Small business guide to accepting recurring payments

Back in 2020 the global subscription market was worth $4,054 million. Business Wire forecasts that it will be worth $7,813 million by 2025. That’s an impressive compound annual growth rate (CAGR) of 14%.

The benefits of accepting recurring payments that are encouraging so many businesses to adopt this model include achieving a consistent cash flow, reducing administrative and manual tasks, achieving lower churn rates, and fostering longer-term customer relationships.

In this guide, you can explore what recurring payments are, how they could benefit your business and how you can implement them effectively.

What are recurring payments?

Recurring payments, also known as recurring billing, subscriptions or automatic payments, are transactions where customers authorize a business to automatically deduct payments from their account at regular intervals.

Typically, recurring payments are set up for subscription-based services or products that customers use on a regular basis, such as streaming services, gym memberships or subscription boxes.

Recurring payments can be structured on a monthly, quarterly or yearly basis depending on the nature of the product or service. For example, a magazine might charge subscribers annually, whereas a SaaS (Software as a Service) company may charge monthly.

The attraction of such payments is that once set up, payments occur automatically, improving customer retention and reducing the likelihood of missed payments.

What are the benefits of recurring payments?

As the growth of this payment model indicates, many businesses are finding that it helps solve several issues that one-off payments cannot.

1. Predictable revenue

One of the most significant advantages of recurring payments is that they give your business the ability to forecast revenue accurately.

Unlike one-off transactions, recurring billing provides a steady stream of income, allowing businesses to predict cash flow and allocate resources efficiently.

Particularly for small businesses, this predictability is invaluable for budgeting, expansion planning and managing day-to-day operations.

2. Increased customer retention

The convenience of recurring billing for customers leads to higher retention rates.

Once a customer has subscribed to a service, the friction of making repeated payments is eliminated. This ease of use is more likely to lead to longer-term customer relationships, without the need for constant re-engagement.

3. Upselling and cross-selling opportunities

This ongoing relationship with customers allows businesses to engage in upselling and cross-selling opportunities.

For example, a subscription box company could offer premium tiers or additional products during renewal.

This regular contact with customers gives businesses a unique opportunity to further engage them and add value while increasing customer lifetime spend.

4. Reduced administrative work

Automated recurring payments allow businesses to spend less time on invoicing and payment collection. This automation also reduces manual errors.

This is why it appeals to small businesses, which often operate with limited staff.

5. Cost efficiency

Manually processing payments can be time-consuming and expensive, especially when you factor in transaction fees and the risk of late payments.

By offering recurring payments, businesses streamline their payment process, reduce overheads and improve their cost efficiency.

6. Improved cash flow

Regular payments ensure a steady flow of income, making it easier to manage operating expenses such as rent, salaries and inventory.

This consistent cash flow is particularly helpful for small businesses that may struggle with irregular income streams from one-off transactions.

7. Minimization of late payments

Late payments can disrupt cash flow and create financial uncertainty in your business.

Recurring payments ensure that regular payments are made on time, every time. This improves the reliability of income.

How to set up recurring payments for customers

The benefits of recurring payments have been outlined above. But are they right for your business? And how do you introduce them?

Let’s look at the steps involved in setting up recurring payments for your customers.

Decide if a subscription model is right for your business

The first step is to evaluate whether a subscription model suits your business and its customers.

Products and services that customers use regularly, such as meal kits, software subscriptions or fitness memberships, are prime candidates for recurring payments.

Consider the products and services that you offer and assess whether your customers would benefit from automated, ongoing billing.

Choose a subscription pricing model

There are many pricing models available for recurring payments. Selecting the right pricing model is crucial for maximizing revenue and customer satisfaction.

Here’s a quick guide to the main options and the sorts of businesses best suited to them:

• Flat-rate pricing: One fixed price for all users. Best for businesses offering standardized services, such as streaming services like Netflix.
• Tiered pricing: Different pricing levels based on features. Suitable for SaaS companies like Dropbox that cater to varying customer needs.
• Usage pricing: Different pricing levels based on usage. Effective for utility companies or cloud services like AWS.
• Per-user pricing: Charges based on the number of users. Ideal for software companies targeting teams, such as Slack.
• Freemium model: Offers a free tier with optional upgrades. Works well for apps aiming to build a user base like Spotify.

Partner with a PCI DSS-compliant payment gateway provider

To accept recurring payments securely businesses must use a PCI DSS-compliant payment gateway. This is to ensure that sensitive customer data is handled securely.

Worldpay offers PCI DSS-compliant payment gateways. Find out how our Safer Payments program helps you to achieve and maintain compliance while building customer trust.

Check subscription law

It is important that you ensure your recurring payment process complies with local, international and financial regulations. Different countries have specific subscription laws regarding automatic renewals, customer notification and cancellation policies.

In the US, the Federal Trade Commission’s “click-to-cancel” rule requires sellers to ensure that consumers can easily cancel recurring payments for subscriptions and memberships.

Set up the recurring payment system

These are the steps you will need to take to implement a recurring payment system:

1. Select a payment processor that supports automated billing.
2. Set up customer profiles within your payment system.
3. Establish billing intervals and terms, paying close attention to any legal requirements.
4. Integrate these payment options into your e-commerce platform.

Discover how Worldpay can simplify this process with its automated billing features, robust customer management tools and reporting capabilities.

Offer multiple payment options

Offering flexibility in payment methods can greatly improve conversion rates with less subscriptions abandoned at checkout.

Customers expect to be able to pay using their preferred method, whether that's PayPal, credit card, debit card, digital wallet or bank transfer.

Worldpay supports multiple payment options, ensuring customers can choose how they pay you.

Manage failed payments

Even with automated payment there will be times when the payment fails. This may be due to expired cards or insufficient funds.

It is important that you have strategies in place to manage these failures, such as automated retries, sending customer notifications and service suspensions.

Worldpay’s system includes tools for managing failed payments to ensure continuity of service and minimize revenue loss.

Conclusion

Many businesses are realizing the benefits of recurring payments. They help with customer retention, encourage longer-term relationships, boost lifetime value and cut down on admin time while maintaining a regular cash flow.

By automating billing processes, businesses can focus on growth rather than chasing down payments.

There is some leg work at the start, however. You will need to implement a PCI DSS-compliant payment system, choose the right subscription model, and manage failed payments to ensure a smooth, secure and successful recurring billing setup.

If you’re ready to implement recurring payments, get in contact with Worldpay to explore how we can support your business.