What is recurring billing?
With recurring billing, businesses make automatic payments from a customer’s account for a product or service. The billing cycle varies based on how long a customer wants to use a product or service. It can be weekly, bi-weekly, monthly, half-yearly, or even annually.
Recurring billing software ensures timely billing with customer’s agreement and fully automates the process without intervention.
Examples of products or services billed on a recurring basis:
- Electricity bill
- Phone bill
- Software
- Newspaper and magazines
- Streaming services
Types of recurring billing
Recurring billing solutions can be categorized into two main types:
- Fixed billing: As the name suggests, fixed billing is when a customer is charged a standard amount on every billing cycle. Newspaper subscriptions, streaming services, and even gym subscriptions use this method. Fixed billing is simple and provides a steady revenue stream without complex calculations or costs.
- Variable billing: With variable billing, the billed amount can vary every billing cycle. It’s a more dynamic type and changes according to a customer’s usage. Businesses can charge customers a standard amount for each cycle and extra costs for add-ons. Variable billing can be further divided into usage-based recurring billing and quantity-based recurring billing.
- Usage-based recurring billing: Businesses can use this payment method to initially only charge customers based on their usage and later schedule regular payments.
- Quantity-based recurring billing: Software-as-a-service (SaaS) businesses often use this type, where companies are charged based on the number of product users. For example, if a company needs a product for two users, it pays extra for those two users apart from its normal billing amount, if any.
How does recurring billing work?
Once customers evaluate a company’s products or services, they usually subscribe. Businesses initiate automated recurring billing after every successful subscription, allowing them to charge customers regularly.
The next step in this process is redirecting customers to a secure checkout page facilitated by a payment gateway. Once the payment is complete, the recurring billing system automatically generates and sends an invoice to the customer. On the other hand, the company passes this information on to accounting and reporting for revenue forecasting.
Benefits of recurring billing
The recurring billing model offers businesses several benefits:
- Helps understand and predict revenue. Recurring billing makes revenue forecasting easier. It allows businesses to forecast sales, assess return on investment (ROI), and decide which product or service to focus more on.
- Presents upselling opportunities. Companies offering multiple products or services can upsell existing customers and maximize revenue.
- Simple to use and customizable. Recurring billing is simple to implement. All a company needs is different prices for different products or services. This ensures no errors creep in when charging a customer since all this information is already in the database.
- Enables automation. Recurring billing is automated and hassle-free, meaning businesses don’t need to manually prompt customers before every billing cycle.
Recurring billing applications
Businesses with auto-renewing subscriptions typically use a recurring billing platform instead of a one-time fee. This allows customers to pay for and use or cancel a company’s offerings as needed. A recurring billing payment model benefits both businesses and customers compared to the high costs of a one-time fee.
The following industries commonly use recurring billing:
- SaaS: The SaaS industry leverages a recurring billing service to allow customers to use their products hassle-free. Customers can choose a plan they like and schedule automatic payments for a suitable period. SaaS vendors such as Freshworks, Salesforce, and Hubspot use recurring billing.
- Media: Buying a Blu-ray disc for every movie or TV show can cost a lot and is cumbersome. Customers want to choose what to watch from the comfort of their own homes. Streaming platforms like Netflix, Hulu, and Disney+ use recurring billing, giving customers a wealth of content.
- News: Newspaper companies and magazines like Times, The Economist, and New York Post offer subscribers recurring billing options to access their online content.
- Education: Online education companies like Coursera and Udemy use this model to charge customers for new courses or certifications.
Recurring billing features
To get the most out of a recurring billing solution, here are some features companies need to look out for:
- Functionality: Automated billing eliminates manual intervention, saving businesses significant time and bridging potential revenue gaps. Recurring billing software should handle proration (distribute and limit billing fee) and automatically reflect discounts or codes to automatically charge customers the modified price.
- Reliability: A recurring billing solution needs to automatically send customers a copy of their invoice as soon as they make a payment.
- Ease of use: Product users, especially in companies with a multi-product business model, should be able to set up a product inventory and set multiple prices. This makes it easier to view the different prices in one place and helps save time.
- Security: Customers need reassurance that a payment method is secure. A recurring billing solution must meet the highest security standards, such as the Payment Card Industry Data Security Standard (PCI DSS).
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Compatibility: The right recurring billing solution should provide customers with a seamless checkout experience. It should support multiple payment gateways and offer users the option to pay in various currencies and payment methods such as debit cards, credit cards, or net banking.
Recurring billing best practices
While recurring billing is simple to set up and use and saves companies a lot of time, it’s essential to keep some of its best practices in mind.
- Security: Recurring billing involves collecting sensitive customer information, such as name, billing address, and banking information. Companies can’t afford to compromise this data. Therefore, they need to choose a certified recurring billing solution compliant with relevant security standards. Businesses can choose a payment gateway comparable to those supporting PCI Level compliance.
- Terms and conditions: Recurring billing makes it easy for companies to automatically debit money from customers’ accounts. However, companies need to establish strict terms and conditions to safeguard their reputation in the unlikely event an additional amount is deducted, or a customer claims that a deduction happened without authorization.
- Updated FAQs: Customers demand quick resolutions or refunds, especially when transactions go wrong. They should also understand how they can downgrade to a lower plan.
Recurring billing vs. subscription billing
While closely related, recurring and subscription billing have minor differences.
With recurring billing, customers sign up for a product or service and manually enter their payment information, such as bank account details or credit card information. The vendor authorizes these details and automates all subsequent payments. This prevents users from manually repeating the process.
Subscription billing occurs after customers sign up for a product or service using recurring billing. Customers can choose how frequently they want to be charged: monthly, quarterly or yearly.
Adithya Siva
Adithya Siva is a Content Marketing Specialist at G2.com. Although an engineer by education, he always wanted to explore writing as a career option and has over three years of experience writing content for SaaS companies.
