About this guide

Recurring payments have become an increasingly popular payment model in recent years, with many businesses adopting this payment method as their primary source of revenue. Recurring billing, or automatic billing, allows businesses to charge their customers at regular intervals (usually monthly or annually) without requiring them to manually authorize each payment.

This payment model has revolutionized the way many businesses operate by providing a more predictable revenue stream and simplifying payment processes. For businesses that rely on a steady stream of income, such as subscription services, membership-based businesses, and software as a service (SaaS) companies, recurring and automatic payments are crucial for maintaining financial stability and growth.

The purpose of this guide is to provide a comprehensive overview of recurring payments and their benefits, as well as the best practices for setting up and managing them. Whatever your subscription product or service, this guide will provide valuable insights into how the recurring payment model can improve your business operations and enhance customer satisfaction.

By the end of this guide, you'll have a clear understanding of what recurring payments are, how they work, and how they can benefit your business. You'll also learn about the legal and compliance considerations associated with a recurring payment system, as well as tips for setting up a successful recurring payment strategy. Let's get started!

What is a recurring payment?

Definition of a recurring payment

A recurring payment is a financial transaction in which a customer pays at regular intervals for goods or services received. Recurring payments are commonly used for subscriptions, memberships, and other ongoing services. In practice, the purpose of the recurring payment model is to automate payments, reduce administrative costs, and provide a predictable cash flow for merchants!

Recurring payments vs one-time payments and usage based billing

The recurring model differs from one-time payments in that they are charged at regular intervals, whereas one-time payments are charged only once, and are normally used for single purchases or transactions. Usage-based billing entails variable recurring payments calculated from the amount of goods or services customers consume, rather than fixed payments of the same amount every time

Use cases for recurring payment models

Recurring payments are commonly used for various purposes, including subscription-based services such as streaming media, software as a service (SaaS), and membership-based services such as gyms and clubs. They are also used for utility bills, insurance premiums, and other services that require ongoing payments.

How do recurring payments work?

A recurring payment system works by letting customers authorize a service provider to charge their accounts at regular intervals. Customers typically provide their payment details (i.e. credit card details) at the time of initial purchase or registration, and merchants store that information in the customer's account securely for future charges. Merchants use a payment gateway or other software to ensure customers are automatically billed, which reduces administrative busywork and helps ensure timely payments.

How recurring payments can benefit your business

Recurring payments lead to more predictable revenue

Variable and fixed recurring payments can provide more predictable revenue for businesses. This predictable revenue stream can help businesses better forecast their cash flow and financial processes, and can also reduce operational costs. Additionally, this payment model can be crucial for industries that rely on stability and growth, such as software as a service (SaaS) businesses and e-commerce retailers.

Recurring payments speed up transactions

The less time it takes to finish a transaction, the more convenient and seamless experience subscribers will have, which can increase customer satisfaction and retention. Industries that benefit from fast and reliable payment processing include phone bills and insurance providers.

Recurring payments improve customer retention

Improving retention by providing a friction and hassle-free payment experience can increase customer satisfaction and loyalty, which in turn can lead to long-term business success. Additionally, automatic payments can also make it easier for businesses to offer subscription boxes or membership programs!

Recurring payments save time

Recurring payments can reduce administrative workload and save businesses a ton of time. Automation can improve efficiency, reduce errors, and eliminate the need for manual payment processing. Industries that can benefit from recurring payments to reduce administrative workload include fitness centers and online marketplaces.

Setting up recurring payments

Payment gateways that support recurring billing

A recurring payment plan requires a payment gateway that supports this functionality. Some of the most popular payment gateways that support recurring billing include PayPal, Stripe, and Braintree.

PayPal offers various recurring payment options such as subscriptions, billing agreements, and reference transactions, making it an excellent choice for businesses of all sizes.

Stripe is another popular payment processor that offers subscription billing and flexible payment plans.

Braintree, owned by PayPal, offers a robust payments platform with advanced features such as customizable billing cycles, payment retries, and automated email notifications.

Integrate with e-commerce platforms

To accept payments of this type, businesses can integrate their payment processing software with an e-commerce platform that supports subscription and recurring billing.

Some examples of subscription and recurring billing platforms include Chargebee, Zoho Subscriptions, Bold, and Subbly. These platforms offer various features, such as customizable payment plans, automated invoicing, and payment reminders. Web builders like Wix and Webflow often lack this basic functionality out of the box.

Among these platforms, Subbly stands out with its powerful automation capabilities and intuitive user interface, making it an excellent choice for businesses looking to set up recurring fixed and variable payments quickly and easily.

Automatic payments frequency options

To provide flexibility and convenience to customers, a service provider can offer multiple payment frequency options for recurring payments. For example, when a customer subscribes, they can choose to pay based on a weekly, monthly, quarterly, or annual billing cycle. Offering various payment frequency options can increase customer satisfaction and reduce churn.

Customization and pricing models

Different payment gateways offer different customization and pricing models, making it essential to choose the right payment gateway that suits your business needs. For instance, some payment processing companies charge a flat rate per transaction, while others charge a percentage of the transaction value.

Some payment gateways also offer customizable pricing models, such as volume-based pricing or tiered pricing, which can be beneficial for businesses that process a large number of transactions. It's important for business owners to compare different payment gateways based on their suitability for different business models and industries.

Legal and compliance considerations

Why the small print matters

Recurring payments are convenient for both customers and businesses, but it's important to consider the legal and compliance aspects of implementing such a payment model. In this section, we will discuss some of the key considerations that businesses need to be aware of when processing recurring payments

Data privacy and security regulations

One of the most critical aspects of implementing a recurring payment model is ensuring that customer data is protected. Businesses that handle sensitive customer information must comply with data privacy and security regulations such as the General Data Protection Regulation (GDPR) in the EU or the Payment Card Industry Data Security Standard (PCI DSS) in the US

The GDPR applies to any business that collects and processes personal data of EU citizens, regardless of where the business is based or what platform their merchant account is hosted on. Businesses must implement appropriate technical and organizational measures to ensure the security and confidentiality of personal data, including that of recurring payment information and bank account details.

Similarly, the PCI DSS applies to any business that accepts credit card or debit card payments. Compliance with this standard is necessary to protect customer payment data from breaches and fraudulent transactions.

Payment Card Industry (PCI) compliance

PCI compliance is mandatory for businesses that accept credit or debit card payments. Businesses must comply with a set of standards designed to ensure the secure handling of sensitive payment data. Failure to comply with PCI standards can result in hefty legal fines, loss of customer trust, and penalties from financial institutions.

Customer consent and authorization requirements

Before starting to accept recurring payments, businesses must obtain the necessary consent and authorization from customers. This includes clearly outlining the terms of the recurring payment agreement, providing the customer with the option to opt-out at any time, and obtaining their explicit consent for future subscription payments.

Businesses must also provide customers with clear information about how to stop recurring payments, what information is collected and stored, and how it is used. This information should be easily accessible and transparent.

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Recurring billing best practices

To ensure a smooth and compliant recurring payment process, businesses should follow best practices such as:

  • Providing clear and concise information about the terms of the automated recurring payments
  • Offering customers the option to choose the payment frequency that suits them best and supporting multiple payment methods
  • Sending reminders for regularly scheduled payments and receipts to customers to keep them informed and up-to-date
  • Ensuring that customer data is stored securely and that the payment gateway is compliant with relevant regulations and standards

Overall, businesses must ensure that they are in compliance with legal and regulatory requirements when setting up recurring payments. This includes implementing appropriate security measures to protect customer data, obtaining consent and authorization from customers to collect payments, and following best practices to ensure a smooth and seamless payment process.

Managing recurring payments

It's important to remember:

Recurring payments are an effective way to streamline billing processes and improve cash flow. However, managing these payments can be challenging without the right tools and processes in place.

Subscription management

Subscription management is critical to maintaining an accurate and up-to-date record of your customers' billing information. It also ensures that your customers receive the product or service they have subscribed to on a regular basis. To effectively manage subscriptions, businesses should have a centralized system that tracks customer subscriptions, billing information, and subscription details. This system should also allow businesses to manage and update subscription details easily.

Handling failed payments

Not every payment will go through every time, and how businesses handle this can have a significant impact on customer satisfaction and retention. Subscription businesses should have a system in place to handle missed payments promptly and effectively. This system should include automated notifications to customers, as well as an easy-to-use interface for updating their information.

Updating customer payment information

Keeping customer data up-to-date is crucial for ensuring that each subscription payment is processed correctly. To make this process as seamless as possible, businesses should provide customers with an easy-to-use interface for updating their card and bank account details. This can include options to update payment details, view billing history, and manage subscriptions.

Dunning and cancellations

Cancellations and refunds are an unavoidable part of any subscription business model. Businesses should have clear policies and procedures in place for handling them. This includes communicating cancellation policies clearly to customers, providing easy-to-use interfaces for canceling subscriptions, and handling refunds and billing errors promptly and fairly.

Tips for a successful recurring payment strategy

Recurring payment models provide businesses with an excellent source of revenue, but analyzing the performance of these payments is essential to ensure that they continue to provide a steady stream of income.

Key performance indicators (KPIs) are metrics that businesses use to evaluate the success of their recurring payment strategies. The following are some of the most important KPIs in this context:

  • Monthly Recurring Revenue (MRR): This metric measures the predictable monthly income that a business can expect from its fixed recurring payments.
  • Churn Rate: This metric measures the rate at which customers cancel their recurring payments.
  • Customer Lifetime Value (CLTV): This metric measures the total amount of revenue a business can expect from a single customer during their entire lifetime, including both recurring revenue and one-time purchases.
  • Customer Acquisition Cost (CAC): This metric measures the amount of money a business spends to acquire a single customer.

Analyzing churn rates

Analyzing churn rates is crucial for businesses that rely on recurring payments. A high churn rate can indicate issues with customer satisfaction, billing processes, or payment options. By analyzing churn rates, businesses can identify these issues and take steps to address them.

Identifying growth opportunities

Analyzing recurring payment data can also help businesses identify growth opportunities. For example, businesses can identify trends in payment frequency, payment amounts, and customer demographics to determine which areas of their recurring payment strategy are performing well and which areas need improvement.

Reporting tools and software

Several reporting tools and software are available to businesses to help them track and analyze their performance. These tools provide businesses with valuable insights into their recurring payment strategy, including KPIs, churn rates, and customer data.

Popular reporting tools include Google Analytics, Mixpanel, and ChartMogul.

Recurring payment model examples

There are several businesses across various industries that have implemented successful recurring payment strategies. Some examples include:

  • Netflix: The king of streaming services offers subscription-based services that allow customers to access their content library for a recurring fee. This has enabled the company to generate a predictable revenue stream and maintain a large customer base.
  • Blue Apron: The meal kit delivery service utilizes repeated payments to provide customers with weekly deliveries of fresh ingredients and recipe instructions. This has allowed the company to retain customers and grow its business steadily.
  • Salesforce: The cloud-based customer relationship management platform offers subscription-based services that allow businesses to manage their customer data and interactions. This has helped the company generate consistent revenue and expand its customer base

Overall, businesses must ensure that they are in compliance with legal and regulatory requirements when setting up recurring payments. This includes implementing appropriate security measures to protect customer data, obtaining consent and authorization from customers to collect payments, and following best practices to ensure a smooth and seamless payment process.

Takeaways from these case studies

From these case studies, we can learn several valuable lessons about how to implement successful recurring payment strategies in business, including:

  • Offering flexibility: Successful businesses offer their customers a variety of payment frequency options and flexible pricing models to suit their needs.
  • Providing excellent customer service: Effective customer service is essential for managing recurring payments and ensuring customer satisfaction.
  • Maintaining security and compliance: Businesses that handle recurring credit card payments must prioritize data security and adhere to relevant regulations to protect customer information.
  • Leveraging data and analytics: By tracking key performance indicators (KPIs) and analyzing customer behavior, businesses can identify opportunities for growth and optimize their recurring payment strategies.

These lessons can be applied to businesses across a range of industries to help them successfully implement recurring payment strategies and drive long-term growth.

In conclusion...

As a business owner or decision-maker, it is crucial to recognize the value of recurring payments and how they can drive business growth and success. By implementing and optimizing a recurring payment strategy, businesses can enhance customer satisfaction, reduce churn rates, and improve operational efficiency.

Whether you're offering subscription box services, magazine subscriptions, or the best gym memberships in town, we encourage you to explore the benefits of recurring payments and choose a suitable payment gateway or platform that meets their specific needs. By doing so, businesses can achieve sustained growth and success in today's competitive business environment.