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Recurring Payment Processing: What It Is, And Its Benefits

A person using their credit card on a laptop to set up recurring payments.

The Advantages of Recurring Payment Processing: Understanding its Definition and Benefits

Subscription businesses are becoming more and more popular because they are a win for both customers and companies. Businesses are starting subscription-based models because they generate steady revenue through recurring payment processing. The predictability of subscription businesses also benefits customers by placing a fixed number on their monthly budget for a service. 

To properly run a subscription business, your business needs recurring payment processing.

A white envelope laying on top of red envelopes with a piece of paper hanging out of it with the word subscribe written on it to subscribe to recurring payments.

What Is Recurring Payment Processing?

Recurring payment processing is the process of charging customers for a product or service on a regular basis, either weekly, monthly, quarterly, or annually. In the past, subscriptions were typically for magazines, gym memberships, or TV packages; however, more companies have begun to realize the benefits of subscription businesses. 

How Does Recurring Payment Processing Work?

Recurring payment processing works by the customer providing their payment information to the business for a specific subscription, which seems simple enough. However, there are several steps going on behind the scenes to make this process work. 

Recurring payment processing steps include:

  1. The customer chooses to order the subscription and enters their information.
  2. The business receives the data and sends it to a third-party billing company. 
  3. The payment details are captured, and a payment request is sent to the provider gateway. 
  4. The gateway then sends a request to the processor to forward it to the card issuer, such as Visa. 
  5. The card issuer then sends the request to the customer’s bank.
  6. The bank approves or denies the request based on funding.
  7. The customer is billed by the company on a recurring basis for their subscription.

Although the process seems complicated, this all occurs within just a few seconds.

What Are The Main Benefits Of Recurring Payments?

Businesses receive several benefits when using recurring payments, including:

  • Simple Setup: Setup is a one-time thing. There isn’t any more work to do every billing cycle by you or the customer. The invoice and payment information goes through the system.
  • Lower Fraud Risk: There is a lower fraud risk because customers don’t need to enter payment information multiple times.
  • More Payment Options: Recurring payments can give your customers several payment and plan options which can be changed whenever necessary. 
  • Fewer Missed Or Late Payments: With recurring payment processing, the customer doesn’t have to remember to pay for their subscription. Instead, the money is automatically withdrawn and sent to your business, eliminating missed or late payments.
  • Don’t Need To Ask For Payment: Every business likes earning money, but many of them don’t enjoy having to ask customers for payment. Using recurring payments, you will automatically get money without having to ask the customer.
  • More Straightforward Accounting: With recurring payment processing, you can easily integrate accounting and invoicing systems. Recurring payments can then trigger the creation of an invoice and record a credit in your ledger. This provides more accurate billing and payment accounting.
  • Hassle-Free For Customers: Recurring payments automate customer payments and shipments so that customers get their services or goods delivered on time with the least hassle for them.

Types Of Recurring Payments

Recurring payments typically fall into one of two categories:

1. Fixed Recurring Payments

Customers who choose to make fixed payments send the same amount of money with each price, such as a subscription. The billing cycle can be weekly, monthly, quarterly or yearly. This is the most common type of payment with recurring payments.

2. Variable Recurring Payments

Variable payments are less common than fixed recurring payments. An example is a utility bill. You aren’t using the same amount of electricity every month, so the monthly cost varies.

 In business, most products or services are fixed in pricing, so variable recurring payments are rare. However, for companies whose services or products vary in quantity, variable recurring payments may be a better option.

What Types Of Businesses Need Recurring Payments?

A box with a piece of clothing and a small white piece of paper on top that a customer received from a subscription service through recurring payments.

When you think of companies that provide prescriptions, you may think of streaming services or other business types. There is a clear need for these services, so the companies don’t need to try very hard to convince customers to subscribe. 

In other industries, the potential of using a subscription for recurring payments isn’t always as clear. If there is a consistent need for a product or service, however, there is potential to charge for recurring payments.

Businesses that use recurring payments include:

  • Subscription Services: This can consist of streaming services, subscription boxes, smartphone apps, and more.
  • Membership Services: Lots of membership-based businesses use recurring payment processing, such as gyms, social clubs, and other professional organizations.
  • Government Or Municipal Services: Providing recurring payments can ensure taxes and utilities are collected on time. These payments vary for every statement.
  • 1:1 Services:  One-on-one services are services for which a business has a set rate, and the charges are based on time. Examples include legal services or child care.
  • Services With Payment Plans: Businesses that offer expensive services, like wedding planners, photographers, etc., allow customers to break up the entire cost in regular payments.

What Are Different Methods For Processing Recurring Payments?

There are several methods for processing recurring payments, including:

  • Accounting Software: Accounting software is an option if you have a small number of plans and a small number of customers. Accounting software gives you the ability to invoice customers automatically; however, it isn’t enough for companies with more complex needs. 
  • Payment Gateways: Payment gateways are a vital piece of the recurring payment process. Businesses can sign up directly with a payment gateway, and this can give you a lower cost. 
  • Subscription Management Or Billing Systems: Subscription management and billing systems can handle every billing need for a subscription business. The best subscription billing options support multiple gateways and also give you insights on how to advance your business. 

Critical Tips For Selecting The Best Recurring Payment System For Your Business

A pair of doll hands around the scrabble word tips referring to tips for choosing the right recurring payment system.

There are a few considerations when choosing a recurring payment processing system for your business, including: 

  • Business Industry: Your recurring payment needs depend on your business industry. For example, a business-to-business company has different payment needs than an eCommerce business. Start by thinking about what the ideal recurring payment processing would look like for your business. If you have a business-to-business company, you may not want to allow your customers to upgrade or downgrade their subscriptions automatically. Still, you may want that flexibility for your customers if you have an eCommerce business.
  • Your Business Goals: If you are an online retailer, you may want to convert your customers into subscribers to boost your business. As a service provider, you can provide several service packages that your customers can subscribe to. It all depends on your business goals.
  • Logistics: You will need to evaluate how the system you choose will integrate with your existing software CRM or payment processor. You will also need to assess the volume of transactions it can handle, how it fits into your billing process, and the value of its features.

How A Recurring Payment System Can Boost Business Profits

When used correctly, recurring payments can positively impact your business and its profits. They can boost your profits by:

Positioning Your Subscription As A Upsell

Subscriptions not only benefit your business, but they also improve your customer’s experience by helping them own the delivery part of the process. Recurring payment options such as Autoship can change your subscription plans into a competitive advantage for your business.

Using A Discount Marketing Strategy

Offering value-based discounting or enabling regular discounts is one of the key growth drivers for a business. A good recurring payment processor allows you to create these marketing campaigns.

Experimenting With Pricing

When it comes to subscription pricing, experimenting with different price points and options can show you your customer’s preferred payment methods, plans, and checkout options to increase your customer’s satisfaction and experience further.

Final Thoughts

Recurring payment processing can have many benefits for your business, including lower fraud risk, giving your customers more payment options, fewer missed or late payments, more straightforward accounting, and more convenience for you and your customers.

Researching and selecting the right recurring payment processor for your business can lead to higher revenue, an ideal recurring payment structure, simpler logistics, and more.

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