Recurring payments are an increasingly popular billing option for both businesses and consumers alike. They offer a convenient way for customers to pay for goods and services without having to worry about the hassle of making individual payments each month. For businesses, recurring payments offer a reliable and predictable revenue stream, which can help improve cash flow and reduce administrative costs.
In this post, we'll take a closer look at what recurring payments are, how they work and how businesses can benefit from using them.
What Is a Recurring Payment?
A recurring payment is a payment that is automatically charged to a customer's credit card or bank account on a regular basis, such as once a month, quarter or year. This payment option is commonly used by businesses that provide ongoing services or products, e.g., subscriptions, memberships, installment plans or direct deposit (in the case of employee paychecks).
Recurring payments can be set up in various ways, depending on the payment platform used by the business. The customer typically provides authorization for the payment to be charged automatically at regular intervals, and the payment is processed without the need for any further action from the customer.
Types of Recurring Payments
Recurring payments come in several different forms, each with its own pros and cons. Here are the most common types of small business recurring billing options for merchants:
- Fixed amount: These payments are predetermined and consistent, such as with monthly gym membership fees. With fixed amount recurring payments, the customer knows exactly what to expect in terms of billing, and the merchant can count on a steady stream of revenue.
- Variable amount: These payments fluctuate depending on usage, such as with a monthly utility bill. With variable amount recurring payments, the customer is charged only for what is used, while the merchant must keep track of changing billing amounts.
- Invoices: Invoicing is not always automatic or recurring, as it typically requires action from both the merchant and customer. Moreover, invoices are normally itemized, with each statement showing a slightly different amount, depending on the scope of services and goods provided. However, recurring invoice payments can be set up and automated. This option is often used by service providers such as lawyers or accountants who bill for their time.
Benefits of Recurring Payments
Below are some of the most important benefits that customers and businesses receive from recurring billing:
1. Customer Convenience
One of the most significant benefits of recurring credit card payments is the convenience it offers to customers. They don't have to worry about missing payments, remembering due dates or making manual payments every month. Instead, the money is automatically deducted from their account on a regular schedule, ensuring that their bills are always paid on time.
2. Time Savings
Recurring payments also save customers time. By setting up automatic payments, they no longer need to spend time writing and mailing checks or logging in to pay bills online.
3. Improved Cash Flow
For businesses, recurring payments provide a reliable stream of cash flow. Rather than waiting for customers to make payments, businesses can count on recurring payments to come in on a predictable schedule.
4. Carbon Offsets
By transitioning to digital payments, businesses can reduce paper waste. Physical bills and invoices require resources to produce, print and mail, and they contribute to environmental pollution. By going digital, businesses can reduce their carbon footprint and save on expenses related to printing and mailing.
5. Scale Customer Base
Recurring payments can help businesses scale their customer base. By offering automatic billing options, businesses can appeal to customers who are looking for convenient and hassle-free payment options. This can help attract new customers and retain existing ones.
6. Increase Brand Loyalty
When customers set up automatic payments, they are less likely to switch to a competitor since it would require canceling and setting up a new billing system.
Uses for Recurring Payments
Merchants can use recurring payments in a variety of ways, depending on the type of business they operate:
- Subscription services: Recurring payments are an excellent way to manage subscription services. Customers who sign up for recurring payments are automatically charged at regular intervals, such as weekly, monthly or yearly. Examples of subscription services include magazines, online streaming platforms and meal delivery services. A customer can sign up once, and his or her payment method will be charged automatically until choosing to cancel.
- Membership-based businesses: Recurring payments are also a popular choice for membership-based businesses, such as gyms, spas and clubs. With recurring payments, a member can sign up for a monthly or yearly membership, and his or her payment method will be charged automatically at regular intervals.
- Payment plans: Customers who purchase goods or services can pay in installments over a set period, with payments automatically charged at regular intervals. This can be especially helpful for high-ticket items, such as home repairs or electronics. For example, an HVAC repair company can offer a payment plan option for customers who need an expensive new heating and cooling system.
In each of these examples, recurring payments offer benefits for both the customer and the merchant. Customers can enjoy the convenience of automatic payments, while businesses can reduce the administrative burden associated with manual invoicing and payment collection.
How to Set Up Recurring Payments
The specific steps for setting up recurring payments will vary depending on the platform and processor. However, here are some general tips that can help businesses get started:
- Determine the overall billing strategy and set up billing options: Decide on the overall billing strategy, such as the frequency of payments and the amounts to be charged. Then, set up billing options, such as the payment methods that will be accepted.
- Choose a POS/payment partner with automatic billing capabilities: Look for a payment platform or point-of-sale (POS) system that has automatic billing capabilities. For example, CardConnect's CardPointe platform offers recurring billing options and can streamline payment processing.
- Market your options to customers: Once the billing strategy and payment platform are in place, businesses should promote the availability of recurring payment options to their customers. This can include email or social media campaigns, as well as prominently displaying the option on the business's website or payment portal.
Improving the Customer Experience
Because of the benefits outlined above, customers generally like recurring billing options. Even still, there are steps you can take to optimize the process and improve the overall experience:
- Set up reminders for customers: Send notifications to customers a few days before payment is due to remind them of the upcoming charge.
- Offer flexibility: Allow customers to choose the billing frequency and payment method that best suits their needs.
- Provide a clear path to cancellation: Make it easy for customers to cancel their subscription or recurring service. Provide clear instructions and a hassle-free process.
- Stay on top of payment method updates: Keep track of payment methods and ensure that any changes are reflected in the recurring billing system (including expired cards, address changes and other payment method edits). This will help avoid declined charges and payment failures.
Summing Up
Recurring payments offer numerous benefits for both businesses and customers, including convenience, time savings and improved cash flow. By following the tips outlined above, businesses can streamline their billing processes, improve customer satisfaction and boost sales.
To learn more about setting up and optimizing recurring payments for your own business, schedule a free consultation with our merchant services team today.