In the pursuit of increasing revenue streams and maintaining profitability, many businesses have made recurring payments a top priority. This approach not only offers convenience to customers but also ensures timely payments.
Especially for subscription-based businesses as they don’t require extra effort in collecting payments. Offering multiple payment modes to customers can lead to timely payments, helping you cover business expenses.
Today’s modern customers are happy to enable recurring payments as it is a more convenient payment option than the conventional method. With recurring payments, they don’t need to take out time to make payments and can simply enjoy uninterrupted service.
If you’re planning to add a recurring payment option to your service, here’s a detailed guide on what is a recurring payment, its process, benefits, and drawbacks.
What is a Recurring Payment?
The recurring payment is referred to as repeat payments, which get automatically deducted from the customer’s bank account for the service usage. Customers need to authorize such auto-payments so that the service provider can deduct the fees and continue to offer their service.
It is not something that customers aren’t aware of when they are being automatically charged. These recurring charges often cover subscriptions like video content, online music, or food delivery services.
They’re also used for renewing gym memberships or paying utility bills. Let’s define recurring payments with an example.
Recurring Payment Example
Online video streaming services are one of the best examples, but it is also useful for buying products such as tea bags, coffee, or items that you need regularly. You can enable recurring payments to let the food supplier charge the total amount and deliver the products.
Hence, the seller receives the payment prior to the delivery, which means no cash hassle at the time of delivery.
Since you know recurring payment meaning, now is the time to learn how it works.
How Does Recurring Payment Work?
A recurring payment is considered an agreement between the business and your active users. Recurring payments ensure timely payments from customers and uninterrupted services from the provider for the specified period. Upon expiration of the subscription plan, the user can upgrade or terminate the subscription. Let us look at how recurring payments work.
1. Subscribe to the Service
The first step is to let the customer pick the right subscription plan for a month or a year. They will be asked to accept payment terms and enter credit card details at the time of checkout. Then, the first installment of payment will be made and details will be saved in the payment gateway for future transactions.
2. Enable Recurring Payments
Since the customer has cleared the first payment and agreed to payment terms, next, ask them to allow auto-payments to begin the billing cycle. Once they have enabled the automatic payments, the subscription fees will be deducted on a monthly or yearly basis. What actually happens is the payment processor connects with the bank and confirms the money deduction.
3. Customer Receives an Invoice
When the payment is received for a particular month or year, all you need to do is issue an invoice straight away. You can choose a readymade invoice template from software like Moon Invoice for invoicing customers in a timely manner. Likewise, the payment will then be automatically processed until the chosen period ends.
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Advantages and Disadvantages of Recurring Payments
Advantages of Recurring Payments
Using recurring payments for availing of subscription-based services has a multitude of benefits. It makes your payment collection process so easy that you no longer need to take follow-up from subscribers. Here’s why recurring payment is mostly used.
1. Flexibility & Convenience
Recurring payments offer convenience like no other as the user only requires to fill in one-time payment details. Other payments will be made automatically without wasting the user’s time. Businesses are no longer required to remind clients about payments as they would receive them on time.
2. Healthy Cash Flow
Recurring payments make sure your business has a stable incoming cash flow, which helps you reduce account receivables. This minimizes cash flow issues and makes it easier for the company to meet its debt obligations. You’ll have a clear idea of the money coming in so that you can form an effective financial strategy without relying too much on guesswork.
3. Increase Customer Retention
As long as there is no disruption in services due to payments being made automatically, customers are likely to retain your services for another term or may upgrade to higher plans. Recurring payments minimize the effort required by customers to access your services, saving them valuable time. As a result, you may see a clear spike in customer retention rates.
Disadvantages of Recurring Payment
Now that you know the positives of recurring payments, it’s time to understand the negatives as well. Here are the downsides of recurring payments that you should be aware of.
1. Billing Issues
Although recurring payments deduct money automatically at the given period, occasionally it may not function and you might face trouble with credit cards. However, you can communicate such issues and offer another payment mode to collect the service fees. This could be a small issue but may hamper your collection process, leading to delays in covering business expenses.
2. Chances of Fraudulent Activities
Enabling automatic payments requires saving your credit card information on payment gateways, which can create security vulnerabilities. This stored information may be exposed to cyber threats and potential misuse by fraudsters. While recurring payments carry security risks, these can be avoided by choosing the right payment processor that prioritizes security measures.
3. Unexpected Charges
Recurring payments are popular for their set-and-forget convenience, but they can sometimes lead to unexpected charges. When this happens, customers seek refunds instead of canceling their active plans. Therefore, it’s essential to understand chargebacks before they negatively impact your business.
How to Accept Recurring Payments
Before you start accepting recurring payments, make sure you have an effective pricing strategy in place. If you’re done with pricing plans, then and only then you should go ahead with the recurring payment option. Okay then, let us jump into the first step i.e. payment processor.
1. Contact Payment Provider
Firstly, approach a payment processor in order to introduce recurring payments for your customers. There are many payment providers such as Stripe, PayPal, Square, and many more, but you should opt for the one that complies with accounting and tax regulations. Check whether they support different currencies or not. Also, Identify how much time it takes to transfer money.
2. Collect Payment Details
Next, ask your customers to go through payment terms and enter their card details. Your customer should know what time the automatic payment will be deducted and when the subscription expires. Request them to fill in details like the card holder’s name, card number, and total amount that will be later saved into the payment gateway. Upon verification, recurring payments will be started.
3. Billing Process
Integrate a payment provider with your existing applications to automate the billing process. The payment provider will verify the information and check if sufficient funds are available in the customer’s bank account before deducting the money at the specified time. Your growing SaaS business will lead to unique requirements. Therefore, your payment processor must be capable of handling complex billing processes.
4. Send an Invoice
Once your customer has paid the total amount through recurring payment, it is your responsibility to issue a fresh invoice copy. Create a professional invoice that helps the client clearly understand the details of the completed payment. Additionally, you can even send reminders to clients informing them about payment deductions so that they keep sufficient money balances.
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Conclusion
That’s how recurring payments are emerging as the top priority for Saas-based companies. It offers the convenience of getting paid without contacting your customers and further eliminates the need to chase payments. Ask your customer to activate the plan and choose the recurring option at the checkout.
Next, you will automatically receive the payment monthly or yearly as per the customer’s subscription plan. So, it is that simple. Remember your job is not done even after receiving the payment because an invoice isn’t delivered. Create it using advanced invoicing software, Moon Invoice, and leave a lasting impression on clients. Try Moon Invoice free for 7 days.
FAQs
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
