Legal Considerations regarding Subscription-Based Businesses and Billing

A subscription business is a great way to earn a steady stream of recurring revenue while maintaining a long-term relationship with customers. Some subscription services, like popular magazines or the Book of the Month subscription box, have been successfully in service for decades. Others have cropped up in the past generation through the added convenience of the internet. One thing is for sure, though: these subscription businesses aren’t going anywhere anytime soon.

The key to a successful subscription business is knowing what your customers want and how to bill them in a smart, effective way. Interested in starting a subscription business? Learn all about it in today’s blog.

Subscription Businesses Explained

Subscription businesses involve a long-term relationship between the business and the customer, rather than occasional interactions through a storefront. The business will offer a product, service or some sort of monthly package which customers can subscribe to receive.

Subscriptions can be anything from a supply of fresh fruit or meal prep ingredients to books or music. Streaming services also work on a subscription basis, offering a monthly subscription in exchange for access to their store of TV, movies, or music. Many apps, from dating apps like OkCupid to food delivery apps like DoorDash, also include subscription programs that offer additional perks.

These are typically paid on a monthly or annual basis. In exchange for the subscription, you receive the product, service or package of your choice once a month. If customers fail to pay, the subscription service is paused or, in some extended cases, canceled until payment is received. Sometimes customers may choose to pause the subscription for a month or to change the frequency of payment from annual to monthly payments or vice versa.

7 Steps To Start a Subscription-Based Business

There are several benefits to this business method. For the customer, it offers products and services they need or enjoy with little to no maintenance or hassle. For businesses, it ensures recurring revenue and ongoing connection with customers, rather than having to hustle for every sale. Your revenue will be fairly predictable, so you can budget more accurately. Here are the steps to set up a successful subscription business:

Step 1: Find a Problem and a Solution

The first question you need to answer when starting a box subscription service is, “What problem will my subscription box solve?” Maybe the customer is struggling to find book recommendations or wants to find fresh, eco-friendly produce solutions. Your subscription service could also be delivering medical supplies and medication to customers with mobility problems.

Knowing why your customers would look for a product like yours and why they would need it regularly allows you to plan your business and market it more efficiently.

Step 2: Choose a Business Model

There are many different types of business models for subscription services. You will need to figure out what type of business model you want to use before starting your business. Some of these include:

  • This model offers access to premium perks and new products in exchange for a monthly subscription fee. This could include early access to certain products, access to a wider variety of products or exclusive deals on certain products.
  • Personalize products based on the customer’s interests or preferences. This could be a monthly subscription box offering a book within a genre that the customer likes to read, clothes that suit their style or a selection of music that matches their taste.
  • This model offers a regular supply of goods that need to be purchased consistently, such as groceries, medications, pet food, and more. Often, this subscription model offers a discount for subscribing as opposed to making a one-time purchase.
  • Subscription as a Service. Fixed subscriptions are very straightforward: for a fixed amount of time, a product is offered in exchange for a monthly or annual subscription fee. This is often for software as a service (SaaS) products or regular professional services.

You’ll need to figure out what kind of subscription business model best suits your product or service before getting started. Research successful examples of that business model and take notes so you can form a plan for how to run your subscription business.

Step 3: Build a Prototype Box

If you’re creating a subscription box, now is the time to set up a prototype. Even if your subscription service is software or an access model to an online store, you’ll need to start planning exactly what products you’ll offer. Come up with a package, whether physically or digitally, of goodies that would be delivered to subscribers. You can run this by test subscribers who can offer feedback about their satisfaction with the box and what might make it better.

Step 4: Set a Price

The feedback from your prototype box should help you get a sense of how much subscribers would be willing to pay for your subscription service. This is also a good time to conduct market research and look at what your competition charges. Think about what your subscription has to offer and what makes it unique. Consider the costs that go into procuring your subscription service for customers. Then develop a price that is fair but makes you a profit.

Step 5: Build a Website

Book your website domain and start building your website. You can do this fairly easily through services like Squarespace, Wix or WordPress. You can also hire someone to build a website for you. Your website should be user-friendly and easy to navigate on both mobile and desktop. A sleek design that suits your brand and plenty of high-quality pictures of your product is also a must.

Step 6: Market Your Subscription Service

Set a date to launch your subscription service and start putting effort into marketing. Do some research into the target audience you want to reach, as well as the social media platforms they’re most likely to use and the marketing strategies that are most likely to reach them. Begin promoting what makes your subscription service unique and exciting. Put those factors front and center of your marketing. Set a reasonable email sign-up goal for your subscription launch, whether it’s 20 or 200.

Step 7: Sort Out Logistics and Launch

If you need to partner with any vendors for your subscription service, make those partnerships. Get the number of products you need based on your email sign-ups and launch your product. This will be an exciting but hectic time as you ship out your products, but the payoff will be worth it.

After launch, keep an eye on the customers that cancel the subscription after one or two months, as well as customers who pick up on any extra offers. Look for patterns within your customer base so you can refine what works and what doesn’t about your subscription box.

Compliance With Automatic Renewal Laws

Your business needs to have a high tolerance for the risks inherent in offering subscription-based products. A risk factor that all subscription businesses ought to consider is the complex nature of complying with idiosyncratic and often varying state laws.

In addition to complying with FTC regulations, subscription businesses must implement individualized programs to comply with applicable state consumer protection laws, like, for example, California’s Automatic Renewal Law (the “ARL”).

The ARL requires subscription business to provide an acknowledgment that includes the automatic renewal offer terms or continuous service offer terms, cancellation policy, and information regarding how to cancel in a manner that is capable of being retained by the consumer. Subscription businesses must similarly obtain a consumer’s affirmative consent to an automatic renewal before charging a consumer’s credit or debit card.

The ARL also requires businesses to present the automatic renewal offer terms in a “clear and conspicuous” manner before the subscription is fulfilled. States like Connecticut, Florida, and Nevada are silent on this definition, causing businesses inadvertently to violate applicable automatic renewal laws.

It is imperative that you understand your compliance requirements under California’s ARL. Any consumer who accuses your business of violating the ARL may bring a claim pursuant to California’s Consumer Legal Remedies Act (“CLRA”). Under the CLRA, consumers can sue your business for (i) actual damages or statutory minimum damages of $1,000 for class actions, (ii) injunctive relief, (iii) restitution, (iv) punitive damages, and (v) attorney’s fees. Consumers may also seek injunctive relief and restitution under California’s Unfair Competition Law and False Advertising Law.

To date, more than half of the states and the District of Columbia have enacted automatic renewal laws. But compliance requirements for subscription businesses must be reviewed on a state-by-state basis.

Colorado, for instance, enacted its own automatic renewal law with the caveat that it only applies to health club memberships. Iowa takes it a step further; physical exercise club contracts cannot contain an automatic renewal clause, at all.

These states are just examples which illustrate the importance of consulting outside counsel. To avoid the class action quagmire, you should hire a firm experienced in navigating the vast legislative landscape.

Don’t Forget About Payment Processing

Of course, it’s essential to develop a plan for payment processing and make sure that it continues to run smoothly. You will want to figure out what payment methods you’ll accept from customers. Credit or debit cards are a must, especially for online payments. Some services also allow payments from services like PayPal or direct checking account payments.

Payment processing is the method by which you receive payments. The most common method of payment processing for subscription services is automatic payments. These are automatically taken out of a credit or debit card, PayPal account or bank account on a set date. Customers should receive reminders a few days before the payment is due to ensure they have the money in their account.

This allows less hassle for customers since they don’t have to interact with your business every time they want to renew their subscription. It also makes it easier for you to receive your recurring revenue.

What Can Go Wrong With Your Payment Processing?

Even in this day and age, there is no completely foolproof method of payment processing. Customers might still have insufficient funds or they may try to contest a payment that was taken out of their account for one reason or another. It’s important to know what can go wrong in payment processing so that you can know how to protect your business.

Chargebacks

A chargeback occurs when a customer disputes a charge made to their card or bank account and is refunded that amount. A customer may report that the charge was made on their card or their bank account incorrectly. The bank can then investigate this claim and, if they find that this is the case, the charge is returned to the customer.

This can happen if the customer has canceled their subscription but has not been removed from the subscription list, the charge was fraudulently made to their account or if there was an issue with the product delivery. When the bank investigates the charge, they will contact you, and you will have to conduct your own investigation. If you have no proof to dispute the customer’s claim, you will have to return the charge to them.

There are also sometimes “bank chargebacks,” in which the bank flags a charge as irregular and likely fraudulent. In these cases, the customer can confirm with the bank that they did in fact authorize the change, and clear the issue.

Chargebacks are slightly different from refunds. In the case of a refund, the customer will report an issue to you directly. Maybe they failed to receive the subscribed product or it arrived with damages. The customer may return the product and you may offer a refund. Refunds are typically set on your terms, based on your business plan for handling them.

Failed Transactions

Failed transactions typically happen when the customer has insufficient funds with their payment method. If the bank account finds that there is not enough money to satisfy the subscription payment, the payment will bounce.

Make sure the consequences of failed transactions are clearly laid out in your terms of service. Typically, you can send out a warning to the customer asking them to revise their payment method. If you have an online subscription service, you can pause their account until this is revised.

If you ship a product to your customers, you can hold off on shipping until the payment goes through. You should always wait until payment is confirmed before shipping the subscription box for the month.

Are You a High-Risk Merchant?

A high-risk merchant is a merchant who has been flagged at a higher risk of fraud or chargebacks, whether customer chargebacks or bank chargebacks. As a higher-risk merchant, you may pay higher processing fees, which cut into your profits.

There are a few reasons that you could be considered a high-risk merchant. Do you accept international payments or have a sudden surge of transactions? This can send red flags to financial institutions. New merchants or merchants within high-risk industries are often flagged as high risk, as well as merchants with low credit.

Do You Need Legal Counseling for Your Online Payment Processing?

Legal counseling can help to support your business when you run into issues with online payment processing. If a customer or bank reports a fraudulent charge, you may be able to contest it with your legal counsel. A legal team will help to protect your subscription business both from fraud and from accusations of fraud, as well as any issues with your payment processing vendor.

Bill Customers Smartly With the Legal Support You Need

Finding a smart way to bill customers is one of the most important aspects of running a subscription business. Fortunately, when you need legal counsel, the Global Legal Law Firm has your back. Since 2008, we’ve specialized in electronic payments litigation across the nation, including local businesses in San Diego and Los Angeles. Contact us today to request a consultation and learn what we can do for you.

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