Billing transactions, not subscriptions

Summary

Businesses which have used subscriptions as their historical charging model will find their billing systems and related processes become more complex when transactional billing is deployed. Transactional billing generates increased processing volumes, more complex invoicing and may use more complex pricing.

Businesses which have been transaction-based historically will find it easier to update their billing systems to include a competitor's subscription-based products than subscription-based businesses who must now learn how to bill individual transactions.

How and what to bill?

'How and 'what' a biller charges their customers is separate to the complexities of the biller's network, business and industry. Businesses with geographically diverse and technologically complex networks (e.g. cable TV, satellite TV, phone networks, internet web hosting, real-time tollway collections) use only a selection of the many opportunities to levy charges against their customers.

Networks that do not produce transactions (e.g. broadcast cable TV networks) will have fewer opportunities than those that do (e.g. telephone networks). Business can still choose when they will levy charges and when they will not (e.g. 'free' local calls in the US versus 'per call' charging in Australia).

Over time, some network business will start out billing for individual transactions/consumption (e.g. AOL's initial time-based billing) and transition to subscriptions (e.g. AOL today). Andrew Odlyzko discusses this movement in his paper "Internet pricing and the history of communications" (pdf, 160Kb) on his website.

Businesses that consume physical resources (e.g. water and gas utilities) must align what they charge their end customers with their own costs (per unit of resource). These businesses are unlikely to move to subscription-based billing (with its fixed revenue) since customers would have little incentive to limit their consumption (with its associated (high) variable costs).

Subscription-based billing

Subscription billing is popular due to the its benefits (listed below) but comes at the cost of limited opportunities for revenue growth. The biller's revenue will be limited to the number of customers multiplied by the subscription charge. Additional customers must be found and/or the subscription charge raised to increase the revenue collected.

Benefits of subscription-based billing include:

Easier network provisioning: The customer's subscription is either enabled and current, or off and no longer active. This simplicity can be translated into any network associated with the customer's subscription.
Easy charge calculation: A constant amount is charged per unit of time (week, month, year) regardless of the customer's activity or the complexity of the related network. The details of the charge will be based on the start and end dates of the charging period, the product, and rate of the subscription. Partial period charging may also be required for new and canceled subscriptions.
Simple product suite: Customers understand that there are few variations on what they are offered. Installation charges, fixed term contracts and cancellation fees may be used, but billing will only need to apply these in limited combinations.
Minimal variations in invoice presentation: Customers' bills are similar with minimal variation outside the labels used to describe the subscribed products. Customers are likely to have only a small number of products reducing the complexity of invoice presentation.
Easier credit management: Subscriptions are often billed in advance ensuring the biller has the customer's money before services are supplied.
Low transaction volumes: The customer generates a single charge per subscription per month (year). Many years of transactions can be stored against customers cheaply for later reference.

Examples of subscription 'businesses' include:

Cable / Satellite TV
Local phone calls (USA)
Virus scanning software (and/or virus updates)
Magazine and newspaper subscriptions
Animal registration
Car registration
Internet domain registration
DVD Rentals (borrowing concurrent DVDs without late fees)
ISP access (billing models differ by country)

Basic-usage based billing

This is half-way between billing on just a subscription basis and a fully transactional model. The fixed simplicity of the subscription model is supplemented with a variable component that increases revenue based on customer consumption. For example, water and gas utilities offer a basic product range (from a billing perspective) based on an access subscription to the utility's network and additional charges per unit of resource consumed.

Examples of other basic-usage 'businesses' include:

Tollways - Each tollway journey is assigned a fixed price with the customer's invoice based on the journeys performed
Cable TV - Pay-per-view billed at fixed amounts in addition to the monthly access subscription
ISP access - Access by subscription plus excess data downloads charged per Mb/Gb (billing models differ by country)
Website hosting - Hosting performed by subscription with excess data downloads charged per Mb/Gb
Mail-list hosting - Charging per email and/or by subscription depending on the size of the mail lists involved

The billing for these businesses is slightly more complex than basic subscriptions but since the usage transactions contain little information and are limited in number, there is limited scope for billing complexity.

Transaction-based billing

Businesses who perform transaction-based billing require a more complex billing environment that must address:

More complex network interfaces: Transactions passed from the network are likely to contain more detail. These details may need validation before transactions are passed to billing.
Multi-dimensional pricing: The additional transaction details can be used to provide increased diversity in customer pricing. For example, billers may choose to price based on the time-of-day, day-of-week, transaction duration, transaction destination or quality-of-service.
Reference data complexity: Complex transaction validation and charge calculations must be supported by more complex reference datasets. For example, international phone destinations must be maintained so that calls to anywhere in the world can be accurately described and priced.
Invoice presentation: The increased diversity of charges must be conveyed on the customer's invoice. The different dimensions used to calculate a charge's price must be presented on the invoice so that customers can confirm their accuracy. Invoices are likely to be larger, and require grouping and sorting of similar transactions.
Multiple networks: Businesses billing on a transactional basis are more likely to consolidate charges from more than one network on the same invoice. The prices charged for one network's charges may be modified depending on the customer's usage on and/or connection to other networks.
Higher transaction volumes: A customer performing only one transaction per day will generate thirty times more transactions per month than a basic subscription model. Each of these additional transactions may be more complex than a subscription charge, and all the details will need to be stored if transactions are to be repriced or validated by revenue assurance processes.
Requirements for archiving: The higher transaction volumes drive the need to archive (or delete) the individual transactions after billing. Customer invoices may also need to be archived since their itemisation of each charge may make them as large (in volume) as the original transactions. The individual customer invoices may need to be archived (rather than deleted) since they support the financial documents of the biller's business.

The business processes that support each of these transactional complexities will differ to those implemented under a subscription model. The business' customer-facing staff will need to understand the more complex billing environment to respond appropriately to customer inquiries.

Examples of transaction-based 'businesses' include:

Local phone calls (Australia) - Fixed amount per call in addition to the network access subscription
Long-distance phone calls - Call prices varying by destination, duration and start time
Mobile phone calls
3rd Party billing - Charges representing external products presented on a biller's invoice
Interconnect exchanges - Prices varying by route, customer, day, time and destination

Tags: Billing, Subscriptions