SOP 78 — Switch to twenty-eight-day billing and collect a second card

1. Where the two changes come from

The four-week cycle came from one gym owner. He built his training programs in four-week blocks and ran payroll every two weeks, so he figured he might as well bill on the same rhythm, and he said nobody had ever had a problem with it. The change was then made at once to every subscription business involved.

The processing fee came from an owner who ran an advertising agency. Near the end of a pitch for starting an agency, he mentioned that a 3.99 percent credit card processing fee had added 33 percent to his profit. That showed two things: how thin his margins were, which ended the idea of starting an agency, and that 3 to 4 percent could be added for no extra work. Offering a second form of payment in place of the fee was added on top of what he described.

2. What four-week billing does

A calendar month is not four weeks. Strictly, it is 4.3 weeks. Bill monthly and you collect 12 times a year; bill every four weeks and you collect 13. The extra billing is a full month of revenue with no extra cost behind it, and people convert at the same rates. Take rates have never differed between every four weeks and every month, offered as experience rather than as a rule. The change is a few words in the contract and in how the price is presented; nobody does extra work.

The result is an 8.3 percent rise in revenue that is both instant and permanent. That may not sound like much, but on a business running a 20 percent net margin it moves net margin from 20 to 26.1 percent and raises net profit by 41.5 percent.

Flag: 41 percent of what. A second reading of the same change has a 20 percent profit business go "from 20 to 28%", calls that almost a 50 percent increase in revenue, and then settles on 41 percent. Revenue rises 8.3 percent. The 41 percent is the rise in profit: 8.3 points on 20. The 28 is profit measured against the old revenue, 20 plus 8.3; against the new revenue it is the 26.1 percent above. This page does not settle which reading is right.

3. The billing periods compared

Every row starts from a $100 monthly price.

Replaced by	A year at $100 a month	A year after the change	Difference
$100 every 28 days	$1,200	$1,300	$100 (8.3%)
$50 every two weeks	$1,200	$1,300	$100 (8.3%)
$25 a week	$1,200	$1,300	$100 (8.3%)
$300 every 12 weeks	$1,200	$1,500, counting a fifth billing	$300 (25%)
$99 every 21 days	$1,200	$1,716	$516 (43%)

Flag: the annual figures. The 28-day, two-week and weekly rows print the new annual figure as "$1,30"; the difference column, $100 on $1,200, gives $1,300. The 12-week row counts a fifth billing date inside the first year. The 21-day row is a full-year rate: 52 weeks hold 17.33 three-week cycles, and 17.33 times $99 is $1,716. On that method, 52 weeks hold 4.33 twelve-week cycles, which is $1,300, the same as the four-week row. This page does not settle which reading is right.

4. Show it weekly, bill it every four weeks

In theory, billing weekly, every two weeks, every four weeks or every 12 weeks all give the same benefit. In practice, weekly and two-weekly billing caused a lot of billing trouble: customers changed cards and asked to pause for a single week. So separate what you show from what you charge. Display the price per week, because that is the lowest-looking number, and bill that price every four weeks. Stick with four weeks, 12 weeks or longer and you keep both benefits.

The worked version: present the price as $50 a week and bill $200 every four weeks. The general rule is to display price in the smallest unit and bill on the longest: a price can be shown as $5 a day and billed as $1,825 a year.

5. Moving existing customers

Four steps, in this order:

Change contracts for new customers straight away.
Set a date on which everyone else changes.
Be open about it, and call it a price increase if needed.
Explain it as reinvestment in your business.

6. Add a processing fee

Once the customer has agreed to the price, ask how they would like to pay. Then tell them, lightly, that a card processing fee applies. It is put at 3.99 percent, and also at 3 percent. They either accept or push back. In neither case is a sale reported lost to the fee, again as experience rather than as a rule.

The fee goes to the top line for no extra work and drops to the bottom line. Run a business at a 10 percent profit, add 3 percent, and you have added 30 percent to profit.

7. Trade the fee for a second form of payment

This is the part added on top. If they hesitate at the fee, offer a way round it: they can skip the fee by giving you a second form of payment. The reason you give is that a declined card costs you time and effort to replace, about 7 percent of cards decline in any month, and a customer who saves you that effort gets the saving passed back. If they ask why, which they rarely do, say the fee exists only because every change of card costs money to chase. By one report, the fee was made up to begin with.

You have now given up the fee. What you get instead is worth more. Recurring businesses lose a lot of money to payment problems: a card number changes or expires while the customer still means to stay, or a card is maxed out or short of funds. One fix covers both.

Recurring payments lose 1.2 to 1.7 percent of customers a month to involuntary churn from card changes. On 5 percent monthly churn, that could be 24 to 34 percent of your total churn. Put more loosely: often, if churn falls by, call it, 20 percent because the involuntary churn is gone, that more than recovers the 3 percent you gave up.

What that does to lifetime value on a $100-a-month service, where lifetime value is price divided by monthly churn:

Situation	Price	Monthly churn	Lifetime value
At 5% churn: before	$100	5%	$2,000
Customer accepts the fee	$104	5%	$2,080 (+4%)
Second card, 1.2 points saved	$100	3.8%	$2,631 (+31%)
Second card, 1.7 points saved	$100	3.3%	$3,030 (+51%)
At 10% churn: before	$100	10%	$1,000
Customer accepts the fee	$104	10%	$1,040 (+4%)
Second card, 1.2 points saved	$100	8.8%	$1,136 (+14%)
Second card, 1.7 points saved	$100	8.3%	$1,204 (+20%)

The gain holds at the higher churn rate too; it is smaller in percentage but still significant.

8. Make the second one a direct bank link

A third move on top. If you can get a second form of payment, try to make it an automated clearing house link: the system banks use to pay one another, drawing straight from the customer's bank account. After cash it is the cheapest way to take money. Whatever you process payments through usually has that option.

Ask yourself how many times you have changed your bank account in the last five years. Probably not nearly as often as you have been issued a new card, and your customers are the same. A bank link hardly ever declines: they either have the money or they do not. So the preferred pair is one card and one bank link, the bank link bought by giving back the fee. It also costs less to process, usually by one or two percentage points, so you save on fees as well as on churn.

9. Doing it

Change your script. Take a second form of payment, and have the customer authorize both. Re-run every failed payment the next day on the second one. The worst case is the 4 percent lift with nothing lost; the best case is a large rise in lifetime value, which falls disproportionately to the bottom line.

10. What this page does not decide for you

Four weeks or longer. Four weeks is preferred; 12 weeks or longer is offered as keeping the same benefit. None of the longer periods is ranked.
The fee. 3.99 percent and 3 percent are both given; this page picks neither.
Your involuntary churn. This page gives no figure for your own card-failure churn; measure it before you count on the gain.

11. The checklist

Question	The answer
Billing period	Every four weeks: 13 billings a year, not 12
What it adds	8.3 percent of revenue; take rates unchanged, as experience rather than as a rule
How the price is shown	Per week; billed every four weeks, or 12, or longer
Moving existing customers	New contracts now; a date for the rest; call it a price increase if needed; explain it as reinvestment
The fee	Stated after the price is agreed: 3.99 or 3 percent
Getting out of the fee	A second form of payment, both authorized
Preferred second payment	A direct bank link
Failed payment	Re-run the next day on the second one

12. What this page does not cover

Restating one month as 28 days or four weeks to make a promotion read as new is SOP 11 — Refresh a promotion in order of operational drag. Annual and quarterly billing, the renewal fee and the other price plays are SOP 77, the umbrella page for the ten pricing plays. How long a customer takes to pay back what they cost is SOP 57 — Compute the payback period and shorten it. Trading free time for a commitment belongs to SOP 75 — Apply a continuity discount and the three-plus-twelve rule, and paying in installments to SOP 70 — Work the payment-plan downsell ladder.

Card surcharge rules, bank-debit authorization rules and contract enforceability are not covered on this page.