A woman buying something from another woman in a store.

The magic of recurring payments

Sunday, November 30, 2014

Leveraging consistent billing models for customer retention

Once reserved for gym memberships and subscriptions, recurring payments are rapidly making their way into practically every industry. From magazines and utilities to software and digital services, the subscription business model is more popular now than ever. The popularity of the subscription model is due to the steady cash flow and other advantages that come with recurring payments; and because they benefit both businesses and customers, recurring payments are gaining steam worldwide.

Recurring payments (also known as subscription payments, automatic payments, or recurring billing), occur when a business sets up a billing cycle with a customer over a set period of time (for example, weekly, monthly, or annual billing). With the provided customer payment information, either from a credit card, bank account (ACH transfer), checking account, or debit card, automatic payments are deducted from the customer's account in exchange for goods or services.

With access to payment details, businesses can provide seamless and consistent checkout experiences for customers without spending time collecting payment data more than once. Then, at every payment period, the payment is deducted seamlessly and without any requirement on the part of the customer.

Recurring payments are booming with subscription businesses. Subscription box or subscription management companies provide specific, desirable services that are offered to the customer on a regular basis. Many of these companies deliver the product directly to the customer at their home in exchange for a defined payment schedule with subscription billing. With this payment solution, businesses can make payment plans easy and simple while eliminating costs of manual billing and generating a more predictable revenue stream.

How recurring payments work

In order to automate payments with customers at a set interval of time, businesses need to have a merchant account and a payment service provider to complete the transaction. A merchant account is an account where the customers’ funds are transferred after moving through a payment gateway and before they enter your business account. These funds are reviewed by a third party, and in one to two days the money is automatically sent to you.

Recurring billing can provide an automated invoice for customers to review every time a payment occurs. Receipts can be generated via text or email – whatever the preference of the customer might be. Moreover, recurring payment options enable customers to update their payment processing information or preferred payment method at any time. Businesses can track these types of changes as well as track the amount of their customer base that is choosing recurring payments as their payment option. Data and metrics that relate to payments can help businesses plan for areas that may be more receptive to this structure and option of payment.

Here is a detailed workflow for the recurring payment system:

  • A customer visits your website and picks recurring payments from the payment options.
  • The customer enters their payment information.
  • For each recurring payment, the payment processor contacts the acquiring bank, the customer’s credit card network, and an issuing bank – similar to a credit card transaction.
  • After all three parties approve the transaction, the funds are deposited in your business’s account.
  • The customer receives notice that the payment has been processed.

Now that you have an idea about what a recurring payment is and how it works, let’s next look at the different types of recurring payments.

Types of recurring payments

Recurring payment systems can be designed in several different ways. However, there are two primary types of recurring payment models that businesses can adopt into their business operations. Fixed recurring payments are the most traditional option while variable recurring payments are a newer payment type in the financial world.

Fixed recurring payments. Fixed recurring payments are when customers are charged the same amount each payment period. An example of fixed recurring payments would be customers who have magazine subscriptions. Customers pay the same rate each month and receive the product at the same time every month.

Variable recurring payments. Variable recurring payments (VRP) are a newer development in the banking and financial industry. VRPs flow through various payment systems like direct debits; however, the primary difference is that customers are able to approve transactions that are not the same every month (such as a utility bill). Instead of the amount being automatically deducted, the authorization must come from the customer.

Advantages of recurring payments

A sustainable business model needs to include a consistent revenue plan. With recurring payments, businesses (especially small businesses) can better project cash flows when revenues are consistent over time. Of course, this is just one benefit of implementing recurring invoices and new payment processor options at your company.

Some of the major advantages to recurring payments are listed here:

  • Increased convenience for customers. Recurring payments enables customers a seamless experience with the payment process. Instead of having to worry about making payments manually, customers can have peace of mind that the payment is already completed. For new customers, they can sign up for a recurring payment option from the very start of their contract or terms of engagement, thereby making it straightforward from the very beginning. Many of the transactions can be set up with online payments, adding to the positive customer experience.
  • Reduced late or missed payments. With the most up-to-date credit card or payment card information, businesses don't have to worry about missed or late payments from customers. The functionality of recurring payments systems is the automation and stored billing information for regular accessibility. Furthermore, recurring payment systems automatically send out reminders to customers whose debit or credit cards are close to expiring. Your customers can also log into their self-service portal and update their card information with no action needed from you.
  • Saves time and eliminates headaches. Customers often manage billing transactions with several companies every month. By setting up recurring payment plans, customers will know what amount they will pay each month. Also, businesses can eliminate manual processes for billing which saves time and promotes efficiency for the overall accounting system.
  • Stabilized steady cash flow. As mentioned above, recurring payment plans help businesses build out and develop their own business plans for operations. Through forecasting and the review of cash flows, businesses can look at the pricing of their product while also knowing the amount of subscribers or members they have. All of this helps to provide a better sense of where their company stands financially. In addition, you can run accurate, real-time financial reports to know how your business is performing.

Disadvantages of recurring payments

Incorporating a recurring billing model within a business brings a plethora of advantages and benefits to businesses and customers alike. But, of course, as with any business innovation, the payment model isn't without some disadvantages.

Some of the disadvantages to recurring payments are listed below.

  • Correcting billing errors can be tricky. Unlike manual processing for billing, when billing is completed automatically, it can be difficult to retroactively change mistakes or issues that come up. When implementing recurring options at your place of business, it may be helpful to have a team member or department that can support customers with any billing questions or concerns should an issue arise. Disputes that involve credit card companies and customers may result in a chargeback, which is the process of a refund, usually covered by the business or entity where the charge took place.
  • Some charges can be overlooked. Some customers may request additional services or products or premium features, if offered by your company. With automatic billing, it may be easier to look over additional charges that should be applied to customer accounts. Subscription payments, for example, are convenient and easy for customers to understand. However, if they decide they want to add something to their account, businesses will need to have a way to account for any of these changes so all charges are accounted for.
  • Services can be halted. If an agreement or contract is not in place, then it may leave room for changes to the service or billing to occur at any time. On the customer end, this may mean they can terminate their services without warning. On the business side, this means that predictability may not be guaranteed if there are service changes for customers without prior notice.

The bottom line

Recurring payments can be a game changer for businesses seeking to boost their customer engagement and customer retention. When recurring payment options are provided and customers come to know what to expect, you can be more certain that they will stick with your brand for the long haul. Implementing recurring payments begins with revenue strategy, continues with right financial tools, and succeeds through marketing and customer awareness.

Whether a business operates in the ecommerce space or with a brick and mortar location, considering a recurring payment option at your company may boost future opportunities for new and old customers alike while simultaneously generating predictable cash flows for your company.

Next steps

Are you ready to implement a recurring payment plan within your business model? Are you ready to take the steps necessary to offer various payment options for your customer base?

Heartland is ready to help.

Heartland helps nearly 1,000,000 entrepreneurs make and move money, manage employees and engage customers with human-centered technology solutions that allow them to rise above the daily grind and lead their businesses into a brighter future. Learn more at heartland.us.