There are two primary sales models, straight sales or continuous sales. A straight sale is basically defined as a one-time purchase of a good or service with no further monetary obligations from the consumer or service obligations from the merchant except whereas expressly stated in the terms and conditions of the sale. Continuous sales, also known as continuity billing or rebills, occur when goods or services are purchased by the consumer with the understanding that they will continue to pay the merchant on a recurring basis for additional goods or services on a pre-determined, mutually agreed upon time-frame. You would think choosing the sales model for your business is a simple choice, but deciding how to sell your goods and services is a little more complicated than it presents itself. Many times the types of products or services offered dictate how they should be sold. However, it’s not always clear-cut and the choice can directly affect profitability, particularly when it comes to costs associated with payment processing services.
The Straight Sales Approach
This is the traditional retail sales approach whereby goods and services are sold on a one-time basis. Merchants set a price, consumers purchase, and there typically are no other obligations from either party beyond this point except where expressly stated in the terms and conditions of the sale such as refund, return, or shipping policies. Merchant service providers look at straight sales as a straight-forward approach to conducting business. It’s viewed as a considerably less risky transaction because good and services are usually exchanged in real-time. You might say wait, “How does that work for e-commerce?” Simple, the shipping policy has to be fair to the consumer and acceptable to the standards set-forth by the payment processor. As long as they fall within that standard, it is considered real-time. Because it is perceived to be less risky than continuous billing, it is usually easier to get approved for a merchant account and is particularly true when dealing with high risk merchants. This also can translate into lower costs associated with payment processing services.
The Continuous Billing Approach
Continuous billing or continuity has become an increasingly popular payment model due to its benefits for both merchants and consumers. Here, customers pay a predetermined amount in a predetermined, recurring timeframe in return for the merchant’s goods or services which the consumer is promised to received automatically and seamlessly when payment is transacted. This is usually the case for any business that has paid members or subscribers.
This continual revenue source combats the biggest problem with straight sales: the fact that once you’re paid by a customer, that revenue stream is over. When times get tough, people are most likely to first cut out new spending, but not necessarily cut spending that is already budgeted. So having a regular, recurring billing approach can help protect you during lean times as well as keep and build-up a customer base you can later nurture by offering different products and services.
In fact, the recurring billing model has become so desirable, that many new businesses are being built entirely around the idea. A great example is the rise in popularity of subscription services such as Dollar Shave Club, or for a thriving business that realized it could capitalize on recurring billing look at Amazon with the recent promotion of Amazon Prime. These are highly popular services that provide tangible benefits to their members, one of which found a way to offer utilize straight and continuous sales.
That said, with all of its benefits, there also comes a few disadvantages to the recurring billing model that merchants should be aware of. The biggest of these is the possibility of fraud and chargebacks. Sometimes it’s what they call friendly fraud that gets you. Friendly fraud occurs when someone who signed up for rebilling charges back because they did not fully understand or expect the recurring charges.
Such chargebacks are an inherent part of doing business, especially online where it’s easier for a customer to dispute their making a payment. Overall, the perceived risk is much greater for using an advanced billing model and merchant service providers unilaterally view these as high risk merchant accounts warranting high costs and greater underwriting requirements.
Regardless of which sales model you use, the payment processor you choose to work with can be the ultimate difference. Usually, a merchant service provider that underwrites in-house has greater capability to work in a more intimate fashion with merchants in order to provide insight on best practices for sales and billing, including the best ways to protect and defend against chargebacks or other issues that could affect a merchant’s ability to sell.