advance. You’ll also need to decide how much customers will pay and how often (e.g., monthly or annually). 
  4. Integrate subscription system: The best PSPs will provide a tool that’s specifically designed for selling subscriptions, which can be integrated into your website. 
  5. Communicate with customers: Let your customers know about the prepaid subscription option, explaining the benefits and how they can sign up. For example, you might want to offer discounts for longer, prepaid subscriptions.

Overall, we recommend being transparent with your customers, making sure they understand what they're getting with a prepaid subscription. This should help reduce the risk of canceled subscriptions.

Explore prepaid subscriptions with Checkout.com

As a subscription-based business, maintaining a dependable service is crucial for your reputation. That's where Checkout.com comes in. We offer a secure and user-friendly prepaid subscription service, designed to help you effectively handle recurring payments, lower your churn rate, and keep customers happy.

Ready to streamline your prepaid subscriptions? Talk to our sales team today for information about seamless payment processing and prepaid subscriptions. 

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November 16, 2023 10:10
November 16, 2023 10:10