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Jordan Schneir
By: jordan_shneir
Read in 9 minutes

What is a Recurring Payment? A Tale of Subscriptions and Memberships

Recurring payment business models have taken over a variety of industries. From Netflix and Hulu to Spotify and Photoshop, different types of businesses have adopted the subscription model.

For businesses, subscription-based commercial models mean recurring, predictable revenue, and the ability to gain new customers quickly.

For consumers, a recurring payment service makes services more accessible. Would you rather pay several hundred dollars for Photoshop or $10 per month? For most people, the second option seems more affordable.

Recurring payments make it possible for us to enjoy some of our favorite services, and they can bring a lot of benefits to your business.

That being said, let’s take a look at what recurring payments are, the different types, and how they can help your small business grow.

What Are Recurring Payments?

In a nutshell, recurring payments are payments that are charged on a repeating basis, usually monthly. Customers authorize merchants to charge them a certain amount on an agreed-upon schedule in exchange for goods or services.

This type of payment method used to be relatively uncommon, it has made its way into a variety of industries, including video and music, gaming, food delivery, subscription boxes, and more.

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Recurring payments save businesses and customers a lot of time when it comes time to collect payment for a service. 

As a business, you don’t have to chase down customers for payments. Instead, after the customer agrees, payments are automatically processed until the customer cancels their subscription.

Additionally, this type of business model can make it much easier to predict your revenue and plan your business’ budget.

Ultimately, a recurring payment based membership can be a huge boost to businesses whose products or services are compatible with a subscription-based business model.

Recurring Payment: How They Work

How does the recurring payments process work? Generally speaking, the process is very straightforward and straightforward.

The recurring payment process involves five main steps:

  1. The customer chooses a recurring payment subscription. First, a customer visits your business and decides to pay for your products or services with recurring payments.
  2. Terms and conditions. During the checkout process, the customer agrees to the recurring payment terms. The customer must agree to the payment schedule, the amount charged, fees, and other important terms.
  3. The customer provides payment information. After agreeing to the terms, the customer provides their payment information, which will be charged regularly.
  4. Payment is processed. The transaction has to be approved by the customer’s credit card company, the issuing bank, and the acquiring bank. After being approved, the transaction is completed, and your business receives the funds.
  5. Invoice. After completing the transaction, your company sends the customer an invoice stating that their payment has been processed.

Payments will continue until either the expiration date is reached (if there is one) or until the customer cancels their subscription.

Benefits of Recurring Payment

Recurring payment services are popular for a reason—they offer several benefits for both businesses and consumers.

Some of the most significant benefits of offering a recurring payment membership include:

  • Convenience

First and foremost, recurring payments are more convenient for both businesses and customers. Subscriptions-based business models require little maintenance, minimize the time spent on processing fees, and more.

Once you set up the payment schedule, and the customer agrees to the terms, money is automatically transferred to your business regularly. It doesn’t get much easier than that.

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  • Predictability

Recurring payments take some of the guesswork out of budgeting and financial planning.

This type of business model guarantees a stable cash flow. You can look at the number of active subscriptions and use that to calculate your monthly revenue.

Recurring payments allow businesses to maximize their revenue through more reliable payments.

  • Save Money

Recurring payments can also help your business save money. First, it makes it so that acquiring a new customer is a one-time expense. Yet, after acquiring the customer, your business benefits indefinitely.

Recurring payments also reduces the amount of time and money your business spends to collect payments from customers.

These benefits, among others, are the reason so many businesses are embracing the recurring payments business model.

Types of Recurring Payments

A wide range of business models uses recurring payments. From media streaming companies like Netflix to software services like Photoshop, recurring payments are fantastic for a variety of businesses.

A few of the most popular types of recurring payments include utilities, SaaS, content, and service providers.

  • Utilities

Utilities include things like electricity, internet, water, phone, cable, etc.

These are services that you pay for monthly and are generally considered things every person needs. They can have fixed prices or prices that depend on how much the customer uses them.

  • Software as a Service 

Software as a Service (SaaS) includes any software that you pay for via recurring payments.

This includes popular programs like Photoshop, Illustrator, Microsoft Office, Dropbox, and others. Instead of having a one-time fee, customers are charged regularly to use these services.

  • Content

This category includes all of our favorite content streaming apps. From TV and movie streaming services, like Netflix, Hulu, and Amazon Prime Video, to music streaming services, like Spotify and Apple Music. 

Recurring payments allow us to take advantage of enormous entertainment libraries.

  • Service Providers

Service providers include physical services that you might receive on a weekly, monthly, or yearly basis.

This could include lawn care, house cleaning, tutoring, personal training, meal planning, or other popular services.

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If your business offers a product or service that requires you to collect payments regularly, recurring payments can make things much more comfortable.

Recurring Payment Providers

The easiest way for small businesses to take advantage of recurring payments is through small business billing software.

These services are typically all-in-one solutions, meaning they handle all aspects of e-billing for your business. This includes collecting and processing recurring payments as well as transferring the funds to your business’ bank account.

Some highly-rated recurring payment providers include:

Every service provider has its terms and conditions, so be sure to review each one to find the one that best meets your needs.

It’s time to have recurring growth and profits

A recurring payment subscription can be a great way to simplify the payment and collecting processes. It can also provide several additional benefits to you and your customers.

Hopefully, this article has helped you understand what recurring payments are, how they work, and how they can help your small business grow.

We invite you to keep reading: How to set up recurring payments for your small business

Interested in learning more about how you can grow your small business?

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