As a business owner, you’ll know the importance of cash flow. And one of the most effective ways to build a steady and predictable income stream is by encouraging recurring transactions. But what exactly is a recurring transaction? In this guide, we’ll explain just that, as well as outlining how you can set up recurring transactions to boost your bottom line.
You’ll also learn about the benefits of setting up recurring transactions, and some of the most common recurring transaction types that exist. With the right knowledge, you can take full advantage of recurring transactions and give your business the financial stability it needs to flourish. Let’s dive in and explore what recurring transactions have to offer.
What is a recurring merchant transaction?
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Recurring merchant transactions are a type of payment arrangement where customers are charged regularly for goods or services that they purchase. This type of payment plan is becoming increasingly popular with businesses as it allows them to generate a reliable and steady stream of income.
Recurring payments typically involve customers signing up for a service or product on a subscription basis and authorizing the merchant to charge their credit card or bank account for the pre-agreed amount. The billing cycle can be monthly, quarterly, or even annually, and customers can usually opt out of the payment plan at any time.
Increasingly, however, recurring payments are offering more convenience to customers, coming as they often do with a range of pricing plans — from fixed price to usage-based payment models — and payment methods including PayPal, Apple Pay, and GoCardless. This enables businesses to offer their customers maximum flexibility when selecting and managing a subscription package.
Benefits of setting up recurring transactions
The main benefit of recurring transactions is that it allows businesses to make more accurate predictions about their income as they can rely on the same amount of money coming in each month. This makes it easier for businesses to manage their finances and plan for the future. It also creates a sense of brand loyalty with customers, increasing the lifetime value (LTV) of the customer by offering a consistent service.
For customers, recurring payments are much more convenient than having to manually make payments each month or year. It also means they don’t have to worry about forgetting to make their payments on time, as the payments are automated. In addition, customers can view their payment history, set up reminders, and even adjust their payment plan if needed. To summarize, the primary benefits include:
- Predictable income. Recurring revenue streams provide a steady and reliable source of income that can be counted on for the long-term.
- Financial stability. The stability of income from recurring transactions helps businesses to plan for the future and manage their finances more effectively.
- Brand loyalty. By providing customers with a consistent and reliable product or service, you can develop customer loyalty and build long-term relationships.
- Investor appeal. Companies that embrace recurring revenue models are attractive to private equity investors and potential buyers.
- Lower acquisition costs. By encouraging repeat transactions, you can increase the lifetime value (LTV) of your customers, which can help to optimize your overall customer acquisition cost (CAC).
Types of recurring transactions
Recurring transactions can serve a number of purposes: for businesses looking to boost cash flow and drive a more consistent income stream, there are a number of recurring transaction models they can implement, and many will offer a combination of two or more of these. The most common recurring transaction types include:
- Subscription-based models. This is the most common type of recurring transaction model, and typically involves customers paying a fixed fee for an ongoing product or service on a regular basis.
- Tiered models. Tiered pricing is a subscription-based model where customers are charged a set fee depending on the tier they choose. Each tier will increase in price and come with added features, benefits, or services.
- Usage-based models. In a usage-based (or “per-unit”) payment model, customers are billed for a product or service based on the resources they consume. This model is often used by SaaS businesses; for example, an email marketing platform might charge based on the number of emails you send in a billing cycle.
How to set up a recurring transaction model
So, we’ve explained what a recurring merchant transaction model is, outlined the primary benefits, and defined some of the different types of recurring payment models, but what about when it comes to actually creating a recurring transaction process? There are various steps to consider — the Chargebee guide to accepting recurring payments is a great place to start — but here we break down the most important factors in setting up a successful subscription-based pricing model.
Determine your payment and pricing models
A crucial first step in the setup of a recurring transaction model is to define which payment gateway(s) you’ll offer and establish your pricing model(s):
- Choose at least one payment service provider, but it’s best to offer a range of payment options to match your customers’ varying needs. For example, many customers will be happy to pay via a debit or credit card, while others will prefer to use a payment processor such as PayPal or Apple, as these offer added convenience and security.
- Determine your pricing model; again, best practice is to offer flexibility by allowing your customers to choose a payment plan which suits their requirements and their financial situation. Opt for a combination of fixed, tiered, usage-based, and quantity-based pricing, depending on the type of product or service you offer.
Automate your billing process
Particularly as your business grows and you’re having to deal with more and more recurring payments, you certainly won’t want to be processing these manually, since this will be a time-consuming and resource-draining process. Instead, utilize a recurring billing platform to automate the process of collecting regular payments from your customers and free up your teams to focus on more pressing matters.
When deciding on which software to use, consider the needs of your business carefully: how many transactions are you likely to be processing each month, for example? Will you accept international payments and therefore require support for multiple currencies? Do you require a high level of customization in order to create bespoke payment plans? There are many automated billing platforms options available, and several of these offer free plans.
Define the user experience
The main draw of a recurring billing cycle for customers is convenience; and that’s why it’s crucially important to offer a seamless and straightforward user experience to allow your customers to create and manage their subscription packages with ease: an obstacle-free UX that enables customers to self-serve will maximize acquisition and retention rates, while a clunky or confusing one will have your customers looking for the ‘cancel’ option.
A key part of the UX, of course, is the checkout process. To enable customers to sign up for a subscription plan and input their payment details, your checkout should be clean, simple, and free of distractions: this is particularly important for mobile users, where cart abandonment rates are around 86% on average. Check out this guide from Adyen on optimizing your checkout to boost conversion rates and reduce abandonment.
Use dunning to reduce failed payments
Of course, when you set up a recurring payment system, one of the risks you face is a glut of failed payments due to factors such as expired payment methods, incorrect payment details, funding issues, and so on. This can have a serious impact on your cash flow if not managed properly, so you need to insert a process whereby you can recover missed or failed payments and keep your payment failure rates as low as possible.
This is where the practice known as dunning comes in. But what is dunning? Well, it’s simply a process in which businesses attempt to recoup lost revenue by recovering missed payments. Fortunately, most modern subscription management systems have automated dunning procedures built in, meaning they’ll automatically retry failed payments, send automated payment reminders, and even allow you to obtain up-to-date payment information directly from credit card card providers.
Recurring transactions are a great tool for making sure that your business has enough cash flow to run smoothly. They can also help you budget for expenses and perform more accurate financial forecasting. There are many benefits to setting up recurring transactions, and it can be easy to do once you understand what a recurring transaction is and how it works.