What is recurring billing?

Recurring billing involves automatically generating and sending invoices on a regular schedule.

This method is used in subscription services, where you must collect payments consistently.

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What is recurring billing?

Recurring billing is a popular payment model that guarantees your business a regular revenue stream.

This ensures a predictable cash flow which is useful for future planning.

That said, implementing recurring billing can pose challenges.

In a recent survey, Ventana Research found that less than half of respondents were satisfied with their company’s subscription invoicing process, with 29% for respondents in accounting and finance roles.

The question is clear: How can financial leaders optimize their business’ recurring billing model?

In this article, we’ll explore what recurring billing is all about, its functions in practice, and how you can make it work for your business.

Recurring billing definition

Recurring billing is the ongoing process of charging customers at regular intervals.

Depending on the service agreement, this could be monthly, quarterly, or annually.

It’s often essential for subscription-based business models, where continuous service is provided in exchange for regular payments.

Types of recurring billing

There are two main types of recurring billing:

Fixed

Fixed or regular recurring billing is the process of creating and sending bills or invoices on a regularly scheduled cadence.

For example, a monthly bill from a movie streaming service like Netflix would be considered a fixed recurrence of billing because it arrives on the same day each month and typically carries the same balance defined by your service contract.

Variable

Variable or irregular recurring billing is when you have a process of billing or invoicing that occurs on an irregular or variable cadence.

An example of variable recurrence of billing would be when invoicing occurs on a basis that is not on a regular schedule and/or a recurring bill with varying balances based on usage.

Usage-based billing can be further broken down into two types: 

• Metered billing: This is based on how much a customer uses, such as in the case of a household electricity bill.
• Quantity-based billing: With this type of billing, you agree to a set usage limit in advance. For instance, cloud storage providers generally charge customers different amounts according to the data storage ceiling they select.

How does recurring billing work?

Here are the key steps to set up a recurring billing system for your business:

1. Establish payment conditions

To start off, you need to consider the type of recurring billing conditions that you’ll be using, whether it will be fixed or variable.

This will also include creating a subscription schedule and establishing promotional features such as a free trial are required.

2. Accept customer orders

This stage is when you issue quotes and invoices and accept customer orders.

You should include information about the payment schedule and options for canceling recurring payments when issuing customer invoices.

3. Process and collect payments

Most organizations collect customers’ payment details once during the initial checkout to complete payments.

These details can then be applied to every payment interval.

You should include a range of payment methods, such as credit cards, debit cards, and bank transfers.

The recurring billing system securely sends payment details to a payment gateway or processor.

The processor then contacts the customer’s bank or credit card company to validate the payment method and proceeds to authorize and process the transaction.

4. Invoice generation

You’ll need to generate an invoice to send out to the customer each time they’re due to be charged.

Plan the schedule carefully so the customer has time to raise any issues and clarify details before payment.

It’s a good practice to stay in regular contact with your customers after an invoice is generated, to reduce the risk of failed payment, for example, due to an expired payment method.

5. Monitor for customer retention

Businesses should ensure good recurring billing management, beyond just collecting payments every month.

Failed payments due to expired cards or insufficient funds that are left unaddressed can impact customer retention.

Your billing software should be set up to send notifications automatically to customers.

All account upgrades, downgrades, cancellations, or changes in billing information should be handled or updated easily.

There should be self-service options or options to contact customer support if a client has any issues.

You should also make sure that customers can access a simple subscription portal that enables them to adjust their subscription (such as downgrading to a cheaper payment plan), update their card details, and view their billing history.

This will allow customers to see the benefits of a recurring billing model.

Once the payment is processed, the next step is to track and record transaction data, enabling real-time reporting and analytics for accurate revenue recognition.

What business types are best suited for a recurring billing model?

Recurring billing is typically most suited for subscription services, as they inherently include a recurring balance that must be paid to uphold a continuation of service.

For another example, while not necessarily considered a subscription, utility services are also well-suited for recurring billing as they are essentially recurring subscriptions to public utilities.

Professional services such as accounting and legal services with retainer fees also use a recurring billing model.

Examples of recurring billing

• Subscription services: Netflix, Spotify, or through subscription apps in the Apple App Store.
• Utility bills: Electricity, gas, and water.
• Software services: Security software or AI tools that charge based on usage.
• Data services: Data center usage or cloud storage based on consumption.

What kind of pricing plans can use recurring billing?

Several different pricing models can be used with automated recurring billing.

Selecting the right one will depend on your business context.

Here are some of the most popular recurring billing pricing plans:

Flat-rate pricing

This is where customers are charged the same price at a regular interval, such as $15.99 every month.

Pricing is simple and easy to explain but doesn’t allow for much variety in your customer base.

Tiered pricing

To offer different product versions, you might want to use tiered pricing.

You might have a cheap tier at $5.99 monthly and a more expensive tier at $15.99 monthly.

This allows you to tailor your services for different types of clients, making it a popular option for SaaS companies.

Per-feature pricing

This is where you charge customers according to the number of features they use.

This means the recurring billing will fluctuate in price, even at regular intervals.

Customers will only pay for what they use, but implementing it can be complicated.

Per-user pricing

Rather than charging according to the features customers use, this charges according to how many users use the service.

For example, a small business can use the service for $25.99 a month, but a larger enterprise might have to pay the $49.99 monthly subscription.

Usage-based pricing

In this model, you’ll charge customers according to how much they use the service.

Utility companies often charge customers according to how much water or electricity they use, for example.

Minimum flat fee pricing

This is where you charge a minimum fee plus an extra amount based on usage.

Included units pricing

This pricing model allows customers to have a certain number of free units (referred to as “included units”).

An example is a recurring phone plan that includes 100 minutes of free calls.

Per-thousand pricing

Per-thousand pricing is when the service is charged on a per-thousand-unit basis.

An example of this is data services such as cloud storage or API.

Here businesses would charge per thousand gigabytes of data.

Customer-specific pricing

Customer-specific pricing involves tailoring prices according to the needs of the client, their usages and negotiated conditions.

 This can include special discounts or offers for loyal customers.

Is annual or monthly billing a better plan?

Both annual and monthly billing have advantages, meaning the best decision is driven by your specific business context.

Monthly billing has lower upfront costs for customers and increased flexibility, which can encourage new customers to sign up. It also ensures that you always receive a regular and predictable cash flow.

However, it can come with higher costs as you process payments monthly, while easier cancellation can lead to high churn rates.

Annual billing can bring lower administrative costs with an automated billing software, allowing businesses to offer discounts for annual subscriptions.

However, the higher initial costs can create a barrier for some customers to join and renew, impacting customer acquisition and retention.

Are recurring and subscription billing the same?

Subscriptions and recurring billing are often used interchangeably.

Both involve regular payments in exchange for ongoing services or products.

While all subscriptions involve recurring billing, not all recurring billing consists of a subscription.

This means that subscription billing can give customers the flexibility to shift between different tiers of payments when they are in the intervals between payments.

Advantages of recurring billing​​​​​​

Many businesses have chosen to use recurring billing due to its many benefits:

Predictable revenue stream

Unlike other businesses where revenue might fluctuate based on one-time sales, companies with recurring billing benefit from a steady income stream that allows for more accurate financial forecasting and planning.

This predictability is vital to helping businesses reinvest in product development, customer acquisition, and scaling efforts, ensuring long-term growth and stability.

Flexibility for customers

Whether monthly, quarterly or annually, the flexibility in making payments of recurring billing models can attract a broader customer base.

This makes your service more accessible and helps in retaining customers who might otherwise cancel due to financial constraints.

Flexibility for the business

In addition to giving customers flexibility, recurring billing allows you to adapt your pricing between service recurrences.

This means that you can effectively respond to changes in wholesale pricing, for instance.

More revenue growth opportunities

With a recurring billing model like tiered pricing, your business can boost revenue growth by incentivizing existing customers to upgrade to a higher tier.

This can scale your business faster than attracting new customers.

Streamlined revenue recognition process

Recurring billing makes revenue recognition easier with automated billing and timely invoicing.

Stronger customer relationships

Customers are encouraged to engage with your brand for longer when using a subscription plan, meaning you might see a boost in customer retention.

Disadvantages of recurring billing

While recurring billing offers many benefits, it also comes with several potential downsides that you should carefully manage:

Customers canceling subscriptions

Although subscription flexibility can improve customer satisfaction, it also means that you can lose out on payments when customers can cancel anytime, often without significant penalties.

As a result, your revenue can fluctuate unexpectedly, and makes it harder to determine the lifetime value of a customer.

Cash flow delays

Cash flow delays might happen when payments are distributed over time.

For instance, a business using a monthly subscription model receives smaller, incremental amounts throughout the year rather than as a single lump sum, which might lead to periods of temporary lower cash flow while waiting for each payment to arrive.

Complexity

Managing recurring billing can be complex, particularly for businesses offering varied pricing models.

Companies often have multiple subscription tiers, usage-based pricing, and other variables complicating the billing process.

Each customer might have a unique billing arrangement, including proration for mid-cycle upgrades or downgrades, discounts, and promotional offers.

Higher compliance challenges

Recurring billing systems require you to store customers’ card details over time, so companies often have to invest in strong data security measures to protect against breaches and ensure compliance.

Revenue leakage

Along with customers choosing to cancel subscriptions, recurring billing can struggle to be effective when customers’ credit cards expire or run out of funds between payments, causing revenue leakage.

How to solve the challenges of recurring billing

One of the biggest challenges of implementing recurring billing is the complexity of many subscription models and contract management.

Many subscription-based contracts often involve ensuring billing aligns with the agreed terms, handling renewals, and dealing with cancellations or modifications.

For instance, some customers may have negotiated special terms, such as extended payment periods or customized pricing, which must be accurately reflected in your billing system.

Additionally, handling cancellations can be complex, especially if early termination fees or other penalties are involved.

You will need clear, transparent policies and robust systems to manage contracts effectively and minimize the risk of errors or misunderstandings.

This is where billing software comes into its own when generating and sending invoices can be automated.

With the system, businesses can have visibility over their customer and transaction data within a single source of truth.

This software also integrates seamlessly with other business platforms, such as your CRM and ERP, to guarantee the data is always accurate in real-time.

When any potential problems with failed or missed payments occur, the system can notify stakeholders automatically, helping your team to follow up with regular customer support, and increase customer satisfaction.

What is recurring billing software?

Recurring billing software or recurring subscription billing software is any system—normally modules of accounting, payment, or billing software—that automates the creation and deployment of bills and invoices on a regular or irregular recurring basis.

A great example of subscription billing software is Sage Intacct.

This includes 300+ options for recurring billing, including usage-based billing, rating, variable, fixed price, and services.

Let’s say you want to add a new subscription to Salesforce.

With Sage Intacct, as soon as you input the customer data, it automatically triggers recurring billing while also updating your records to account for the expected revenue, regardless of the exact billing or pricing terms.

Sage Intacct is designed to connect with various payment gateways so that your accounting records are automatically updated when card payments are charged.

What’s more, you can use it to simplify the renewals process, which means your accounts staff don’t need to spend hours on manual data entry.

How to choose the right recurring billing system for your SaaS company

We built a checklist for you to use with 100+ criteria to guide your decision:

The Ultimate Checklist for Choosing Subscription Billing Software

Here are a few of the main points to consider:

Subscription management

Billing and pricing types supported; integrations with payment gateways and other customer-focused platforms such as CRMs; revenue forecasting tools.

Process flexibility

Support for different compliance environments; accrual or cash basis accounting options; customizable workflows.

Analytics tools

Variety of reporting options, including dashboards and visualization tools; ability to categorize transactions by customer, contract, or location; spend management insights.

Cloud architecture

On-demand scalability; self-service reporting; automatic software updates.

How to deploy a recurring billing solution for your SaaS company

We created a brief video for the factors to consider in deploying a recurring, or usage, billing solution: