What is auto-renewal in payments?

Auto-renewal refers to the automatic continuation of a customer’s subscription or service plan at the end of the billing period.

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November 21, 2023
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What is auto-renewal in payments?

As a merchant, being able to accept recurring payments is vital – especially if you offer a subscription service. You’ll need the ability to charge your customers at the end of every billing cycle – be it monthly, quarterly, annually, or longer – and, more importantly, do so with minimal friction and fuss on the customer’s part.

Here’s where auto-renewal comes in. Auto-renewing payments are good for you and your customer – allowing you to lock down the ongoing unearned revenue so vital to your business’s sustainability and success, and relieving your customers of the tiresome, tedious burden of having to manually renew their subscription every month.

So to help you learn more, we’re diving deeper into what auto-renewal is – and how, as a merchant, it can the lives of you and your customer base much easier. We’ll look at how it works, how to optimize it, and – ultimately – how to offer auto-renewals quickly and conveniently with Checkout.com.

What is auto-renewal?

Auto-renewal refers to the automatic continuation of a customer’s subscription or service plan at the end of the billing period.

Since the customer has pre-agreed to their card being charged for automatically to renew their service, you – the merchant – won’t require their explicit authorization when the billing period comes to a close.

You can simply charge the credit or debit card the customer first used to pay (which you have saved on file) and renew their subscription: without requiring any effort from them.

How does auto-renewal work?

Let’s break down the auto-renewal process into five simple steps.

  1. The customer subscribes to your service: entering their payment details, and agreeing to your terms and conditions. These should include your auto-renewal policy.
  2. The customer selects their billing cycle: this could be monthly, quarterly, annually, or multi-year. (Typically, providers offer discounted rates for longer billing periods – charged upfront – to lock in that custom for the predetermined period.)
  3. Before the subscription is set to expire, your billing system automatically checks your customer’s account for the requisite funds or credit. You then charge their card – a process known as a merchant-initiated transaction (MIT) – and renew their subscription. The customer doesn’t have to do anything to continue accessing your service.
  4. Some providers send email notifications to their customers several days (or, in the case of longer billing periods, weeks) before the auto-renewal date to remind them of their upcoming service renewal. This is good practice – but not necessarily standard practice.
  5. Providing the customer doesn’t cancel, they’ll continue to enjoy smooth, interrupted, and hassle-free access to the service you provide.

Let’s say, for example, that you run a flower delivery subscription service – sending your customers a fresh bunch of curated flowers every month.

When your customers sign up, they can choose how they want to be billed: either month to month, or year to year. They’ll pay for their first billing period (for the purposes of this example, we’ll call this a month) and agree to the auto-renewal of their service following that.

At the end of the first month, you’ll simply charge the customer again for the next month. They don’t have to log in, enter their payment details again, or take any manual action to renew their service. You simply charge the card they have saved with you – called a card-on-file payment – and continue delivering those wonderfully smelling flowers each month.

Benefits of auto-renewal payments

So – should you implement recurring payments into your business’s payments strategy?

We certainly recommend it. For merchants, auto-renewals offer:

  • Predictable revenue, which allows for better financial planning and budgeting; freeing up room for you to reinvest those recurring profits back into your business.
  • A seamless and uninterrupted service for your customers: increasing their levels of loyalty and satisfaction and, through removing any manual effort from their side, ensuring they’re more likely to continue using your service.
  • Reduced churn: by reducing the administrative burden on the customer, auto-renewal minimizes the risk of involuntary churn (where a customer inadvertently stops using your service, rather than because they were dissatisfied), and decreases the likelihood of them simply forgetting to renew.
  • Powerful data insights: auto-renewal payment systems generate valuable, granular data about customer behavior (including usage patterns, customer preferences, and renewal rates), which you can use to optimize the service you provide going forward.
  • Opportunities to upsell and cross-sell: a stable customer base is more receptive to deals and discounts enabling them to upgrade their service – meaning more chances to grow your revenue and increase each customers’ CLV (Customer Lifetime Value).

Want to know more about customer churn? Our comprehensive guide to churn rate offers everything you need to know: including the different types of churn, how to calculate churn rate, and the different churn rate benchmarks by industry. 

How to optimize auto-renewals

As with all processes, auto-renewal comes with differing degrees of effectiveness.

You can do the bare minimum. Or, you can provide auto-renewing payments in a way that suits you and your customer: ensuring their subscription continues in a way that builds trust, engenders loyalty, and lays the foundations for a long, sustainable relationship.

Below, we’ve listed three of our top best practices for optimizing your business’s auto-renewal process to help you do just that.

Send a reminder when the auto-renewal data is approaching

Sometimes, auto-renewals get a bad rap.

Executed poorly, they can come across to customers as a sneaky ploy by businesses to trick customers into signing on for longer than they thought they were.

Consider, for example, a SaaS (Software-as-a-Service) business offering a 30-day free trial. 

You sign up, enjoy a month’s free usage, but – because life is busy – forget that there was an auto-renewal policy. You wake up the next day, and realize with horror that you’ve been charged for an entire year’s worth of the software in one go. This can amount to a nasty, jarring shock for you as a customer – so don’t go down that route as a merchant.

Instead, send your customers an email a week ahead of the date their subscription is up for auto-renewal, reminding them of their options. This gives them a chance to re-evaluate their subscription, and make an informed decision about whether to go ahead with it.

Sure – you may lose a few more customers this way. However, the upshot is that you’ll know the customers that do decide to let their subscription auto-renew are doing so because they actually want to – not because they simply forgot to cancel it.

Sending auto-renewal reminders is also a good way of avoiding lost revenue through having to send back customer money. After all, some customers – waking up one morning to find they’ve been charged hundreds of dollars for an annual subscription they didn’t think they’d bought – may dispute the charge with their bank. This is called a chargeback, and it can end up with you not only having to refund the charge, but pay a frustrating chargeback fee on top.

Use an automatic account updater

Credit and debit card details change all the time.

A customer might have lost their card, had it stolen, or – having suspected a fraudulent transaction – had it canceled and replaced. They may have changed their name due to marriage or divorce, or switched to a different bank; alternatively, the card might simply have expired.

When this happens, you’ll need to ensure you have the customer’s latest debit or credit card details on file. If you don’t, the payment will fail, the customer’s subscription won’t renew, and the customer – unaware that it was their refreshed card details that caused the issue – might blame your company; leading them to become frustrated, and potentially cancel their subscription.

But of course, customers aren’t so proactive when it comes to updating their payment details across the many subscription services they’re juggling at any one time. This is something your business needs to take into its own hands: and here, a credit card updater can help.

A real-time credit card updater – like the one we offer here at Checkout.com – automatically updates the customer credit and debit card details you have saved on file. This means that, when those card details do eventually change, there won’t be any action required by you, or the customer, to ensure their subscription continues seamlessly.

Tokenize your customers’ payment card data

To successfully auto-renew your customers’ subscriptions, you’ll need a way of charging them every month. And to do that, you’ll need a way of securely storing their card details.

Understandably, there are strict protocols when it comes to storing sensitive cardholder information. PCI DSS (Payment Card Industry Data Security Standard) is a set of regulations that govern how you store debit and credit card data. Failure to comply can result in big fines – so it’s important to get up to speed as to how you can achieve PCI compliance.

One way you can achieve this is through payment tokenization. This is the process of replacing the card details you store on file with ‘tokens’: randomly generated alphanumeric strings that act as proxies, or surrogates, for the actual data. 

By ‘tokenizing’ your customers’ stored debit and credit card details, you keep them safe from infiltration and misuse by cybercriminals. Because tokens are meaningless outside the system they’re built for, they’ll be indecipherable – and thus useless to any hacker that gains access to them. This way, you remain compliant with PCI regulations – while also demonstrating to your customers that you’re committed to safeguarding some of their most important financial data.

How to offer auto-renewals

To offer auto-renewals, you’ll first need to partner with a reliable payment processor.

These are companies that enable you to accept credit and debit cards from your customers online: be those one-off or, in the case of auto-renewal, retail subscription payments.

The right payment processor – such as Checkout.com – will be able to help you:

  • Implement a secure payment gateway with several payment method options to authorize each recurring payment you accept.
  • Store your customers’ debit and credit card information, and collect subscription payments from it at the end of each billing cycle.
  • Ensure any changes to cardholder data is updated – automatically and in real time.
  • Tokenize your card data to simplify your PCI compliance obligations, and help you sidestep the hefty financial penalties of non-compliance.
  • Stay on top of failed payments and quickly follow up on payment delinquency.
  • Remain abreast of legal and regulatory requirements related to auto-renewals, such as the Electronic Funds Transfer Act (EFTA) and similar regulations.

Where can you find a payment processor to help you do all this? Read on to find out.

How Checkout.com helps with auto-renewals

Here at Checkout.com, we can help you set up and manage your auto-renewal payments – then implement industry best practices to optimize them on an ongoing basis.

Our subscription payment processing service is both secure and simple to use. We’ll help you keep your customers secure by tokenizing their card data, while protecting your brand and bottom line from the damaging effects of payment fraud. We’ll also empower you with all the data and analytical tools you need to understand how your subscriptions are performing – and drive continuous improvements in subscription pricing and frequency.

The result? Less churn for your subscription business. More accurate forecasting for the future. And less manual, administrative effort for you – and your customer – when their next billing cycle rolls around.

Get in touch with our team of payment experts today to learn more about implementing auto-renewal payments at your business; and for a friendly, no-obligation chat about how Checkout.com’s subscription solution can work for you.

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November 21, 2023 10:07
November 21, 2023 10:08