Let’s be honest - recurring billing is every business owner’s dream. Most popular with subscription services (but not only), recurring billing means knowing that you will have a regular income coming in via recurring payments, making it much easier to manage your cash flow. And, if you set up automated recurring billing, no action is required on your part - you can just sit back and watch the cash roll in.
Whether recurring billing makes sense for your business depends on what you sell and what your pricing strategy is. For example, a subscription business almost always will want to offer recurring payments even if several different pricing plans are offered. A merchant who is selling individual products on more of a one-of basis might find recurring charges less relevant. Read on to learn more and see whether you should be offering recurring billing to your customers.
What is Recurring Billing?
Recurring billing is a type of payment model in which customers are charged at predetermined times (usually monthly or annually) for a product or service that they are using on an ongoing basis. A recurring billing platform can be used by a merchant to process recurring payments and make sure that they receive recurring revenue from customers purchasing a subscription or other products that follow the subscription model.
Most often used for subscriptions, the customer is asked to enter their payment information and credit card details only one time and that same data is then used to charge the customer on future dates. They are also asked to authorize the seller to put the future charges through during each billing cycle.
Sometimes referred to as recurring bill payment or automatic bill payment, recurring billing works well for any product or service that requires payments on a regular basis. Some examples include utility bills and magazine subscriptions. A number of subscription management tools are available to help make it easier for merchants to keep track of their sales.
How Does Recurring Billing Work?
There’s no question that recurring billing provides an extra layer of convenience to the customer and seller alike. It aims to provide stable and continuous revenue and a predictable cash flow. Rather than always having to provide payment information each time a bill comes due, the customer provides their credit card details once along with authorization allowing the seller to keep the details on file and use them each month, year or whatever time frame is determined by the billing cycle.
As a seller, you can decide what type of recurring billing system you will use, how you will set up the infrastructure to receive recurring payments and what types of payment methods you will accept including bank transfers, credit cards and mobile apps.
The recurring billing process itself is fairly simple:
- Customer selects the item to purchase and enters payment information into the recurring billing system.
- Customer authorizes use of payment details for future payments.
- On the due date(s), the seller (or automated system) processes the payments.
Depending on the type of accounting system you use, you will need to determine whether you count payments as revenue when the first purchase is made or at the time of each payment. If you are going to accept credit card payments, you will also need to make sure you set up a merchant account or use a payment service provider that will help process your recurring billing and make sure that you receive your funds.
Recurring billing can have a designated end date from the outset, or they can continue indefinitely until the customer requests to end it. This may depend on the type of pricing plans that you offer.
What are the Types of Recurring Billing?
There are two types of recurring billing: fixed - also called regular recurring billing - and variable - also called irregular recurring billing.
Fixed (Regular) Recurring Billing
Fixed recurring billing means that the payment taken each billing cycle is an equal amount. This type of recurring billing is used for services or products that have a fixed price, such as a monthly gym membership or a standing order for a particular product. A fixed billing model is good for some subscription companies because it provides a stable and ongoing revenue and also offers opportunities to try to upsell and encourage customers to add premium services or upgraded products to their standing order.
Variable (Irregular) Recurring Billing
When the payments depend on customer usage or other determining factors, it is referred to as variable recurring billing. A new bill with the amount for that time period is created each payment cycle. Variable recurring billing is used for things like electricity or other utility bills where the amount that needs to be paid changes based on how much the customer used.
Within variable recurring billing, there are two categories: metered billing and quantity-based billing.
- Metered billing means the customer’s usage of the product or service is measured throughout the time period and then they are charged accordingly. For example, your cell phone provider knows how many minutes you used or the number of text messages you sent and your bill will reflect that. While the seller still receives recurring revenue, the amount may be different, making it slightly harder to predict cash flow.
- Quantity-based billing is a model in which a particular quantity was agreed upon at the time of purchase. This model is often used for SaaS (software-as-a-service) providers who will sell a particular number of licenses for a product - if more licenses are added, the cost goes up.
Examples of Recurring Billing Services
Recurring billing can be used in many different situations, especially for companies that use a subscription model. The most common are ongoing bills like phone, electricity and internet. Some companies offer a discount for customers who sign up for automatic recurring billing as an incentive because it helps mitigate the risk of payment errors and missed payments.
Other examples include subscription based services. For example, if you sell a subscription to a monthly box of make-up or clothing, you can get customers to sign up for a 3-month, 6-month or annual plan in which they commit and authorize you to charge them on a recurring basis throughout the time of the plan.
What are the Advantages and Disadvantages of a Recurring Billing System?
As with most things in life, there are positives and negatives to recurring billing. Following is a rundown of key advantages and disadvantages:
Advantages of a Recurring Billing System
- Predictable revenue - when you are billing customers on a recurring basis, you know exactly how much money will be coming in and when. This will help you build a reliable and stable cash flow.
- One-time setup - you only have to collect payment information one time and then the payments will be automatically processed on each due date.
- Reduced chance of late or missed payments - because the process is automated and customers are charged automatically on the due date each cycle, there is much less of a chance that you will need to chase after late or missing payments.
- Increased customer retention - because customers have to take action in order to cancel a recurring bill payment, they are less likely to do so unless they have a very good reason to cancel, increasing customer retention.
- Improved customer satisfaction - customers love the convenience of being able to set up a recurring charge, saving them the time and hassle of having to make a manual payment each month.
- Pricing flexibility - you can be more flexible with your pricing and offer pricing plans with discounts to those who sign up for recurring billing. Since you know that the money will be coming in each month, you can make up for the price difference with volume.
Disadvantages of a Recurring Billing System
- Payment failures - there can be unexpected payment errors and failures even in the most well-organized recurring billing models such as when a customer’s card expires or has insufficient funds. It is important to have a plan in place for dealing with these challenges when they arise.
- Security - your customers are trusting you with their personal payment details that you will need to store in order to charge on a recurring basis. You need to be certain that the subscription management tools and other solutions that you use have all of the right security measures in place to protect their data.
- Difficult to fix errors - because the whole process is automated, if an error is made, it may take a while for the customer to notice that they have been charged the wrong amount and you may find yourself processing a refund or dealing with other complicated situations that could impact your cash flow.
- Churn - while recurring billing does provide stable and ongoing revenue, there is always the risk of customers canceling their subscription at any time (depending on your cancelation policy). When customers leave, it is called churn, and to prevent it you will need to “win” your customers' support each time the recurring billing comes up for renewal to ensure that you keep up that recurring revenue.
How are Subscription Billing and Recurring Billing Connected?
Sometimes the terms subscription billing and recurring billing are used interchangeably. This is because they are very closely related with a slight technical difference. Recurring billing involves customers signing up for an ongoing product or service and providing their payment information and authorization for the seller to charge them at the agreed-upon times. This situation may or may not be specifically for a subscription business, rather it could just be a purchase using a payment plan or some other reason why recurring billing will be needed.
Subscription billing is the term used by subscription companies when they charge customers for their service. This process takes place after the customer has signed up for the service in which the subscription billing solution charges the card and processes the payments on a recurring basis.
Which Types of Businesses is Recurring Billing Designed For?
Any business that offers a product or service on a recurring basis and/or has a subscription business can offer recurring billing. Some of the most common uses of recurring billing include electricity, internet, telephone or other businesses that measure the usage of their service and bill accordingly; newspaper or magazine subscriptions; gym and health club memberships; and SaaS products such as Slack or AWS.
Other times that recurring billing might be used can include home or office rentals or other ongoing services like private tutors or personal trainers.
Does SaaS Have to Be Recurring?
Most SaaS companies use a recurring billing model, offering their customers access to their software solution based on a subscription plan that can be canceled at any time or renewed annually. This is not, however, a requirement and any SaaS company is welcome to make whatever decision they think is best for their product and company. Some may prefer to offer a pay-as-you-go plan or even one upfront payment for lifetime access - it depends on what the product is and what their business model is.
Alternatives to Recurring Billing and Recurring Payments
There are other alternatives that you can offer and customers can use if they do not want to commit to a recurring billing set-up. Possibilities include:
- Online bill pay via bank - some people prefer to manage all of their bills directly with their bank. They can set up recurring bill payments through their online banking portal and then you can receive the payments. This, of course, only works if you can accept ACH transfers.
- Prepaid gift cards - if someone has been given or purchased a gift card for a particular subscription service (i.e. an iTunes gift card), they can upload the card to their account and then as the seller you would use the balance of the card rather than charging their personal credit card or other payment method.