Case Study Lesson: The Drawbacks of PayPal for Recurring Billing

In this week’s new Subscription Site Insider Case Study we examine the lessons learned when a veteran subscription marketer launched his own subscription site last fall. Michael McCurdy, formerly of TheLadders.com, shared great stories about how he adapted his content development and marketing strategies to deal with surprises after the launch of TestingMom.com, a site to help parents prepare their kids for elementary school placement and intelligence tests.His most significant finding is also our No. 1 lesson learned this week: Don’t launch a subscription site with PayPal for recurring billing.McCurdy chose PayPal because it offered the quickest way to get his site’s payment processing up and running.  After the first month, he saw his retention rate tanking because of PayPal’s practice of sending a notice to every subscriber a few days before their card was going to be billed for a monthly subscription. Sending renewal notices is a best practice when renewing longer subscriptions, such as six-month or annual terms. In fact, several state laws now dictate that a renewal notice be sent 30-60 days prior to billing those subscribers’ cards (You can find details on renewal notice practices in the legal resources section of our site). But such notices are not required for monthly subscriptions; and, as McCurdy discovered, they can really hurt your renewal rates.There other drawbacks to using PayPal for recurring billing. For example, there’s the question of who “owns” that customer account info. If you ever sell your site, PayPal may not allow a new third-party to take over those subscriber accounts from you, and will have to sign up every member again.We’ve also heard complaints about integrating PayPal’s cancellation process with a subscription site’s membership database. In some cases, sites aren’t receiving timely updates about subscribers who cancel their subscription through PayPal. The cards are no longer billed, but the subscribers still have access to the site’s content.The upshot is that ease of set-up may not outweigh the potential headaches down the road if you’re planning to develop a significant online subscription business.PayPal can be a viable option if you’re planning to stay very small, or have to process a lot of international transactions. But in the long run, it makes more sense to set up a merchant account with an acquirer that specializes in recurring billing for card-not-present transactions. That way, you’ll have a payment processing system that can grow with your business.

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