Recurring billing: What is it and how does it work?

With the rising prominence of subscription-based business models, businesses must prioritize their chosen payment methods for customers. A business's success or failure often hinges on its payment strategy's effectiveness. Therefore, gaining a comprehensive understanding of recurring billing processing is essential. 

In this article, we will delve into the significance of recurring billing and how it can play a pivotal role in determining the trajectory of your business. We will answer questions such as "What is recurring billing?" and "How does recurring billing work?". Join us as we explore the essentials of recurring billing and unlock the potential for your business's success.

What does recurring billing mean?

Recurring billing refers to the practice of subscription businesses regularly charging their customers for a product or service. The frequency of billing cycles can vary, with options including monthly, quarterly, or annually. In essence, it involves the systematic and precise billing of subscriptions to ensure accurate and timely payments from each customer. This process considers factors such as global taxes, proration, payment failures, and other considerations.

How does recurring billing work? 

After a customer has subscribed to your product or service, recurring billing enables you to seamlessly process and accept regular payments. To ensure secure payment processing, payment gateways are utilized. Once the transaction is authorized and successfully processed, it can be directed to the accounting and reporting system to ensure precise revenue recognition.

Recurring billing software, such as Upodi, plays a vital role in streamlining this process by:

• Automating the recurring billing process and eliminating manual errors.

• Offer a personalized and devoted service to all customers.  

• Handling complex billing scenarios like upgrades, downgrades, add-ons, and taxes.

What is an example of recurring billing?

Subscription-based services: This includes streaming platforms like Netflix or Spotify, subscription boxes, software-as-a-service (SaaS) products, and membership-based services.

Utilities: Recurring bills for electricity, water, gas, or internet services are typical examples of recurring billing.

Gym or fitness memberships: Many gyms or fitness centers charge their members regularly for access to their facilities and services.

Insurance premiums: Insurance companies often bill their customers periodically for premiums on auto insurance, home insurance, or health insurance policies.

Also check out: SaaS Recurring Billing

Are subscription and recurring billing the same?

Subscription and recurring billing are often confused as they share many similarities. Both models involve an automated billing system, storage of customer payment information, and periodic withdrawal of funds from the customer's account. Additionally, both subscription billing and recurring billing can accommodate various payment methods.

The primary distinction between them lies in their pricing structures. Subscription businesses typically offer multiple pricing plans, allowing customers to switch between higher or lower plans according to their needs. On the other hand, recurring billing does not necessarily require different pricing tiers since the billing mechanism remains consistent across all plans.

It's important to note that while recurring billing is commonly associated with subscription businesses, it is suitable for any type of business, not limited to subscriptions.

What are the two types of recurring billing?

Recurring billing can be classified into two main categories:

1. Fixed, or regular recurring billing
2. Variable, or irregular recurring billing

Fixed billing

Fixed recurring billing encompasses collecting a consistent amount from the customer during each payment cycle. This approach is ideal for businesses that offer services at a fixed price, such as newspaper subscriptions or gym memberships.

Businesses can ensure a steady and uninterrupted revenue stream by employing fixed billing. Additionally, this method presents opportunities for upselling, allowing the business to offer additional products or services to customers and potentially increase its overall revenue.

Variable billing

Variable recurring billing involves collecting an amount from the customer that can vary in each payment cycle. This type of billing considers the customer's product usage or consumption, allowing for the creation of dynamic bills for each billing cycle. The fluctuating nature of variable recurring billing ensures customers are charged based on their actual usage or consumption, providing a more tailored and accurate billing experience.

Variable billing can be further categorized into two types: metered billing and quantity-based billing.

Metered billing

Metered billing, also known as usage-based billing, charges customers recurrently based on their service usage. It is commonly used by internet service providers and utility companies. Customers are typically billed for any usage beyond the base plan, providing flexibility and transparency in payment.

Quantity-based billing

Quantity-based billing charges customers based on an agreed-upon quantity at the time of purchase. It is commonly used by businesses like SaaS providers and volume-based cloud storage services. For example, SaaS providers charge based on the number of licenses or seats, while volume-based cloud storage services charge based on the storage space utilized.

Why recurring billing?

Recurring billing is widely adopted due to its advantages for both customers and business owners.

1. Entirely automated
   
   In a recurring billing system, the process of charging customers is fully automated. Once the invoice is generated, the payment cycle is established, and the customer's payment information is linked – the system automatically bills and charges the customer for the service without requiring any manual intervention. This automated mechanism eliminates the need for repetitive tasks by both the business owner and the customer, streamlining the billing process for everyone involved.
2. Consistent cash flow into the business
   
   Recurring billing offers a dependable and steady cash flow for a business, enabling the business owner to forecast the revenue. This will be generated within a given timeframe.
3. Saves time for both customers and business owners 
   
   In a recurring billing system, customers simply need to sign up and provide their payment information once, knowing that the business owner will be automatically paid for the services rendered. This "set it and forget it" mechanism relieves customers of the responsibility of ensuring payment is made in each billing cycle.
   
   For businesses, recurring billing greatly minimizes the occurrence of delayed or missed payments since customers are automatically charged promptly in each cycle. This results in significant time savings by reducing the need for payment follow-up.

This is why you should consider a dedicated recurring billing platform 

Predictable revenue helps solve a lot of common business headaches. But it can only benefit you if you have established a reliable recurring billing engine.

When it comes to setting up a recurring billing system, there are three ways you can go: 

• Choose some traditional accounting software.
• Build your own subscription engine.
• Pick a dedicated recurring billing and subscription management platform, such as Upodi.

What accounting software does well is - no surprise here - accounting. But what about subscription management, customer communication, and data concerns, among many other aspects of recurring billing?

When considering a DIY approach to handling your subscriptions and recurring billing, it may initially sound appealing. However, it's essential to recognize the significant amount of resources it demands, both in terms of finances and personnel. Additionally, you'll have the added responsibility of ensuring seamless integration with your ERP system and compliance with regulations like GDPR or PCI.

On the other hand, the true power lies within a dedicated recurring billing and subscription management platform. The term "dedicated" indicates that its primary objective is to address any challenges you may encounter with recurring billing. This includes automating invoicing, managing subscriptions, and providing various payment options. By utilizing such a platform, you can concentrate on refining your offerings and maximizing your profits.

Upodi is the Nordic leader in next-generation recurring billing and subscription management software. See how Upodi can help improve your recurring billing efforts; book a free trial!