What are the types of recurring payments?

Recurring payments can make your customers very happy but do you know the different types and what they mean for you?

Set-it and forget-it is a great way to think of recurring payments; make sure you understand how they work for your business.

Rounding it up

  • Recurring payments come in fixed or variable options.
  • Recurring payments provide ease for your customer and a more solid income source for your business.
  • Ensure you select the right recurring payment provider for your business.

Intro

It’s 2022 and if there’s anything more ubiquitous than subscription services, we haven’t found it. Honestly, you can subscribe for anything. From shaving supplies to vegetables, clothing to adult coloring books, subscription services are a hallmark of our lives now. Even the vast majority of our media consumption takes place inside of a subscription model; think Netflix. But what makes these subscription services tick? Well, crucially, many of them have a niche and dedicated audience (looking at you Slime Box Club). But the real thing that makes them tick is recurring payments.

Recurring payments allow consumers to “set-it and forget-it” with services they know they’ll want for the long term. Most importantly for businesses, recurring payments are quick and easy, and allow for some forward planning. So how do recurring payments work, what types of recurring payments are there and what are some of the ways they can help your business? Let’s take a look.

Set-it and forget-it

We love automatic and recurring payments that offer just that. One of the most important aspects of recurring payments is that they are quick, easy and seamless for customers. All types of recurring payments will offer this to your customers but for the merchant, things can look a bit different. There are two main types of recurring payments that you should consider. 

Regular or fixed recurring payments are the standard ones you think of. Magazine subscriptions, gym memberships and box shipments all work on fixed recurring payments. If you agree to pay $12 per month for the Pen of the Month club, you’ll be charged just that, every month, until you cancel.

Irregular or variable recurring payments change based upon the usage of the customer. Utility bills are the best example of variable recurring payments.

In both cases, the flow looks the same to the customer; they will input either their banking or card information and authorize credits at agreed upon intervals. That’s about it - they’ll get charged each month and receive their product.

On the business end, things can get a little bit more complicated. The customer will input their card information and authorize ongoing payments. Then, your bank, via your payment processor, will ask the customer’s bank if they’ve got the money to back what they’re buying. For subscriptions or recurring payments, this can often take the form of a small charge that is refundable. Then, when it’s time for the recurring payment to charge, the normal payment process will begin, just as if the customer was making the same on-time payment. 

There’s nothing all that special about the recurring payment itself; your payment processor simply holds onto the payment information and charges your customers appropriately. However, business owners have a number of things to consider when they’re thinking about offering recurring payments to their customers. 

Platform

Depending on the type of platform with which you accept your electronic payments, your ability to set and accept recurring payments can change. Payment processors often offer recurring payment options but may lack tiered options that many businesses offering subscriptions may want to take advantage of. eCommerce platforms also tend to offer recurring payment options but also tend to offer much higher rates than one-off charges. Finally, recurring billing specialists are a great option for businesses whose income almost entirely relies on subscriptions. However, the same features that make things super convenient can also make them extremely expensive.

By way of example, Stripe is one of the payment processors that hosts some extensive subscription recurring payment models, including flat charges, tiered models and models that include overages. For this service, Stripe charges an additional .5% on top of any other transaction fees. PayPal also offers recurring payments, though they do tend to be a bit simpler than Stripe’s offerings, charging a flat $10 per month. You can see that the volume and cost of your subscription plans matter a great deal when selecting a provider.

Size & Scope

Your company’s size can play a huge part in your decision process for how you want to process recurring payments. Some of the larger platforms have rather large fees associated with them. If you’re a small company making artisan baskets for the Pacific Northwest market, for example, you may not have the bandwidth to send over high fees for each recurring payment.

The Cons

There are undeniable positives associated with recurring payments but there are also some negatives you have to keep in mind. Chargebacks are a problem all merchants deal with and are no different for recurring payments. 

This is an important thing to consider. If you surpass a 1% chargeback ratio, it's very likely that you could lose your merchant account. Follow all best practices for recurring charges and subscriptions: remind customers you are going to charge them and have your merchant descriptor accurate. They can be expensive and ultimately business ending if they get out of hand. You’re also dealing with the storage of credit card info - something that your payment processor should take care of for you - and that can be a stressor too. 

Cancellation

We can’t really talk about recurring payments without mentioning a bit about cancelling subscriptions. Any reader will likely have experienced a bad cancellation experience. Either the cancel button and menu are well hidden, or you have to leap through a ton of interstitial pages to finally reach the page where you can end your subscription. No one wants to lose a customer but you can count on never getting that customer back if you make them jump through a ton of hoops to cancel their recurring payments. Now, there’s no problem with an offer or two, but make it easy to understand. The Federal Trade Commission (FTC) is even looking into subscription cancellation. The agency has put businesses on notice that services need to be clear and easy to cancel. If the customer service angle doesn’t get you, the possible federal probe should.

The convenience factor

Even with all those things you’ll need to consider, you can’t really beat the value recurring payments bring to the customer’s experience. If you find the various types of recurring payments confusing, Swipesum can help. We take all the guesswork out of finding the right payment service providers for your business, no matter what size and what you sell.

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