Picture your favorite streaming service—be it music, videos, movies, or any other form of media.

All of these services leverage subscription-based payments to give you access to their platforms.

Recurring payments (such as subscriptions) have become one of the most popular billing models. As of 2020, Gartner reports that all new software businesses and 80% of historical vendors now offer subscription-based business models.

Meanwhile, Forbes describes the model as a “a radical change from traditional transactional interactions, encouraging sustained customer engagement by offering ongoing value.”

The recurring billing model can have widespread advantages for businesses across many industries, not just media services. If you’ve been wondering whether recurring payments are right for your company, this guide is for you.

We’ll take you through everything you need to know, including what to look for in recurring billing solutions.

Getting Started with Recurring Payments & Billing

Recurring billing is the engine that keeps every subscription business running smoothly. It’s the process of charging customers at specific time intervals in exchange for ongoing access to a product or service. While monthly payments tend to be the standard, the time interval can vary. The different types of recurring billing models include:

• Fixed billing: Fixed billing features a set price charged at consistent intervals. The amount is always the same unless a new agreement is reached with the customer.
• Quantity-based billing: Quantity-based billing is based on the total number units or products purchased in a set period. For example, a customer can pay for a clothing delivery service and choose a pricing model that fits how many articles of clothing they want to receive.
• Usage-based billing: Usage-based billing is all about consumption. The more of a product or service that a customer uses, the higher the monthly bill. Conversely, if a customer chooses to be conservative with their usage, they can lower their recurring bill significantly.

Media subscription services (think Netflix, Spotify, Hulu, etc.) are well-known uses of recurring billing systems, but they are far from the only ones. Common use cases for recurring billing include:

• Subscription-based services: Beyond media streaming platforms, subscriptions can also include services like SaaS products, computer programs (i.e., Microsoft 365), payment technologies, and more.
• Utilities: Depending on the utility company you use for services like water, WiFi, and internet, you may be able to opt into recurring monthly payments.
• Memberships: Memberships are similar to subscriptions but often include more benefits for a higher monthly rate, such as gym memberships with additional service add-ons.
• eCommerce: Many eCommerce companies offer recurring payment options for both customer and business services. Customers can sign up for subscriptions or memberships that provide exclusive benefits, like early access to their favorite merchant’s products, while businesses can set up automatic payments for specific services offered by the platforms.
• Publications: Publications like online newspapers, newsletters, or magazines often offer subscription options for exclusive access to their entire content catalogues.

  The recurring payment cycle is fairly straightforward. A customer must first choose to sign-up for your business’s subscription service. Once they’ve done so, the process is as follows:

  • The customer selects their preferred payment method and enters their payment information.
  • The payment information is saved in your business’s chosen payment gateway.
  • When the time comes for the recurring payment charge, your payment gateway collaborates with the acquirer, issuer, and card network (if applicable) to approve the payment.
  • A payment approval or denial is sent to the gateway. If approved, the payment goes through automatically. If denied, your business must request that the customer update their payment information and double-check its accuracy.

   

How Recurring Payments Create a Strategic Advantage for Businesses

Managing your company’s cash flow only becomes more complex as your business grows.

Recurring payments provides a more optimized approach to ensuring customers pay their bills on time. The automatic nature of this billing model keeps revenue flowing without having to chase customers down for missed or late payments. Customers also appreciate the convenience of recurring payments, as it prevents them from having to transact with your business manually.

From a growth perspective, offering subscription services to your clients is most certainly worth it—according to Chargebee’s 2024 State of Subscriptions report, an astounding 94% of subscription professionals anticipate an increase in revenue in 2024.

Not only can recurring payments increase your revenue, but they can also improve its consistency. One-time payments for products and services may be beneficial initially but do little to support your business in the long term. Conversely, customers signing up for products or services that require ongoing billing give you a steadier stream of revenue to rely on.

Aside from boosting cash flow, we can also think about recurring payments in terms of the operational advantages they pose, such as:

• Increased financial predictability, helping your business plan better for upcoming expenses, growth initiatives, and product development
• Elimination of manual payment processing on both the customer and business ends
• Reduced friction in payment and checkout processes, allowing customers to continue transacting with your business with greater ease

Let’s also consider some of the key benefits recurring billing offers to your customers. Charging customers monthly for a product or service enables you to maintain more open lines of communication with them. Customers who sign up for a subscription or membership are also more likely to want to engage with your business regularly, as they want to see what value they are receiving in return.

This gives you a vital opportunity to increase retention, as you can keep up with your customers’ evolving wants and needs more closely. You can reward your customers by delivering consistent value, and your customers can reward you with their continued loyalty.

Implementing a Recurring Billing Model: Factors to Consider

So—how does all of this work?

We’ve mentioned the role of automation in a recurring payment system, but that is only one piece of the operational puzzle. The entire process involves several essential steps:

1. Set-Up

Before you can even think about offering recurring payments, you must update your current payment infrastructure to support them.

For businesses still operating from legacy systems, it’s likely time to start your migration to a cloud-based platform. Cloud-native technologies offer many operational benefits that can simplify and streamline the recurring billing process. Implementing these technologies can also be massively helpful for improving your overall operations and introducing automation across several business functions.

Want to modernize but not sure where to start? A great first step would be to meet with expert payment consultants to begin creating your payment digitization roadmap.

2. Billing Cycles & Amounts

It may seem counterintuitive to set up your billing cycles before gaining customer sign-ups. However, the reality is that you want to ensure your recurring payment system is prepared to perform its billing cycles before you start allowing customers to interact with the system.

Test out your system first to make sure it can handle varied billing cycles and is applying the correct payment amounts according to what product or service a customer is purchasing. Vigorous and thorough testing early can help you identify and resolve potential issues yourself, rather than having to rely on customers encountering these problems first.

3. Payment Method Integrations

Next up are payment methods.

Traditional credit and debit card payments are essential. In fact, they’re the preferred payment method of many customers around the world, but especially in the U.S. Between 2022 and 2023, the Federal Reserve reports that 60% of payments were made with cards.

However, although cards are a vital option to offer to your customers, they are far from the only one—and many alternative payment methods are growing in popularity swiftly. Digital wallets are a particularly notable option showing rapid growth worldwide. According to WorldPay, wallets accounted for 21% of eCommerce spending in Latin America in 2023 and 50% of all global eComm spend.

Here’s a breakdown of the most important payment methods to integrate in your payment system:

• Credit and debit cards
• Digital wallets (Apple Pay, PayPal, Google Pay, etc.)
• ACH transfers
• Direct debits
• Buy Now, Pay Later

If you plan on offering your products and services globally, it is also important to look into local payment methods. These can help you reach more remote and rural regions, giving customers in these areas access to their preferred local payment options and building trust along the way.

4. Automation & Third-Party Services

Automation is the backbone of recurring payments.

An automated payment system can charge customers at exact dates and times without manual intervention from you or the customer. It can minimize errors and save significant administrative time by immediately recording the transaction in your bookkeeping.

Additionally, automation can help reduce the occurrence of chargebacks and payment failures by detecting fraud early and rerouting payments as needed. With automated capabilities, you can enable real-time transaction monitoring and alerts to stay ahead of potential failures and address errors or delays in the payment process quickly.

Setting up automation requires you to choose and integrate a payment gateway (or multiple gateways, if your chosen payment platform allows it). Once you’ve done so, you can create customer profiles and set specific rules for when and how much they should be charged.

You should consider integrating a variety of third-party tools and services that can assist you with crucial operational tasks, like compliance and reporting. Some of the most crucial third-party services to consider include:

• Automated analytics
• Fraud prevention and detection tools
• Open payments and/or payment orchestration technologies

5. Customer Sign-Ups & Authorization 

Now that your system is set up and ready to go, you can finally begin introducing it to your customers.

To properly utilize a recurring payment model and maintain compliance, you will need to acquire consent from each of your customers. This consent authorizes your business to charge their chosen payment method automatically each billing cycle, as well as defines what that billing cycle will be.

With the customer’s consent, you can collect the necessary payment details and store them securely in your system. Again, consider using third-party services that can assist you with storing payment credentials according to the latest regulatory standards.

Challenges & Limitations of Recurring Payments (& How to Address Them)

Recurring payments are highly beneficial but they are not flawless.

When setting up your new billing system, there are several challenges and limitations to take into account. Thinking about these hurdles proactively can help you address potential problems early and develop solutions that match the needs of both your business and customers.

Common challenges that impact recurring payments can include:

• Payment failures and declines: If your payment system is not optimized and automated, you are likely to face several issues with failures and declines. Many factors can contribute to this problem, such as outdated authorization techniques or geographical risks. Improving your authorization rates and preventing declines often requires real-time data and advanced risk-scoring, as well as the ability to integrate multiple payment gateways.
• Voluntary and involuntary customer churn: Customer churn can happen both voluntarily and involuntarily In the case of voluntary churn, you can lose customers by making the payment process too clunky and not offering their preferred payments. Involuntary churn can be trickier to resolve, as it often involves operational issues and errors. Solving both necessitates  exceptional analytical tools that give detailed insights into your system’s operations.
• Lack of scalability: Scalability issues tie back to the optimization of your payment system. Without modern tools and technologies, such as a cloud-based platform, it can be immensely difficult to scale your payment system with the growth of your customer base.
• Data security and compliance: Compliance can be a deadly beast when it comes to payments. Regulations like the PCI DSS, GDPR, PSD2/PSD3 can impose a whole slew of requirements and restrictions on your system—and they’re only the tip of the iceberg. Unless you have a large legal and compliance team, dealing with regulatory challenges often requires expert third-party help.

  Check out our latest webinar, Open Banking: How the Final 1033 Ruling Can Impact Your Business.

Essential Features to Look for in a Recurring Billing Solution

The time has come to upgrade your payment system to support recurring payments.

We’ve discussed many of the capabilities you need to prioritize, like a cloud-native architecture, automation, and outsourced compliance. Still, there’s more to it than just these factors.

You need a solution that can handle and optimize the entire subscription lifecycle. One vital capability you need in such a solution is automatic adjustments to pricing and plan terms when customers make changes to their subscriptions (including upgrades, downgrades, pauses, renewals, or cancelations).

Other critical features to look for when choosing a recurring billing solution include:

• Customizable billing cycles that can be tailored both to customers and to your business’s specific pricing and billing model
• Integrations with accounting and CRM software to reduce administrative overhead
• Automated notifications and alerts that notify your customers of upcoming payments and send your business alerts of any potential billing problems
• Advanced reporting and analytics that can give you automated insights into valuable KPIs, like:
  • Customer churn rate
  • Monthly recurring revenue
  • Customer acquisition costs
  • Renewal rates (for subscriptions and memberships)
  • Failed payment rates and payment decline rates
  • Authorization success rates

Simplify Your Recurring Payments Process with Optimized Payments 

Succeeding with your recurring billing model starts with automated analytics and expert insights.

At Optimized Payments, we provide the solutions you need to strategize effectively and harmonize your entire payment system. Our comprehensive dashboard gives you vital data visualizations and assists with tracking your most important KPIs.

Request a demo of Optimized Payments now.