Recurring payments explained
With convenience more important than ever for online consumers, the rewards for implementing recurring payments are becoming obvious to businesses.
Recurring payments apply to anything from essential fixed costs to leisure and entertainment expenses.
So, what do businesses need to know in order to implement recurring payments effectively? Keep reading to learn everything you need to know about this payment option, including use cases, their benefits, potential drawbacks, and how businesses can use them to set themselves up for success.
What is a recurring payment?
A recurring payment is a payment that is automatically charged to a customer's credit card or bank account periodically. Online merchants will typically use card-on-file transactions for a recurring payment meaning they will store the cardholder’s payment details with their consent, in order to withdraw the funds that are due.
Recurring payments aren’t a new concept, but today, we’re seeing many more applications for this payment method for merchants in a wide range of industries. Next we look at the use cases - traditional and innovative - for subscription payments.
Recurring payment examples
Household bills like water, electricity, gas, cable television, phone and internet service bills are some of the first applications of recurring payments. Since most of these utilities and services are considered essential year-round, they are the most common types of recurring payments.
Subscriptions are widespread today. It may have started with newspaper and magazine subscription fees, but some of the most popular digital subscriptions are video streaming services like Netflix, audio streaming platforms like Spotify, and access subscriptions like Amazon Prime. However, there has also been a rise in other subscription models, such as monthly boxes that are sent to customers, food service subscriptions, and more. As these services rise in popularity and become increasingly ingrained into the daily lives of consumers, many businesses are adopting the recurring payment model for their offerings.
Memberships at physical places that offer amenities, such as fitness centers, gyms, spas and country clubs also follow a recurring payment model. Additionally, recurring fees can also apply to non-physical service memberships, such as organizations and social clubs that require membership fees to grant people access to their resources and events.
Payment plans for services offered over a prolonged period sometimes offer the option for clients to pay in recurring payments. Examples include legal council, education courses, and cleaning services.
Financing plans are a hot topic now, with services like buy now, pay later (BNPL) becoming an attractive option to finance purchases. BNPL plans allow customers to pay for a single product over a more extended period rather than paying in total upfront, making certain products more accessible for people with less monthly disposable income.
Recurring giving is offered by many nonprofit organizations, a type of recurring payment whereby a donor gives a set amount of money regularly. Since nonprofits rely on donations to help them fund their operations, this type of payment plan is ideal, allowing the donor to spread out their giving.
Benefits of recurring payments for merchants
As mentioned, implementing recurring payment plans comes with many benefits for merchants. Here are some ways a business can benefit by accepting recurring payments online and offline:
Stabilize cash flow
Maintaining a healthy cash flow can be a struggle, even for the most profitable enterprises. Adding recurring payment options gives businesses a way to get more insight into the volumes of sales and conversions that they’ll receive throughout the financial quarter, allowing them to make more calculated and effective decisions for the future. In this way, recurring payment transactions can be extremely valuable as a steady revenue stream for businesses.
Build a loyal customer base
When companies offer recurring payment plans, they create better, more seamless customer experiences. Cardholders don’t have to re-enter their payment details regularly, which can be a time-consuming task, especially in the on-demand economy. It also makes it easier for customers to budget for what they are buying, providing transparency and simplicity of use, and ultimately making paying for a service an afterthought. This level of convenience can go a long way in developing a loyal customer base and makes it more likely for a business to attract new customers.
Eliminate late payments
Automating payments makes it easier for customers to make timely payments, reducing the likelihood of late payments or missed bills. By setting a solid payment schedule, funds will always be withdrawn at the agreed-upon time, relieving customers of some of the responsibility of managing their ongoing expenses.
Save time and resources
Recurring payments save businesses time and energy on billing and collections tasks. They no longer have to worry about sending out invoices or following up with customers to make sure they have paid their bills; the system will take care of everything for them. In this way, recurring payments allow companies to focus on their core business activities. When you don't have to worry about billing and collections, you can focus on what you do best: running your business.
Increase business productivity
When accounting teams don’t have to focus on collections because of a recurring payment plan being in place, they can shift their energy into finding solutions and improvements for other aspects of a company’s finances. Similarly, marketing teams will have less pressure to re-engage existing customers, allowing them to focus on expanding the customer base instead. The number of active subscriptions can also serve as benchmarks to beat for a company’s various teams, making recurring payment options an effective productivity tool.
Potential drawbacks of recurring payments
Although there are several benefits of using recurring payments, there are also drawbacks to consider before deciding if this type of payment is right for your business.
Risk of failed payments
When a customer opts for a recurring payment plan, they will typically use a credit card as their form of payment. For businesses, that can present several downstream risks. For instance, since all credit cards come with an expiration date, there is a likelihood that the customer’s credit card could expire during a payment cycle—unless an account updater is used. Additionally, if a cardholder goes over their credit limit or places a lock on their card because of fraud, the transaction would be declined. This would leave businesses with the responsibility of following up with their customers to correct billing errors, which can be a complex and timely process.
If a customer cancels their subscription halfway through the billing cycle or opts for add-ons that would change the total cost, businesses will often have to prorate the bill accordingly. Prorated billing can be a difficult process for merchants, however it ensures that customers feel they are paying a fair price for the products and services they’ve received.
Recurring payments success strategies for businesses
Before implementing this payment method, it’s crucial for businesses to understand how to manage recurring payments in an effective way. To minimize friction and maximize success, we’ve rounded up a few tips that can help businesses get the most out of recurring payments.
Make paying easy
To reduce the risk of isolating potential customers, first and foremost, merchants must ensure that paying online is simple and straightforward for customers. This means providing clear instructions on what direction to take to ensure that their chosen payment method is accepted, and presenting a seamless checkout experience with as little steps as possible.
Provide more payment options
Every consumer is unique, each differing in their preferred method of payment. That’s why it can be beneficial for businesses to provide their customers with a variety of choices beyond credit cards, like direct debit, digital wallets, and alternative payment methods like cryptocurrency.
Offer different payment tiers
The importance of having multiple options also applies to recurring payment plans. Creating different payment tiers lets customers choose the one that best suits their budget and preferences. It’s also worth exploring how annual plans at reduced rates versus monthly plans at higher rates perform against each other.
Keep customers in the loop
People value transparency from the companies they show their loyalty to. Sending customers regular updates about the products or services they’re using will help cultivate better connections with customers and provide them with a sense of ownership and community involvement.
Always stay one step ahead
To minimize the risk of any potential friction, there are measures businesses can take to navigate managing payment errors and outdated payment information. For one, features like Checkout.com’s Account Updater Service take care of the complex process of reaching out to customers to get their updated payment information. Taking these steps early on can help give a business a leg up down the line.
How to set up recurring payments with Checkout.com
Given the benefits of recurring payments, it's no wonder that more and more businesses are using them to improve their cash flow and customer experiences. If you're not already using recurring payments, we encourage you to explore this option further. Not only are there several benefits to be gained, but implementing recurring payments is also easier than you may think.
Learn how to accept recurring payments today.