Introduction
Subscription
and recurring payments refers to a business model where customers sign up to
automatically pay a fixed amount on a recurring schedule, usually monthly or
yearly, to gain ongoing access to a service or receive periodic deliveries of a
product. This payment schedule repeats until the customer chooses to cancel or
the business ends the subscription.
Businesses Choose the subscription
and recurring payment Model
Recurring revenue has become an increasingly popular business model as it
provides predictable cash flow and a continuing customer relationship. Some key
reasons why companies choose subscriptions include:
Reliable Cash Flow
Subscription businesses can forecast revenue more accurately since payments
are spread out evenly over time rather than coming in one-time purchases. This
results in smoother, more predictable cash flow that is easier for budgeting
and planning compared to one-off purchases.
Recurring Income Streams
Rather than relying on each new customer to purchase the product or service
only once, subscriptions generate ongoing income from the same customer over
multiple periods. As the customer base grows each month, so do recurring
revenues without having to acquire new customers.
Subscription and Recurring Payment: Customer
Retention
Because customers must actively cancel their subscriptions, subscriptions
tend to have higher retention rates than one-time purchases. On average,
subscription customers will stay longer than non-subscribed customers since the
ongoing value of the product or service provides an incentive for them to keep
their subscriptions active.
Pricing Flexibility
Businesses have flexibility in how they package and price subscription
plans, from basic to premium options. Customers are also generally willing to
pay more for subscriptions versus one-time purchases in order to maintain
ongoing access and support over time.
Lower Customer Acquisition Costs
It is typically less expensive to upsell and cross-sell additional services
to existing subscribers than to acquire new customers. By focusing on retention
and increasing customer lifetime value through additional subscriptions and
services, businesses can improve their unit economics.
Consumers Adopt the Subscription Habit
As subscriptions have proliferated across media, technology, and consumer
products, customers have grown accustomed to the subscription paradigm. They
have shown a willingness to subscribe for ongoing access to useful,
high-quality services and bundles of content/products.
Setting Up Recurring Payments via Credit
Cards
For subscriptions, the most widely accepted payment method is credit/debit
cards as they allow automated recurring charges. Here are the key steps in
processing subscription
and recurring payment via cards:
1. Collect Customer Card and Billing Details
The customer provides their name, billing address, card number, expiration
date, and CVC security code during signup. This information is securely stored.
2. Get Customer Authorization
Under PCI DSS compliance standards, explicit written consent must be obtained
from the customer to process recurring charges to their card.
3. Create a Subscription Profile
A customer profile is created in the merchant account with the billing and
payment details entered, along with information like their subscription plan
and billing frequency.
4. Run Initial (Trial) Payment
An initial payment is processed immediately to verify the card is valid. For
trials, this amount may be $0 or a nominal fee.
5. Schedule Future Payments
The payment processor is provided instructions to automatically charge the
customer’s card on a fixed recurring schedule (e.g. first of every month) based
on their subscription duration and pricing.
6. Process Recurring Payments
On each scheduled date thereafter, the saved card details are charged, and
funds are deposited into the merchant account if authorized. Customers receive
emails notifying them of each transaction.
7. Handle Payment Failures and Expirations
If a scheduled payment fails due to expired cards, insufficient funds etc, the
merchant must have procedures to address issues, notify customers to update
payment details and potentially suspend access.
8. Allow Cancellations and Changes
Customers must be able to cancel at any time and either stop future payments or
switch to a different subscription plan through their account dashboard or
customer support.
With these core processes in place, merchants can offer worry-free
subscriptions and recurring services to customers while delivering the ongoing
revenue streams that make the business model so powerful and sustainable.
About Author:
Ravina
Pandya, Content Writer, has a strong foothold in the market research industry.
She specializes in writing well-researched articles from different industries,
including food and beverages, information and technology, healthcare, chemical
and materials, etc
*Note:
1. Source: Coherent Market Insights, Public sources,
Desk research
2. We have leveraged AI tools to mine information it
