What is Recurring Payment? [Complete Guide]
When you’re running any business with a subscription model, making it easy for customers to make repeat payments is crucial to your success. This is particularly true when it comes to running your SaaS business, where customers want to be assured of continuous and uninterrupted service.
Using a recurring payments system means:
- Your customers don’t have to remember to pay you or take time out of their busy schedules to do so.
- You can optimise your checkout experience easier.
- It will be easier to project your cash flow, as you will know that Number of Subscribers x $ Subscription Cost = $ Regular Income.
What Does Recurring Payments Mean?
The simplest recurring payments definition we can think of is that they allow your customers to repeatedly make payments, without having to take any action.
You seek permission from your customers to take repeat payments from them so that they can use your product or service on an uninterrupted basis. How you offer your subscription will depend on your business model.
How do Businesses Manage a Recurring Payments Model?
Typically, SaaS businesses offer a monthly or an annual payment option, with a discount for paying on an annual basis.
Businesses are happy to offer a discount on annual subscriptions as they have that revenue locked in and guaranteed. Many SaaS companies will also have conducted research or have data analysis tools that tell them what the optimum discount to offer is, while targeting annual sign-ups is a great way to grow revenue if your data shows you that your typical subscriber unsubscribes within 12 months.
Your business not only gets revenue but then has a longer window to address customer issues and make improvements to your service based on feedback. A customer on a monthly subscription plan may be more likely to unsubscribe on a whim, you lose them and the revenue, and it may be difficult to get them back.
How Can You Offer Your Services with a Recurring Payment Option?
In terms of offering subscriptions, you have the option of:
- Offering fixed term subscriptions, after which the customer must subscribe again. An example would be offering a six-month subscription that does not recur, so you would ask permission from the customer to take six payments – or one payment to cover the six months – after which the subscription would end and they would no longer be able to use your product or service, unless they subscribed again.
- Offering a straight up recurring monthly subscription, with the payments recurring until the customer cancels them. This model can work whether you offer monthly, annual, or any other subscription length, and is the model most offered by SaaS businesses.
What Are the Benefits of Using Recurring Payments?
Having a subscription or recurring payments model for your business is a great way to grow your sales, profit, and your business overall. You’re effectively putting an element of your business on autopilot!
You’ll enjoy a vast range of benefits when your business is set up to accept recurring payments, including:
- Certainty that you’ll receive payments on time. Remember what we said earlier about cash flow projections!
- Having the flexibility to offer your customers a free trial. Your customers get to use your service before committing to a payment schedule, while you can collect data about usage, and make improvements based on feedback from everyone who takes out a trial, regardless of whether they ultimately subscribe or not.
- Improved customer lifetime value metrics. While a one-time purchase is great, what if the customer doesn’t come back? Your customers will be more valuable to you if you play the long game.
- Depending on your product and model, customer may be able to subscribe to more than one plan, or if your product is tiered, they may be able to pick and choose what they use, enabling you to grow revenue.
- Improved customer relationships. Subscribers often come to feel part of your business and will work closely with you as you develop and improve your SaaS service. You can take your customer relationships beyond them being purely transactional and more towards them being truly mutually beneficial.
Best Practices for Managing Recurring Payments
1. Take Care When Choosing Your Payment Handler
You can have the best SaaS platform around, but if you have a sub-standard platform handling your payments it will be hard to grow your business.
While you will have your own specific requirements for what you need based on your business model and target market, as a minimum you should be looking for your payment handler:
- To be compliant with industry practices in your country that ensure security and fraud protection for your customers.
- To be able to handle international payments so you can sell your SaaS service across borders.
- To accept all major credit cards and offer a range of payment options such as PayPal.
- To give you flexibility as a business in terms of how you use them.
- To provide a range of reports relating to recurring customers, churn rate, and other analytics to reduce your need to use additional tools to review this data.
- To not require a significant upfront financial investment to use their platform or expensive web developer resource to integrate their platform into your website.
2. Take Advantage of Where You Can Save Expenses
Recurring payments is a type of automation, which means you can minimise the human time you need to spend on tracking customer payments. Your expenses and the resources you need to use in terms of collecting revenue will reduce dramatically, and you can save cash on paying for outsourced accounting functions or redeploy any in-house roles to be more beneficial to your business.
3. Continue to Manage Your Customer Churn
While a great payment platform will provide you with all the data and insights you need in relation to customer churn, it’s critical that you continue to manage it!
It’s easy to see healthy revenues coming in, especially if you are seeing slow and steady growth. However, the devil will be in the detail of that slow and steady growth. Are you attracting a lot of new customers, but losing a lot of customers at the same time? If so, this might suggest a disconnect between your sales team and the reality of your platform or the standard of your customer service.
Remember to keep on top of your customer churn, slow and steady growth and consistent revenues might be nice but doing a little digging could help you realise you’re on the cusp of a huge revenue increase.
Learn more about customer churn analysis and management with this Upodi guide.
4. Don’t Rely on Customers Who “Set It and Forget It”
In the same manner that you should continue to focus on managing churn, you should also ensure you’re actively managing non-active users.
It’s easy to rely on customers who “set it and forget it”. The customer database of businesses that offer subscriptions are filled with people who pay each month but rarely, if ever, use the service or product they are paying for.
From a revenue perspective, this might seem like a bonus, but your engagement for these customers will be zero and you’re not really making a difference to these people. You could argue they’re not even really customers!
Use your data to send emails out to customers who don’t sign in over a specified period. Yes, this will prompt some people to unsubscribe and give you a short-term drop in revenue, but in the longer term it will mean your business grows an engaged subscriber base.
How Can You Get Started with Recurring Payments?
Getting started with recurring payments in your business is easy.
- You need to make an initial sale to the customer – such as the first month or activate a free trial while taking their details for the first payment.
- Customers select the relevant subscription they want to sign up to.
- The customer accepts the terms and conditions on your website.
- The customer checks everything and accepts the subscription sign up, after which you will bill for a fixed period or until they cancel, depending on the model you have chosen to use.
How to Set Up Recurring Payments with Upodi