What are Recurring Payments?
Recurring payments are the charges deducted from a customer’s bank account automatically at specific time periods. Recurring payments are also known as subscription payments, or recurring billing. This type of payment works for any business which follows the subscription model. Popular examples include SaaS companies who offer digital services to consumers. This includes all the streaming platforms that work on a subscription basis too such as Spotify. E-commerce businesses which deal with physical products, such as subscription crates also benefit from recurring payments.
Recurring payments are currently popular due to the rise in subscription-based businesses. One of the key characteristics of recurring billing is its convenience. Since these payments are automatic, customers do not have to be sent reminders every time their payments are due. Customers do not even need to remember their subscription dates, or be proactive about tracking their renewals since it all gets done on auto-pilot. What’s more, customers do not need to fill out their payment details every time they are required to pay. Their details get auto-saved for once and all unless they wish to edit or update them on their own. This saves them a lot of time and effort.
Aside from making the customers’ lives easier, recurring payments have also proven to be the way forward for businesses. They not only don’t have to manually track the payment dates of thousands of customers; they also get saved the trouble of chasing each customer to get them to pay. Moreover, repeating scheduled payments mean that businesses get to have more predictability in their profits. They can design their future plans with more certainty, as they have a stable revenue stream to rely onto. Recurring payments can either be fixed, or subject to modifications. It depends on which billing model a business uses.
Steps in a Recurring Payment Cycle
Customer Sign-Up
The first stage is when the customer subscribes to a business’s service. They come into an agreement with the business. In exchange for the service, they pay the required amount on a regular basis defined in the contract terms. Customers select their preferred subscription tier, and subscription duration. They may choose their subscription to last for a number of months, for a year, or more. They also provide their payment information, and choose their preferred payment method. Such as credit card, direct debit, ACH, digital wallet, etc.
Payment Authorization
This step involves authorizing the payment method chosen by the subscriber. Their credit card or bank account is checked to ensure that they contain funds sufficient for the chosen subscription. This verification is necessary in order to minimize the risk of payment failures in the future.
Invoice Generation
When a customer is to be billed on their due date, an invoice is generated and sent to them. That invoice is tailored to their subscription plan, and relevant details such as the date, and payment method. In the case of usage-based billing, the invoice contains details of service usage, and the total due amount based on that.
Payment Processing
Payment gets automatically fetched from the payment method that the customer had selected at the beginning. It is then processed via a secure payment gateway. After successful processing, the amount is deducted from the customer’s account and transferred to the company’s account.
Payment Confirmation
Once the payment gets safely collected by the company, the subscriber is sent a payment confirmation message. They are notified of their active subscription status. Customers are also sent their payment receipts which include all the transaction details, for fostering trust and transparency.
Service Renewal
After payment confirmation, customers continue using the service without interruption throughout their billing period. They are empowered to modify their subscription plans too as needed. For instance, they can upgrade or downgrade their plans during this period. Once the next billing period arrives, the whole billing process repeats itself. However, customers are not asked to provide their payment details again, as they are already saved.
When Does a Recurring Payments Cycle Stop?
The recurring payments cycle continues as it is until either the subscription duration ends, or a subscriber chooses to cancel subscription, or a payment failure occurs. Smart billing systems try their best to recover payments when failures occur. Often times these failures are involuntary, and get fixed easily by gaining the customer’s attention.
Payment failure may occur due to insufficient account balance, card expiry, or other unintentional issues. Billing systems resolve this by attempting payment retries on their own, and sending customers notifications until they respond. A company’s customer support team can also assist subscribers in resolving their payment issues.
The 2 Types of Recurring Payments
Fixed Recurring Payments
Fixed recurring payments mean that a customer is charged a fixed amount at each billing period throughout their subscription duration. For instance, a customer receives a subscription box each month, and they have to pay $30 every time their subscription has to renew. That is because the box in question has a fixed price. And the same cost of $30 is deducted from the customer’s account each month.
In the context of SaaS, businesses may allocate fixed prices to their subscription tiers. No modification can be made to these prices. For example, Netflix charges a set price for its family streaming plan each month. The user has to pay this amount regardless of how much they utilize the service per month, or whether they use the service at all.
Variable Recurring Payments
SaaS businesses that employ pay as you go, or usage-based billing models offer variable recurring payments. This type of payment is based upon the consumption of service by the user. Unlike the case with fixed recurring payments, a company does not charge its service users the same set amount each month. Instead it empowers the users to pay for only what they have used.
For instance, if a company offers a subscription bundle comprised of various online services, it will not only allocate a price to this bundle as a whole, but also a separate price to each of the services included in it. When a user subscribes to this plan, they will have the choice to utilize either all of the services, or only the ones they need. Then each month, they will be charged for only those services or features they utilized, and not for the whole plan.
Similarly, SaaS businesses may also charge a user by tracking their service usage. Let us take a streaming service provider for instance. The company offers a monthly subscription plan, but it charges the streaming fee according to the time a user has spent using the service. The more a subscriber benefits from the service, the more they will be charged, and vice versa.
Companies may offer the option of both fixed and variable recurring payments depending on the nature of their service, and their target audience.
Advantages of Recurring Payments
Recurring payments spell convenience for both businesses and customers. Customers can subscribe to a service without consciously keeping track of their payment due dates. This is thanks to recurring payments running on automation. Some major benefits it provides businesses with are as follows:
Consistent Revenue
With recurring payments enabled, businesses can rest assured and expect a stable revenue stream. That is because their one-time subscribers can transform into a source of lifetime revenue for them. Customers continuously renewing their subscriptions keeps the cash flow going strong as well.
Revenue generated by one-time purchases is not consistent. Since companies have no way of ensuring if their customers would make repeat purchases. With the subscription system in place, it is easier to predict revenue, as the customers are obliged to pay every subscription renewal period. With recurring payments, companies can devise long-term growth plans, as their financial health becomes stable.
Reduced Workload
Businesses can set up recurring payments once, and then the rest falls into place itself. Well strictly speaking, not itself, but with an effective billing software in place. The software instantly collects payments from thousands of customers at their scheduled times automatically.
Companies do not have to send out email reminders to customers at the start of every month. They do not even have to track the payment statuses of their customers manually. The billing system lets the company know which of its customers’ payments have been successful, and which of them have failed. This saves the employees extra effort and working hours.
Customer Retention
With the system of recurring payments in place, it is easier to retain customers. Since the customers can just subscribe to a service and then literally forget about it, because of automated payments, it motivates them to stay loyal to a business. Moreover, a robust subscription management software offers detailed insights into customer behaviour. This enables the businesses to tailor their offerings according to their customers’ needs.
Additionally, if subscription companies keep their subscriber engagement game strong, they are more likely to retain their customers. Recurring payments have made customer retention much easier than acquisition. That is because customer acquisition needs a lot of marketing effort, and a great deal of investment. However, once a customer is acquired, it is relatively easier to keep them engaged and satisfied to foster loyalty. Recurring payments simply add to this satisfaction.
Improved Customer Lifetime Value (CLV)
The longer a customer keeps their subscription alive, the longer their CLV. And the more revenue a business generates from them. As long as the relationship between the business and the customer goes on, due to the recurring payments model, businesses can level up their marketing game. They can give exciting offers to their existing customers, and can encourage more upselling and cross-selling.
Pain Points of Recurring Payments
No business approach is completely flawless. And while recurring payments hold numerous advantages for businesses, the system is not without its own set of pain points.
Customer Churn
Loss of a customer for subscription-based businesses is not simply a loss of one-time cash. It is the loss of recurring revenue, which is a lot of money on the table. Subscription businesses make the maximum profits when their customers have a high lifetime value. If that value is cut short, that means reducing the profits by a big margin.
Moreover, the customers can opt out of their subscription whenever they wish to. That is why it is important for companies to keep their customers engaged, and give importance to the customer feedback. A robust subscription management software can help businesses offer a stellar customer experience for maximum retention.
Customer Data Security
Choosing reliable payment processors is important, as customer payment information is subject to potential data-breaches. Customers do not commit to those services who cannot guarantee their data protection. Hence, companies must be proactive about this concern.
Dunning Management
Payment failures can be a potential cause of customer churn if not handled appropriately. In order to restore missing payments, businesses need to invest in a smart dunning management system. It is essential to keep the cycle of recurring payments going.
Complicated Billing Scenarios
If a business offers variable recurring payments, based on complex payment models like usage-based billing, they need to be proactive about billing accuracy. If customers are not getting billed accurately, it can mean potential revenue leakage for businesses. At the customers’ end, unfair billing can lead to dissatisfaction, and eventual customer churn. Thus the businesses need to go for a robust billing system which can handle their complicated billing needs.
How to Accept Recurring Payments?
The first step is to choose a payment provider. Your payment processing platform must facilitate seamless customer transactions. These are some of the features you need to look for in a recurring payments provider:
Versatile Payment Options
If you are a business with an international customer base, select a payment provider which accepts a range of payment methods. Such as credit cards, direct debit, digital wallets, ACH, etc. The provider must also be able to scale along with your business.
Billing Automation
The payment provider must offer billing automation, so that the transaction processes are quick, and error-free.
Integration
Choose a service provider which seamlessly integrates with multiple payment gateways, as well as other accounting software required for streamlined workflows.
Compliance
It is a must for the payment provider to be PCI/DSS compliant, and complaint with the tax jurisdiction in your region. Additionally, it must guarantee customer data protection.
Analytics and Reporting
In order to keep an eye on your business performance, you require a service provider which offers you insights into your customer activity, and revenue trends.
An advanced payment provider which fulfils your business needs, and aligns with your future goals is necessary for accepting recurring payments smoothly.