What’s one of the most important concerns of any business? Getting paid.
What’s the next most important concern of any business? Getting paid on time.
There’s this concept called the “prepaid postpaid convergence”, which hailed from the telecommunications industry (where I spent the majority of my professional life in). You’re probably on a postpaid mobile phone plan, where you’re charged for what you used in the previous month. Or you might be on a prepaid plan, where you dump a bunch of cash into your plan/phone/card/thingy and you can text and call until your money runs out.
This is a particular problem in the telecommunications industry because billing customers is challenging. It’s difficult to bill in one generic way to handle both prepaid and postpaid charges.
Think of it this way. I could dump $50 into my prepaid card and not use my phone for 6 months. But for 6 months, the company has to keep track of that $50. The worst thing is, depending on the billing requirements and laws in the country, the company may not include that $50 as “revenue earned”. The company can only include any monetary amount after I used some of that prepaid cash. Say I used $11.25, then the company “earned” $11.25 (even though I’ve paid $50 upfront).
Prepaid billed amounts are “future money”. Postpaid billed amounts are “past money”.
There are 3 general payment modes:
- You used a product/service but haven’t paid yet.
- You pay at the point of usage.
- You pay first, but haven’t used the product/service.
The timing is important. For the purposes of this article, we won’t be strict about the point of usage and point of payment. In some restaurants, you get to eat first before you pay. I will consider that as “payment at the point of usage”, unless you intend to get a free meal and bolt the moment you get a chance to.
So why is this important to you?
The business models are different
Let’s consider the Apple App Store. You find an app you like. You purchase it. 2 business models come into play.
First, Apple charges you immediately on your credit card. You pay immediately upon purchasing the app. Apple gets the $0.99 from the credit card company, and can report that $0.99 on their profit/revenue report.
Second, the credit card company bills you the next month, including that $0.99 app you bought. You’ve enjoyed using the app first, before actually paying for it.
Apple and the credit card company have 2 different business models, even though the “product” is the same. (technically, the credit card company isn’t selling the app, they’re selling you the service of having a credit card, but to you it’s the same thing)
Web hosting companies use the prepaid model (that I know of). They may charge you for 3 years worth of hosting your website. You pay for 3 years first, then you get to have your website hosted. Even if you decide to cancel after 6 months, and you might get a 2.5 year refund back (depending on whether the web hosting company has this policy. Please check), but you still had to have paid for 3 years upfront.
I’m assuming you’re a developer. The trend is that the Internet is going to be a big thing. Let’s say you’re a startup founder. Choose your business model wisely, because it’s going to be hard to change it.
The Amazon S3 service lets you store stuff. You pay for what you use (the more data transfers made, the more you pay). This is postpaid.
iStockphoto lets you buy credits which you can then use to buy images. You pay first (in a large lump sum) then you buy images with the credits (that were bought with cash). This is prepaid.
Prepaid has this annoying thing…
It’s called “keeping track”.
Let’s say a text message costs $0.10, and you bought a prepaid card for $10. That means you can make 100 text messages.
A postpaid customer will be billed $0.70 for the 7 messages she sent in the last month. She will also be billed $1.00 for the 10 messages she sent this month (in the next month).
You on the other hand, won’t be billed. Because you already paid $10. Theoretically, you could hold onto that $10 value in your phone card for eternity. Depending on the billing requirements, the telecommunications company might include that $10 as revenue. But since you haven’t actually sent any text messages (or phone calls), it’s kinda shady since the company hasn’t rendered any services to you yet they “earned” $10 for nothing. In any case, you’ve paid $10 for nothing (since you didn’t use it).
The worst part is the telecommunications company has to store that $10 as a line entry in a database somewhere. And without any corresponding entries to “deduct” that amount. That database entry will stay there forever without resolution. The telecommunications company now officially hates you.
This is why most prepaid items have an expiry date, even if they’re virtual products and won’t decay over time. For example, iStockphoto credits last 1 year. Vouchers from movie theatres, supermarkets, restaurants also typically have a 1 year expiry date. They’re vouchers, it’s not like they’re going to wither away. But companies need to keep track of them.
When the prepaid items expire, the companies can then include the value of the items into revenue, because the customer at that point can no longer use the item, hence it’s taken as the customer had already used it.
Imagine you have to write a program and design a database to support the prepaid billing structure. Your program has to keep track of anything the prepaid customer does, and deduct the corresponding amount from the stored value in a database. Every single text message and phone call the customer makes, the program has to go check if there’s enough in customer’s stored value. Technically, there’s a switchboard that bars the customer from making a text message or phone call before the text message or phone call can be made (that’s the hardware check). Then your program breathes a sigh of relief when the stored value is gone or expired… And then the customer tops up his stored value with $50. Your program grows an unreasonable hatred for this customer.
A postpaid model requires you to trust that the customer will pay you. A prepaid model lets you get money first, but keeping track might pose a small challenge.
With the Internet being real-time, the better model for online products and services is the “pay immediately” model. You don’t have to keep track of inventory (if at all) and you get the money immediately to your bottom line.
I know there’s also the subscription model. But do you charge customers for the month they haven’t yet used, or for the month they’ve already used?
I’m pretty sure I left something out, or haven’t explained something properly, so leave a comment or send me an email.