Money Matters

What are recurring payments and should your business offer them?

Learn about recurring payments, how they work, pros and cons of using them, and decide whether they're right for your business.

Recurring payments are on the rise, and they provide both businesses and consumers with a range of advantages.

The market was worth $13.2tn (£10.3tn) in 2023, and is expected to rise to $15.4tn (£12tn) in 2027, representing an increase of 17%, according to recent research,

This is partly driven by the growth of subscription services, which research published by Visa suggests, will grow to $1.5tn (£1.2tn) by 2025.

However, some businesses will find them more relevant and useful than others and managing correctly them successfully is essential.

In this article, we talk about recurring payments and what they are, how they work and what to consider if you’re thinking about using them for your business.

Here’s what we cover:

What are recurring payments?

Essentially, recurring payments are a type of payment that’s authorised by a customer and is then taken by a company automatically according to a predetermined schedule.

Sometimes, as is usually the case with gym or sports club memberships and magazine subscriptions, they’re fixed and the consumer will pay the same amount every time.

Subscriptions services such as Netflix fall into this category.

But over the past few years, companies offering everything from regular deliveries of socks, coffee and beauty products to organic fruit and vegetables have sprung up.

On the other hand, there are also irregular or variable recurring payments where the amount fluctuates in accordance with your usage.

These might include phone, water, electricity other utility bills.

Online payments companies such as Stripe and GoCardless provide you with the option for your business to provide recurring payments.

How do recurring payments work?

As a business, before you set up a payment collection system, you should ensure that this form of payment is right for your sector and business model.

If it is, then you’ll need to consider the right pricing model.

Is it flat rate or is it tiered?

In the latter case some customers might get a premium service or have greater access if they agree to pay more.

You’ll be familiar with this if, for instance, you pay more to avoid adverts with a streaming service such as Netflix or Spotify.

The various price options that you offer might also be based on your customers’ individual usage of your products and services.

You might also want to offer people something completely free – a try-before-you-buy option – before asking them to pay.

These payments are usually collected automatically from a customer’s bank account, through their payment cards or via a direct debit or standing order.

Offering customers a range of options for setting up these recurring payments will increase the chances of them choosing to make regular payments or setting up a subscription.

Either way, you’ll need a payment gateway.

This is a network that enables your customers to transfer funds to you. It’s essentially the online equivalent of a point-of-sale terminal used in a bricks and mortar store.

As well as checking your chosen payment gateway’s security credentials, you’ll also need to ensure that it’s easily integrated into your own e-commerce system.

It’s worth making sure that the payments provider can handle failed payments by a customer easily and quickly. This means that it alerts you to this problem and it can then try and make the payment again.

The risk of failed payments is another reason why the technology needs to be easily integrated into your own e-commerce system.

You don’t want to find yourself sending out products or giving access to services to customers who aren’t paying you for them.

Compliance is also essential, so check that what your payments provider gives you complies with all relevant regulations.

Another legal consideration is consumer consent. This should be clear and explicit in your communications.

Finally, as is the case with any supplier, it’s important to check fees and the quality of customer support.

Advantages of using recurring payments

A key advantage of this form of payment is that it means you receive a regular income stream.

Essentially, you know how much you’re getting and when the money will arrive in your business bank account.

This helps with financial planning and your longer-term business strategy.

Neither do you have to spend time and energy chasing payments with reminders, reissued invoices and statements.

And since customers don’t have to make payments or renew their subscription manually, recurring payments can increase customer retention.

Customers like the fact that they only have to input their payments details, be that card number or bank information, once.

Although many businesses offer a discount on a one-off annual payment – and this has advantages – regular, smaller payments help many customers with budgeting and don’t appear so intimidatingly pricey.

Disadvantages of using recurring payments

Recurring payments can often require your customers to jump through more hoops compared to one-off transactions.

The flipside of better cash flow for customers and regular income for your business is that unfortunately you have to wait longer for your money, rather than receiving it straight away in one lump sum.

Inevitably, the rapid growth of subscription services has led to some adverse comment with consumer champions and others warning that customers can easily forget about these regular outgoings after they’ve stopped using the service.

Receiving the same amount of money each month might have the merit of predictability but, on the other hand, it can make it harder to raise prices.

Meanwhile, offering new customers lower better deals can naturally upset your existing regular payment customers who realise they’re paying more each month than this new, introductory offer.

New technologies such as dynamic pricing, where prices can change on a regular basis depending on supply and demand, is difficult to implement with regular payments.

The same is true of value-based pricing, where you use data to discover how much customers are really willing to pay for the value that your products and services provide.

It’s worth adding as well that in some situations, setting up regular billing can require extra compliance because of the need to hold more customer data than is the case with one-off payments.

Manual checks as well as technology

Enoch Omololu is a personal finance expert, analyst, and founder of Savvy New Canadians, a personal finance education platform in Canada.

He warns of the risk of technology failures or incorrectly processed payments.

“I’ll never forget the time when a client of mine switched banks and forgot to update the account number for their recurring tax payments,” he says.

“When tax time came around, they realised the payments had been getting rejected for months without their knowledge.

“It was a scramble to get caught up without penalties. Moments like those remind me that as helpful as recurring payments can be, they still require vigilant monitoring.”

His advice is to take advantage of automation to streamline payments but also have backup plans in place in case there are hiccups.

Enoch adds: “Review bank statements regularly to catch any errors quickly.

“Set calendar reminders to periodically verify payments are processing as expected.

“Have someone double-check changes any time banking details are updated. And don’t be afraid to pick up the phone and speak to a real person if something seems off.”

Should your business offer recurring payments?

To answer this question, you need to start by looking at the nature of your business.

Are you offering a service that customers are likely to come back and use on a regular basis?

As noted above, gyms and clubs are an obvious example here, as are something such as cleaning services.

Similarly, if you offer a product rather than a service, does it have a relatively low price point and is it one that people might use on a regular basis?

Razors, food, cut flowers, wine and bath products are typical examples. Items with greater longevity and a higher price point such as jewellery, furniture, suits or computers are less likely to work.

If you think recurring billing would be right for the type of product or service that you provide, you should look at your cash flow and financial projections, and calculate what effect it might have on them.

You’ll need to consider the fluctuating cost of raw materials – will the price commitment that these payments require prevent you from raising prices to cover costs when you need to?

You can use your accounting software to model some of these projections.

How recurring payments can help when planning for business growth

Finn Wheatley is a financial expert and risk analyst at The Small Business Blog. He says: “In my early days pioneering data consultancies, reliable cash flow was tough to come by with one-off projects.

“That’s what drew me to experimenting with subscription packages for services like custom data analysis and training.”

He adds: “On the plus side, recurring payments lock in predictable, auto-renewing revenue streams that make growth planning far easier.

“My businesses saw 20 to 30% revenue lifts simply by migrating clients to annual or monthly subscriptions. However, my companies lost some clients who felt locked into unwieldy contracts despite occasional usage declines.”

Finn, who has worked in the City of London and for the UK government to develop its data science capability, concludes: “Good communication is essential.

“I found empowering clients to shift or pause subscriptions averted churn. Starting with short one to three-month trials also ensures initial fit while building trust for longer commitments.”

Final thoughts on recurring payments

Recurring payments can be a great option for your business, especially as they can help you to lock in predictable cash flow.

But, as with any business decision, before you think of going down this route take advice.

This means speaking to your accountant, if you have one, and your marketing and production teams if you have them.

It’s also worth doing some research to see if other businesses operating in the same sector with ranges retailing at a similar price point are offering payments in this way too.

Having taken advice, carried out your competitor analysis research and identified a good payments technology partner, you might want to pilot certain products and services on a recurring payments basis and then review the situation after a few months.

This will provide useful data and insights into sales volumes, profitability and customer sentiment, and help you to decide whether recurring payments are right for your business.