A billing cycle is the time period between payment due dates for a subscription service. There are different lengths for billing cycles and different reasons for which a merchant or a customer may choose one over the other. Understanding billing cycles can help you become an informed consumer and a preferred merchant for your customers.
What is a Merchant Billing Cycle?
Billing Cycle Table of Contents
A merchant billing cycle is the interval between subscription payments for a particular service. If you subscribe to a service, you likely have a set date on which the bill is due for that service to keep it in good standing. When you receive your monthly billing statement, you can look to see what your billing cycle is. Most merchants include the dates for which you are being billed.
How Long is a Merchant Billing Cycle?
The most common length of a billing cycle is 30 days, but it can vary based on the merchant, the service, or the customer. For example, billing cycles for utilities such as electricity and water are commonly 30 days long. On the contrary, subscriptions to many software services can be 6 months, 12 months, or longer. Although there are commonalities in most industries for the length of a billing cycle, there are no regulations to mandate a specific length.
Examples of Monthly Billing Cycles
- Mortgages
- Gym Memberships
- Services and Some Utilities
- Most Credit Cards
Examples of Semi-Annual Billing Cycles
- Car Insurance
- Water/Sewer Utilities
Examples of Annual Billing Cycles
- Financial Services Fees
- Property Taxes
This is not a finite list but gives you an idea of some common services and which category they generally fall in to. All of the above may also have other billing cycle options, depending on the provider.
How do Merchant Billing Cycles Work?
Depending on your business, you may choose to offer different options for billing cycles. When setting up your business, you have a few decisions to make regarding the billing cycles you will offer to your customers. The first is the length of the billing cycle.
Billing cycles can be offered weekly, monthly, quarterly, annually, and the list goes on. For simplicity, we will discuss monthly and annual billing cycles here, but remember that you can set your billing cycle for any length that works for your business.
Annual Billing Cycles
Many Software-as-a-Service (SaaS) providers offer annual billing for their clients. This allows the merchant to collect due upfront for a full year of service, which increases cash flow. It also decreases the churn rate, or the rate at which customers unsubscribe to your service. Forecasting and revenue projections can also be easier to manage when your customers bill on an annual basis.
Monthly Billing Cycles
For some subscribers, an annual commitment is too much. In this case, many SaaS providers also offer monthly billing. This is a great option for start-up businesses because they don’t have to commit to a year of service. This is the “try-before-you-buy” option. However, it can be difficult to project revenue, cash flow, and churn with monthly payments. Most SaaS providers offer monthly billing cycles to entice customers to give them a try, and then try to convert them to annual subscribers later by offering a slight discount or more value.
Structure for Monthly Billing Cycles
If you’re considering monthly billing cycles for your subscribers, there are a couple of ways to do this, as well. Some merchants opt for cycles that occur on the day the service was purchased, while others opt for payments to be all on the same day. Let’s look at how that works:
- Option 1: Your subscribers purchase a membership to your software service on the 5th of the month, and their payment is due to you every month on the 5th. This is a simple method to use that most subscribers will understand. However, it’s not the best option if you’re trying to control your cash flow.
- Option 2: Your subscribers purchase a membership to your software service on the 5th of the month, but their bill will be due every month on the 1st. In this case, you would offer a pro-rated amount for the first month, and then start charging them every month on the 1st. This is a great option for merchants who want to control their cash flow every month but can be confusing to the subscriber.
Regardless of the length you choose for your billing cycles, it’s important to clearly communicate the fee structure to your subscribers. Make it clear when they will be charged and how often the charge will happen. This can avoid a lot of angst for you and your subscribers.
What is a Credit Card Billing Cycle?
A credit card billing cycle is similar to a merchant billing cycle but applies specifically to a credit card. Most credit card billing cycles are monthly cycles during which transactions are tallied. At the end of the billing cycle, a statement is sent to the cardholder with an expected payment date.
Credit card billing cycles differ from merchant billing cycles. Here’s a brief synopsis of how:
- Credit card billing statements are usually 30 days, and they include any transactions made during those 30 days
- At the end of the billing cycle, a statement is generated and sent to the cardholder
- The cardholder can see the billing cycle dates, the total balance on the card, the minimum payment due, and the payment due date
- Payment is due on the payment date – NOT the date that marks the end of the billing cycle
Some credit card billing cycles can be adjusted by the cardholder. They can do so by calling their bank and requesting a different cycle and due date. This is not always available but can be requested in some cases.
What is a Grace Period?
The term “grace period” refers to a length of time after the payment due date that a merchant or credit card company extends to their subscribers to pay their bill without incurring penalties. For many service providers, this grace period is 5 days. However, you are at liberty to choose this number as well.
Offering a grace period can help subscribers in times of low cash flow or difficulties in business. Many subscribers appreciate the flexibility offered by merchants in this way. Merchants are not required to offer a grace period, but it’s something to consider as you build out your billing structure.
Should I Offer a Grace Period?
Many merchants offer a grace period as a good-faith gesture to their customers. It acknowledges that sometimes it’s hard to get the bills paid and gives them a few extra days to make it happen. If your business is able to thrive without their payment for a few more days, it might be worth considering.
Pro Tip: encourage people to sign up for autopay for your service. Doing this can help your cash flow stay on track without the need to worry about grace periods or penalties and fees.
