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Recurring billing is an automated method that enables businesses to automatically charge customers at regular intervals for products or services they have subscribed to.
How Does Recurring Billing Work?
When a customer chooses a subscription or recurring service, they provide their payment information, such as credit card details or bank account information. The business securely stores this information, whether natively or through a 3rd party. Then, their billing system communicates with the payment service provider and automatically charges the customer on a predetermined schedule, typically monthly or annually.
Customers don’t need to manually make payments or renew their subscriptions, providing a seamless and hassle-free experience.
What Pricing Models Utilize Recurring Billing?
Recurring billing is commonly used in subscription-based pricing models, such as software as a service (SaaS), streaming media, online memberships, healthcare services, and utilities.Â
Additionally, it can be employed in usage-based business models. In such cases, customers are charged based on their consumption or usage of a service. This includes metered billing for utilities like electricity or water, flat fees for telecommunication services, or pay-per-use cloud computing resources (pay per API call).
Examples of Recurring Billing
Businesses across a wide range of industries follow recurring billing business models. These include the following.Â
Software Subscriptions: Companies offering software subscriptions, such as Adobe Creative Cloud or Microsoft Office 365, utilize recurring billing.
E-Charging: EMSPs (emobility service providers) offer their customers a connected network of charge points that can be used on a recurring basis. Pricing is pay-per-use, and as such, billing must be automatic. Often, there are subscriptions bundled into these products.Â
Cloud Services: Providers of cloud computing services, such as Amazon Web Services (AWS) or Microsoft Azure, follow this billing method to charge customers (businesses) based on their usage of cloud resources.Â
Software and Hardware Leasing/Rental: Some businesses offer B2B clients the option to lease or rent software, equipment, or machinery, with recurring billing for the rental or leasing fees.
Subscription-Based E-commerce Services: B2B e-commerce platforms may offer subscription-based services to other businesses, including features like custom online storefronts and inventory management tools.
Pros & Cons of Recurring Billing
ProsÂ
Convenience: This billing approach eliminates the need for manual payment processing, making it convenient for both businesses and customers.
Predictable Revenue: Businesses can forecast and plan their revenue stream more accurately due to the predictable nature of recurring payments.
Improved Customer Retention: By automating payments, businesses reduce barriers for customers to continue using their services. This can improve customer retention.
Cons
Potential for Churn: Customers may cancel their subscriptions or services, leading to revenue loss, especially if there is a high churn rate.
Payment Failures: Technical issues or expired payment methods can result in failed payments. This creates delays in realizing revenue and requires time-consuming follow-ups to remedy the issue.
Customer Disengagement: Some customers may forget about their subscriptions or lose interest in the services, leading to unused or underutilized subscriptions.