Recurring payments work when your customers agree to pay you automatically each billing cycle. The benefits in business include improved cash flow, less admin work and a better customer experience, but they also come with risks you'll need to manage.
In this guide, you'll learn about the different types of recurring payments, the most common methods and how they could work for your business.
What is a recurring payment?
A recurring payment is when a customer pays you automatically each billing cycle – a week, month or quarter, for example. You might use recurring payments to cover a subscription, membership or ongoing services.
What are the different types of recurring payments?
The different types of recurring payments are fixed and variable.
Fixed recurring payments
A fixed recurring payment is when your customer automatically pays a set amount each billing cycle. Examples of fixed recurring payments are a monthly gym membership or a subscription to a streaming service.
Variable recurring payments
Variable recurring payments can go up and down between billing cycles, depending on how many products a client buys or services they use. For example, a mobile phone bill might include set costs and additional fees for services like international calls that will vary from month to month.
How do recurring payments work?
Recurring payments work when your customer agrees to pay you automatically. Customers can set up recurring payments with their credit or debit card or by giving you direct debit authorisation from their nominated account. When you're offering a recurring payment plan, this is what you need to consider:
Specify the recurring services to be charged
Specifying the recurring services to be charged is the first step – it sets out what services or products your customer will get each period.
Set billing intervals
Billing intervals can be set according to your preference or service delivery – you might take payment weekly, monthly or yearly.
Collect customer information & authorisation
Collecting customer information, like credit or debit card numbers or bank account details, and their authorisation will let you automatically access funds.
Secure storage of payment information
Securely storing payment information is critical – this will let you continue accessing funds, while keeping the customer details safe.
Automation of invoice creation
Automated invoice creation makes the whole process set-and-forget – each time a payment is due, the system sends the customer an invoice with information on what they're paying and for what.
Automated emails and overdue notices
Automated emails and overdue notices keep everyone informed if a recurring payment fails, so customer service is never disrupted. This can happen if a customer doesn't have enough funds in their account or a credit card expires.
Examples of recurring payments
Examples of recurring payments are traditionally seen in businesses that offer memberships and subscription services, but you'll find recurring payments across almost every industry. Here are some examples of fixed and variable recurring payments:
SaaS products such as accounting software
SaaS products, such as accounting software, web hosting platforms, and other kinds of cloud software
Utility bills
Utility bills for services like water, electricity and gas.
GST or provisional tax payments
GST or provisional tax payments – and any other tax payment you need to make.
Contractor invoices
Contractor invoices where the contract is ongoing.
Gym memberships
Gym memberships to cover monthly access to the facilities.
Mobile phone bills
Mobile phone bills and other telecommunication services like broadband.
Advantages of recurring payments
There are advantages of recurring payments for both your business and your customers.
Improved business cash flow
Improved business cash flow management is one benefit of recurring payments. Because you're paid automatically, you can more easily predict when you'll have money in the bank, create more accurate cash flow statements, and avoid cash flow problems.
Increased convenience for customers
Recurring payments increase convenience for customers – they'll enjoy uninterrupted service without thinking about invoices or worrying about missing payments.
Minimised billing administration work
With recurring payments, you send invoices and process payments automatically. Set it up, and you instantly boost your accounts receivables.
Ability to offer reduced pricing
You may be able to offer reduced pricing to customers because you're saving time on admin and can rely on a steady stream of income.
Disadvantages of using recurring payments
Some disadvantages of using recurring payments include:
Risks of billing issues
There's a risk of billing issues with recurring payments because you don't oversee invoices or payments – they happen automatically. Errors can often fly under the radar, and fixing them takes time and effort from you and your customer.
Higher churn rates
Higher churn rates are when you lose more customers. Recurring payments tend to come with hands-off service, so keeping customers engaged and loyal is harder, increasing the risk of churn.
Services can be halted if billing issues arise
Services can be halted if billing issues arise – a customer's credit card expires, payment doesn't go through, or they miss your automated reminder emails.
This will be a hassle for customers if you offer nice-to-have services like gym memberships or streaming platform subscriptions. If you sell something more essential like utilities, food, insurance, business web hosting or security, a break in service could have serious consequences for your customer.
Less direct client billing interaction
Less direct client billing interaction reduces transparency, communication and customer engagement. Without an established relationship, you'll find it harder to resolve issues constructively.
Annual vs monthly recurring payments
Each option has pros and cons when it comes to lowering churn rates and increasing sign-ups. When customers sign up to pay monthly, they can cancel anytime, increasing your churn risk.
However, customers may be less willing to commit to a larger annual sum, which can reduce your sign-ups. Most businesses will offer both options, with a discount incentive to pay annually.
How to get started with recurring payments
Choose the recurring payment method that best suits your business – direct debit, automatic payment or payment gateway.
Create payment terms, including timings and amount of each billing cycle, any room for variation and what happens if customers miss a payment.
Set up automated emails to keep customers informed about their accounts and flag any issues.
Get necessary authorisation from customers, either with a direct debit authority, collecting their credit card details or having the customer input them into a payment gateway.
Set up and send recurring invoices in your accounting software.
Recurring payment FAQs
What is the difference between a one-time payment and recurring payment?
The difference between one-time and recurring payments is the frequency. A one-time payment is when a customer pays you once, although they might buy from you again later. Recurring payments happen automatically at each billing period.
Are automatic payments the same as recurring payments?
Automatic payments aren't the same as recurring payments. Recurring payments are when a customer agrees to pay you regularly. An automatic payment is one recurring payment method, which the customer must set up from their end.
What is the difference between subscription billing and recurring payments?
Subscription billing is a type of recurring payment where a customer pays for a subscription weekly, monthly or any other period.
Cash flow in, admin out
With recurring payments, you'll be able to better manage your cash flow, avoid the admin associated with accounts receivable, and offer customers a convenient way to pay you. While there are some potential risks and disadvantages, recurring payments can be an extremely valuable tool for businesses.
Explore how MYOB Business can help your business get paid today!
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.