One of the most important aspects of a business is how it processes payments. Regardless of how popular a company is, if payments are processed inefficiently, or the payment structure is inconvenient for clients, the business is at risk of failure. The most commonly used payment structures are on-time payments and subscription services. Choosing the correct option for your business is very important. Let’s look at the pros and cons of each.
The Benefits of One-Time Payments
An inevitable risk with the subscription model is that clients can miss payments. This is less likely with an automated withdrawal; however, it is still possible to miss a payment if the client’s debit card expires or they do not have enough money to pay. When the entire price is paid immediately using a one-time payment, missing an installment is not possible.
Subscriptions require a business to wait for payment, which could result in the product not being fully paid until multiple payments have gone through. A one-time payment avoids this issue by providing the entire amount all at once.
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Drawback: Payment Only Occurs One Time
Unfortunately, one-time payments do have a major drawback. The business makes less money overall. While a subscription service charges a smaller amount, it does so repeatedly, which adds up over time to a larger amount than a single payment. This depends on the product and price, of course, but as a general rule: one-time payments bring in all the money immediately, but the total amount of profit is less than what is earned through a subscription service over the course of a year or two.
Additionally, it can be difficult to set up a one-time payment for an intangible product. For example, when purchasing a software license and it requires an update, the product gains value.
The Benefits and Drawbacks of Subscription Models
Subscription models can be tailored to be more appealing to clients by lowering prices when they sign up for a long-term subscription. Perhaps with a 6-month subscription, the client pays $30 per month, but with a year subscription, the client pays $20 per month. The client benefits from saving money, and your business receives guaranteed payment for a longer period of time. It’s a win-win.
Another benefit is payments for a subscription only need to be set up once. Clients are not required to put in payment information every time. They simply insert their information once and are automatically charged at the set renewal time. This is convenient for both the business and the client.
Subscriptions can be more difficult to use for products that must be received in person. When the client has to visit the store to pick up the product they have subscribed for, they may feel it is an inconvenience and would rather spend a few more seconds paying for the product each time. Subscriptions work better for online services and products that are delivered online or by mail.
One unique problem that subscription services present is the issue of inequality. If your service is used extensively in January but as often in March, the client may feel like the subscription is not worth the price. If your business provides widely varying qualities or amounts of a product/service over the course of a month, a subscription service may result in the client paying much more or much less than the product is worth, which could cause client dissatisfaction.
What About Taxes?
Because many subscription services are used for intangible products, calculating sales tax becomes complicated. Some states require you to use the tax rate of the state in which your business operates, while others use the rate of the state in which the client is located. If the product is intangible, you may know the purchaser’s billing address but not their true location. Different locations will also have different policies on tax-exempt transactions. Additionally, if clients are not having to put in their payment information each time the subscription is charged, it is possible that a client could move states without changing their location in your payment system. All of this can make accurately charging tax difficult when using a subscription service.
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Using a one-time payment vs a subscription-based system often comes down to how often the client needs to refresh your product or service. If they only need to purchase the product once or do not need to reorder or replace the product for at least a year, a single payment is ideal. If a client needs to renew a license on your product multiple times or purchase a new version of the product regularly, a subscription model would work best. It is also possible to offer both! Just always consider your client’s needs and the capabilities of your business before determining a payment structure.