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What Is Recurring Billing? The Complete Guide for 2022
Jun 14, 2022

What Is Recurring Billing? The Complete Guide for 2022

What Is Recurring Billing?

Recurring billing has proven to be an absolute game-changer for companies all over the world.

While the business model was already popular, COVID quarantines made recurring billing companies commonplace in homes across the globe.

In fact, in 2020, the “Global Subscription/Recurring Billing Management Market” was estimated to be worth $5.1 billion.  

And even with COVID over, recurring billing and subscription services are expected to represent $10.7 billion by 2025.

So, if your company hasn’t started offering recurring billing yet, it’s definitely not too late.

But before you do, let’s talk about what exactly recurring billing is – including how it differs (slightly) from a subscription model.

What Is Recurring Billing? A Complete Breakdown

With recurring billing, companies charge their customers on a recurring basis for their services or products on a regular (or recurring) basis, be it weekly, monthly, quarterly, or annually.

The main benefit to both parties is obvious.

If your company offers recurring billing, you can count on automatic payments coming in on a regular basis. You don’t need to continue to resell them on your products or services or remind them when their payment is due.

Unless customer churn becomes a problem, you’ll often have a customer for life once they sign up.

How Recurring Billing Works

Recurring billing is a fairly simple practice given how effective it is for turning massive profits.

It couldn’t be easier.

All recurring billing requires is four ingredients:

·         A product or service that customers need on a regular basis

·         A webpage that makes it easy for customers to sign up for it

·         A recurring billing plugin that automates the ongoing billing

·         A process for delivering said product or service on a recurring basis

Ideally, your plugin should cover those middle two steps: processing signups and automating the customers’ recurring billing.

Ours does both, by the way, for:

·         Magento

·         BigCommerce

·         WooCommerce

·         Shopify

So, it couldn’t be easier to take advantage of recurring billing for your eCommerce company (or more affordable; our plugin is free).

Another Option: Variable Recurring Billing (aka Recurring Invoicing)

Recurring billing doesn’t always mean regular charges or even a regular payment schedule, though.

Some companies offer “variable recurring billing”, which is when the amount they charge can change with every billing cycle. You may also hear this referred to as “recurring invoicing” because the amount owed changes from one payment to the next.

For example, a “usage-based” recurring billing model would charge the customer based on how much of the product or service they used. Utility companies run on a “usage-based” model. If you don’t use any electricity for a month, your bill will be a lot different than if you kept every light on the entire time.

“Quantity-based” recurring billing is another variable version. This is when the customer pays for a service based on a price-per-quantity they agreed to when they signed up. Cloud storage companies often offer this option to their customers, allowing them to choose how much volume they’ll need on a monthly basis.

The Pros and Cons of Recurring Billing

If your company offers a product or service that lends itself to a recurring billing model, this approach might seem like a no-brainer.

And for most companies, it absolutely is.

But it’s also smart to consider both the advantages and the disadvantages of this approach before moving forward with your decision.

Compared to subscription billing – which we’ll cover next – there are some important pros and cons:

The Pros of Recurring Billing

We already touched on the first – most obvious one: once a customer signs up for recurring billing, you can typically depend on their regular payments coming in for years and years.

But there are other advantages, too:

·         Dependable Cashflow and Forecasting: When you can be 99% sure how much money is coming in next billing cycle based on your recurring customers, it makes it much easier to plan for the future.

·         Customers Love Recurring Billing: You also can’t forget that customers love recurring billing, too. If they need your product or service on a regular basis, this billing model gives them another reason to love your company: convenience. They no longer need to worry about remembering to place their orders.

·         Simpler Processing: For the most part, recurring billing makes it about as easy as possible to process your transactions. Everyone pays the same amount at the same time. It doesn’t get much simpler than that, which means your team has more flexibility to focus on other priorities.

·         Less Chance for Error: Along the same lines, it’s almost impossible to make mistakes when billing customers through a reoccurring model. It completely removes the risk that any human error will hurt your bottom line or customer satisfaction.

The Cons of Recurring Billing

But there are also drawbacks to this simple billing method.

·         No Opportunity to Upsell:  This is the big one. With recurring billing, you have just the one tier. Everyone pays the same amount for their gym membership, the same rate for their electricity, or the same price for your one product or service. While this makes for reliable forecasting, it also doesn’t leave a lot of room to improve your profit margins per customer.

·         “Out of Stock” Isn’t an Option: While most companies would consider this a great problem to have, you’ll need to make sure your “terms and conditions” cover what happens if you ever run out of a product that one of your customers has already prepaid for. Even then, running out of products can cause the kind of churn that loses your customers forever.

Now that we’ve covered the pros and cons of recurring billing, let’s look at a popular alternative that may be a better fit for your business.

Recurring Bill vs. Subscription Billing: What’s the Difference?

Most people would consider subscriptions and recurring billing to be the exact same thing.

And, for the most part, it is.

But for those who draw a distinction, the easiest way to think about subscription billing is that it’s the same concept as recurring billing but offers customers more options.

A we covered earlier, a strictly recurring payment plan would be where everyone signs up for the same thing: whether that’s the same access to streaming services or paying the same amount per watt of electricity.

A subscription service is one where the customer can decide on different plans that cost different amounts.

For example, if you sign up for an Audible subscription, you’ll have two different tiers to choose from:

At any time, you can decide to switch to a different subscription plan.

The Pros and Cons of Subscription Billing

So, is a subscription model a better option for your business?

Let’s consider a couple pros and cons of this approach first.

The Pros of Subscription Billing

·         Customers Like Options: The biggest advantage of a subscription service is that it’s easier to onboard new customers when you give them options. Instead of hoping that one plan and payment amount will fit your entire market, you can come up with as many options as it takes to maximize conversions.   

·         Opportunities to Upsell and Cross-Sell : At the same time, you can always earn more from each customer by encouraging them to move up to a tier or take on another subscription altogether (through a cross-sell).

Audible is also a good example of a subscription service that takes opportunities to cross-sell their customers. Instead of focusing solely on their subscription tiers, they also regularly offer users 2-for-1 deals on audiobooks, sales on certain titles, and even discounts on the credit themselves.

Of course, you could also do this with recurring payment plans. It’s just that upselling and cross-selling is more common with subscription companies because they tend to offer multiple products, which lend themselves better to this strategy.

The Cons of Subscription Billing

While those are definitely some big advantages, this subscription models also come with a couple drawbacks:

·         Cashflow Is Less Reliable: While subscription billing means you can always work to upsell your subscribers into the highest tier – and make more in the process – the opposite is true, too. Your subscribers can also decide to downgrade to a lower tier, which is something you need to take into consideration when you do your financial forecasting.

·         Forecasting Is Less Reliable, Too: Likewise, it becomes harder to forecast how much each new customer will be worth to your business. Instead, most subscription companies rely on the average value for each customer. Every business does this to some degree, but subscribers usually represent a lot more variability.

Subscriptions vs. Recurring Billing: Is There Really a Difference?

To put it simply: no, not really.

But, again, if you’re looking for a difference between subscription and recurring billing it’s basically that the latter involves just one tier.

Even if it’s variable recurring billing – as with a utility company – there’s just a single tier. Customers don’t have to choose between different options.

When you introduce tiers or levels to your recurring billing plan, it becomes a subscription service.

That’s about it.

Nothing too crazy.

And yet, it’s important that you know which billing model makes the most sense for your business.

Why This Distinction Between Recurring Billing and Subscriptions Matters for Your Business

While it might seem like there’s a significant difference between recurring and subscription billing models, it’s important to understand which version makes the most sense for your customers.

If there’s no interest in tiers, you could waste a lot of resources planning for and marketing different subscription levels only to discover that one, recurring option would’ve been ideal.

Alternatively, your market may appreciate having some different possibilities from which to choose. In that cace, forcing them into a one-size-fits-all situation will almost inevitably result in customer churn – something you want to avoid at all costs – as they go looking for a competitor that offers more options.

Examples of Companies That Use Recurring Billing

Whether you call it recurring or subscription billing, charging customers on a regular basis for ongoing products or services has become commonplace in today’s economy.

Don’t expect that trend to change anytime soon.

While more and more companies are adopting subscription models every single year, here are some of the most popular brands that have already embraced this popular method:

·         Beauty Subscription Services like Birchbox, IPSY, and Kinder

·         Clothing Subscription Services like Stitch Fix, Rent the Runway, and Trunk Club

·         Cloud Storage like Dropbox and Sync

·         Food Subscription Boxes like Daily Harvest, HelloFresh, Freshly, and Blue Apron

·         Gyms like 24 Hour Fitness, LA Fitness, and Anytime Fitness

·         Messaging Services like Slack and Microsoft Teams

·         Periodicals like The New York Times, Washington Post, and Sports Illustrated

·         Streaming Services like Netflix, Amazon Prime, and Hulu

The list goes on and on.

Will your company be next to join?

Choosing Between Subscriptions and Recurring Payment Billing

While both billing models are extremely similar, there are enough differences between subscriptions and recurring billing that you should take the time to consider which will fit your unique business – and customers – the most.

Once you’ve made your decision, choose Dominate to make sure it’s the right one.

Our subscription plugin makes it easy to accept subscription AND recurring payments from customers.

Best of all, it installs within minutes and is completely free to use. We don’t even charge transaction fees!

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