The subscription model has been gaining traction amongst eCommerce merchants, whether they offer physical or digital goods online, as an acquisition and retention tool for customers.
As a business offering subscription-based services or products, an important strategic decision you must make is how to handle payments for each cycle.
Allow us to shed some light on how the subscription billing model works for eCommerce, SaaS, and many other types of businesses.
We will talk about what recurring payments are and how they work, offering in-depth insights into how merchants can implement a recurring payment model for their services while keeping common security concerns and limitations in mind.
What does recurring payment mean?
Recurring payment, aka recurrent billing, is an ongoing payment during a period of time, where a merchant charges its client automatically. Recurring payments are used where the products or services are subscription- or membership-based.
Subscription-based billing is when a merchant automatically charges their client's card or account for a subscription or membership package for a fixed duration.
The ease and convenience of a recurring payment option make it an essential function for all online businesses that offer products or services that are purchased on a regular basis periodically.
As consumers have limited free time, they may not be willing to go through the checkout process every time they want to buy a subscription-based product or service. Merchants who accept recurring payments offer their customers a convenient way to insert their payment details just once and enjoy the product or service recurrently.
Today, our lifestyles are busier than ever, and people are determined to enjoy life without worrying about time-consuming transactional payments. Having the option of automating transactional processes is now an expected feature, especially as it relates to payment for subscriptions. Allowing people the freedom and peace of mind by taking repeated payments off their hands for something they are uber-interested in and ready to pay for is a win-win situation for both the paying customer and the business itself.
How do recurring payments work?
When customers select the recurring payment option at the checkout page of an online website, they provide the merchant with debit or credit card information and authorization to withdraw money from their account on a regular basis. The checkout page where this occurs could be one found on an eCommerce store, a SaaS company website, or even an education portal. Streaming services and subscription box services are good examples of businesses that follow recurring payment models.
There are two types of recurring payments. They can be set up to either pay the same amount each time (fixed recurring payments) or allow payments within an amount range that allows for variations in bill payments (variable recurring payments). Netflix, for instance, doesn't charge you based on how many movies you watch each month. They charge a fixed fee per payment cycle. An example of variable payments is utility bills, where the amount each month is dependent on the usage. A great company practice to remove any confusion about the billed amount is to send a reminder to customers to notify them when a recurring payment is due to be withdrawn.
From a company's perspective, the merchant will need to partner with an acquiring bank to obtain a merchant account and a payment processor that will provide the payment gateway needed to process recurring payments. payabl. is an acquirer and a payment processor offering online merchants a payment gateway along with the necessary technology to accept recurring payments.
What customers might want to know before allowing recurring payments
With the increase in data breaches and fraud activities, consumers are more concerned than ever about whether they should provide their card information to online providers, especially for periodic automatic payments. Here are the most common factors that customers consider before they proceed with recurring purchases made via the online payment method.
The legitimacy and repute of your company
Merchants should include verification that their business is legitimate and support that claim with related documents where possible. Consumers who check for such confirmation will feel safe enough to pay and provide their card information to verified merchants. For instance, having existing customer reviews visible on a merchant's website enhances the perception of legitimacy with potential customers.
Winning consumers' trust is a strong and important brand element. Thus, security in payments is not only crucial for customer acquisition but is also a key element to customer retention.
Terms of agreement for payment
Companies must provide consumers with a copy of their agreement terms or, in the case of an eCommerce site, include this information in a separate section on the website's homepage footer.
Payment terms and conditions must be laid out in an easy-to-understand manner. Make sure you inform customers about how much they need to pay and how much will be taken out of their account, or if they should expect any extra charges under certain circumstances. Details about the billing cycle should also be clearly mentioned and agreed upon before the subscription begins.
Also, have a clear unsubscription or return policy that will resolve any reservations the customers might have about committing to a repeated purchase. They will feel more comfortable if they know exactly what to do if they are not happy with the product or service you deliver after they've already paid for it.
Finally, provide your customers with flexible subscription modification terms so that they can feel comfortable that they're not stuck with something long-term and that their subscriptions can be altered as their future needs change.
Payment overdraft policy
Keep your customers informed about the conditions under which you may charge an overdraft fee during a payment transaction. Such a fee is usually imposed on the customer when insufficient funds are present, and the company or the cardholder's bank charges an overdraft fee as a guarantee that they will receive the amount of the recurring payment. Informing your customers about the fees that they might be charged is important. Once the customer considers you untrustworthy when dealing with their money, it's game over.
Payment security measures
Online merchants must use fraud protection tools to protect their business and their customers from fraudulent activities, especially in the case of payments. It is important to clearly state that the payments submitted on your website are protected from criminals and emphasize the security of your browser and servers. Make it a point to convey that your payment page and the payment systems you are using are PCI-compliant.
The benefits of recurring billing for merchants and customers
Recurring payments are beneficial for both businesses and consumers. Let's quickly summarize both aspects.
One major upside is the convenience they provide to shoppers. Customers only have to submit their card details once instead of providing their information every time they buy a product or service. Another plus for customers is that being charged automatically makes it close to impossible to miss a payment, which means they don't risk getting charged any late fees.
From a merchant's perspective, a recurring payment solution will minimize late payments. Moreover, a recurring payment function can help predict business cash flow and manage inventory levels. With a regular, expected sale of goods and services, merchants can predict the revenue they will earn and make well-informed business decisions for the future. Plus, offering a recurring payment option can yield higher conversions and improve brand loyalty due to the benefits enjoyed by the consumers.
Potential limitations of offering recurring payments
The decision to accept payments on a recurring basis involves many benefits for both merchants and their customers. However, you should take into account the possible limitations of recurring payments before you finalize your choice of billing model.
Added payment processing expenses
If consumers forget that they have subscribed or face billing errors, refund claims will increase, resulting in added fees for the company to manage such cases. The merchant will not only lose sales but also get caught up in correcting transaction statuses and processing refunds. Furthermore, not having a consumer-friendly return policy might lead to service-related chargebacks against your company, which can be costly and time-consuming to manage, as well as tarnish your brand reputation.
Effects on customer relationships
Even though recurring payments cement a company's existing customer base, many merchants rely on them too much and forget to take any further action to enhance their relationship with their clients. By communicating with customers through personalized content, special offers, and other client-focused initiatives, a merchant can improve their relationship with their customers and deliver a better customer experience.
Things merchants should consider before offering a recurring payment option
Merchants should consider varying factors before setting up a recurring payment option for their clients. Here are the main questions that you must think about before offering fixed recurring payment options.
Is your product or service model suited for recurring payment?
The tempting benefits of recurring payments have led many companies to adopt this payment option. We see it in online education, video streaming, dating, gaming, SaaS, fashion, and more. Even big players in eCommerce have branched into a subscription model with recurring payments, which brings greater revenue to the business alongside the regular sales that the eCommerce platform drives by itself. But before you decide to become one of the subscription businesses and initiate a recurring payment plan, you need to make sure that your product or service will work with such a model.
Setting up subscription billing on your own can be complicated
Setting up subscription payments requires merchants to partner with an experienced payment service provider, such as payabl., that can provide recurring billing solutions for their business. This system must be flexible enough to accommodate the unique needs of particular businesses by being customizable. They should also offer multiple options in terms of payment frequency or billing cycle and failed transaction notifications. You will also need efficient credit card data change management because you must have the most updated credit card information on record, which can be challenging because credit cards expire and can get lost, stolen, or hit their spending limits.
Certain payment providers like payabl. offer tools like card updater services, which automatically update customer records when a card has expired or been reissued. Real-time updates are received during the authorization process automatically, ensuring that recurring billing merchants have better approval rates. Hence, it is important to partner with a billing system provider who can manage things automatically, saving you resources and lost revenue and allowing you to focus on growing your business.
Will you be able to continually sell the product to the recurring payee?
When you start offering a subscription service, you can't assume that the customer will commit to your product for life without you enhancing your product offering and working for that customer loyalty. When you decide to proceed with a recurring payment model, the customer experience needs to stay exciting and you must maintain quality.
Partner with payabl.
Partnering with a payment service provider with the right experience and resources to support the recurring payment model saves costs, time, and resources for merchants.
payabl. has years of experience with recurring payment solutions and is determined to ensure that our clients maximize their time to focus on the things that really matter to them without having to worry about the technicalities.