What is Recurring Billing and How Does it Work?

Over the years, recurring billing has proven to be beneficial to both businesses and customers.

For customers, this billing model has streamlined the process of purchasing goods and services online. For merchants, recurring billing has helped foster business growth as it simplifies the billing process.

Are you considering adopting the recurring billing model in your business? Below, we’ll explore the benefits of recurring billing and how it can catalyze your business's growth. 

What is recurring billing?

Recurring billing is an automated billing system that allows you to charge your customers for the products or services they purchase on a pre-planned schedule (weekly, monthly, or yearly). 

How recurring billing works  

A recurring billing process begins when a customer sets up a subscription for a service or product.

A customer must agree with all the terms and conditions of the recurring billing before proceeding to the checkout stage to avoid future disputes.

Some details customers must pay close attention to include the product or service charge, fee structures, payment schedules, and expiration date, if applicable.

Companies often notify their customers weeks before the next charge is processed. And, each time billing takes place, the customer receives an invoice (and receipt) for the transaction. 

Types of recurring billing

There are two categories of recurring billing:

  • Fixed recurring billing
  • Variable recurring billing 

Fixed recurring billing

With fixed recurring billing, the customer is charged the same amount in every billing cycle. A publication subscription is an example of fixed recurring billing.

One advantage of this type of billing system is that it’s stable and brings in predictable, consistent income for a business. 

Variable recurring billing

With variable recurring billing, factors like the frequency at which a customer uses a product or service, the quantity consumed per cycle, and the subscription features determine the amount a customer will be charged per payment cycle.

Based on these factors, variable recurring billing is further classified into three categories: 

1. Usage-based billing
Customers are billed based on how often they use your products or services, so they’re charged at the end of the pre-planned billing cycle. Snowflake is an example of a SaaS company that operates on this billing model.

2. User-based billing
User-based billing is a type of variable recurring billing where customers are charged based on a pre-established quantity of the product or service during purchase. An automobile subscription, for example, is based on this billing model.

3. Tiered billing
With tiered billing, subscription charges depend on the number of features selected by the customer per payment cycle. This means that upgrading to a comprehensive bundle automatically attracts higher charges.

Examples of companies that utilize this model include eBay, Amazon, and AliExpress, among others.  

Annual recurring subscription vs. monthly recurring subscription: Which works best?

A monthly recurring subscription works better for first-time or short-term users who may need to test a product/service before making a long-term commitment.

On the other hand, an annual recurring subscription is most suitable for long-term users who are satisfied with the quality of a service (or product) and are certain that they’ll need it for a year or more.

So, your choice of recurring subscription method depends on your business requirements at any given time. No method is less beneficial than the other. 

Pros of recurring billing

1. It works for almost all businesses. Whether you run a SaaS business or a rental service, recurring billing can help streamline your billing process.

2. Cash flow is stable, predictable, and continuous. With recurring billing, businesses can calculate their expected income in a given timeframe. This makes it easier to predict profits or losses.

3. It reduces the risk of late or missed payments. Because it’s automated, charges on subscriptions are deducted at the right time for every subscription cycle.

4. It saves time and money for the business and the customers. With recurring billing, you don’t need to prepare weekly invoices or process payments manually.

5. It improves the overall customer experience. The convenience and ease of using recurring billing can result in happy and loyal customers.

Cons of recurring billing 

1. You can’t predict customers’ behaviors. Sometimes customers may unexpectedly fail to see the value in your products or services. This might lead to canceled subscriptions since customers are free to stop the billing cycle at any time.

2. The process could get overwhelming. Factors like non-recurring add-ons, multiple pricing tiers, discounts, and taxes are reasons why recurring billing involves a much more complex process than one-time payments. 

Why recurring billing is important for your business

Challenges like cash flow shortages and missed payments are common when you’re running a subscription-based business. Fortunately, among its other benefits, the recurring billing model helps to handle these challenges.

The most effective way of implementing the recurring billing model in your business is through a reliable subscription management platform. And one of the best options to explore is Goolash.

Goolash helps business owners and CTOs save time, streamline their billing process, and increase their revenue. So, if you're looking for a reliable subscription management platform, click here to gain free access to Goolash's features for 30 days.

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