What Is Recurring Billing? Pros, Cons, and Examples

Today, we’re going back to basics. 

It seems that the stronger technology gets, the more we collectively prioritize convenience — and recurring billing is perhaps the epitome of our shift toward convenience. By establishing an automatic and ongoing payment dynamic, recurring billing eliminates the hassle of submitting a payment (for purchasers) and chasing said payment (for sellers).

‍If you’re a subscription business, having a grasp of the recurring payment model is a stellar starting point for scaling your business. Though it may seem like a simple concept, there’s a lot to break down — especially with the many B2B-focused recurring billing apps along with a host of options within the Shopify ecosystem alone. We’re exploring everything you need to know about recurring billing, including its definition, a comparison with subscription billing, advantages, and some examples.

What is Recurring Billing?

Recurring billing is a prearranged payment model where a business repeatedly collects payment from customers at set times in exchange for products or services. This could happen weekly, monthly, annually, or at a custom-set interval. 

The system starts with the consumer granting permission to be charged regularly and providing their information — and from there, the vendor doesn’t need permission. The cycle then repeats indefinitely until the customer either takes away permission to be repeatedly charged (like choosing to pause) or cancels altogether (also known as churning).

The idea is that consumers can easily “set and forget” their payment, making their lives simpler. 

Businesses benefit from this model because of the reliable revenue stream and will also often offer a discount as an incentive for customers to opt in, but we’ll do a deeper dive into the pros and cons of the business model in a bit. 

So are Subscriptions “Recurring Billing”?

Sort of! They're definitely intrinsically linked.

If these two concepts seem really similar, that’s because they are. The terms are often used interchangeably and even combined as one due to the fact that they are very closely related. Subscription businesses can and sometimes do utilize recurring payments, but it’s the simplest form of the system.  

The option for a free or reduced-price trial, different membership tiers, and the ability to change between tiers are all scenarios that would specifically fall under subscription billing rather than recurring billing. But make no mistake — subscription billing exists because of recurring billing, and the two are very much connected.  

In other words: subscription billing is more fluid and complex, whereas recurring billing is a straightforward model.

Recurring Billing Examples 

Believe it or not, recurring billing is all around you. It’s highly likely that you’ve interacted with this payment model within the last month (or even the last day), and that’s because there are a variety of businesses that use and benefit from these repeated payments. 

Here are some examples:  

• 📦 eCommerce DTC Subscriptions
• 🏋🏼 Gym Memberships
• 💻 Internet and Cable
• 💡 Utilities 
• 🗞 Magazine & Newspaper Subscriptions 
• 🖥  Streaming Services (Like Netflix)
• ⌨️ SaaS Companies

Specifically from an eCommerce standpoint, recurring billing unlocks the ability for brands to foster long-lasting relationships with consumers, since customers are guaranteed to interact with your brand at these preset intervals. 

Unlike paying your utility bill, which is necessary, contingent on usage, and has nothing to do with your relationship with the electric company, encouraging subscribers to keep paying for your product each month directly correlates with how they feel about your brand as a whole.

Types of Recurring Billing

There are two main types of recurring billing with fairly self-explanatory names: 

Fixed

A fixed recurring payment is a model where the customer is charged the exact same amount every time at the agreed-upon interval. Streaming services, gym memberships, and newspaper subscriptions would all be examples of fixed billing. 

Variable

Variable recurring payments are contingent on the consumer’s actions or decisions and can fluctuate based on the services provided. This means that each bill could wind up looking different. 

Within variable billing, there are two different types: 

‍Metered Billing

Metered billing (also known as usage-based billing) tracks a customer’s usage to then create a relevant bill. A utility bill is a great example of this. 

‍Quantity-based Billing

Quantity-based billing revolves around paying for an agreed-upon quantity which can increase or decrease based on the needs of the users. For example, paying up to increase Cloud storage space would qualify as quantity-based billing, as would SaaS products that operate on a certain number of licenses or seats. 

Advantages and Drawbacks

So why might a business opt to implement recurring billing, and perhaps even a bigger question, why would a customer choose to participate? 

Let’s discuss some advantages and disadvantages associated with recurring billing. 

‍Advantages for Businesses

• Reliable revenue stream. As we’ve discussed, this is the biggest selling point for vendors and companies. The ability to generate predictable recurring revenue is not only a security blanket during difficult economic times, but it also enables companies to effectively plan ahead — whether that’s related to hiring, securing funding, or managing inventory.
• Payments are on time, and there’s no need to chase after unpaid customers. Relatedly, because this model automates payments, business owners don’t have to deal with unpaid clients nor do they have to spend time and resources trying to chase down late payers. 
• Ability to use savings to attract new customers with discounts. Because businesses can cut back on costs associated with chasing down payments — and because recurring payments typically bring in more money in the long run, businesses can painlessly provide customers with discounts for signing up. 

‍Disadvantages for Businesses

• Possibility for dissatisfied customers. If there’s an issue with billing and the customer doesn’t notice it right away, their frustration may be amplified by the fact that they’ve been charged incorrectly multiple times. Plus, rectifying this mistake is more complex than a one-time payment. 
• Customers can churn. Since businesses depend on the customers they already have, if a customer decides to cancel, that churn can cause a hit to profits. 
• Risk of failed payments. Up to 48% of subscription churn has been linked to failed payments. If a payment fails and there’s no proper system in place to flag this to clients, then the customer churns.

Advantages for Customers

• Convenience. To put it plainly, recurring billing is easy. Customers can get the services or products they need without having to think about payment. 
• Savings & Discounts. The ability to save money on each recurring payment is a big draw for consumers. 

Disadvantages for Customers

• Difficulty budgeting. If customers participate in multiple subscriptions, it can be tougher to stay on top of their finances since they’re charged automatically. Customers may be less aware of how much they’re spending. Plus, if a customer stops using the service or product, they may forget to cancel and accidentally keep paying the bill. 
• Risk payment failure. Similar to the business end of things, if a payment fails and the customer isn’t properly notified, they may lose access to the product or service without realizing. 
• Wrong billing can be tougher to catch and rectify. Since billing happens automatically, it’s easy to miss an error — and it’s tougher to correct if the error has impacted multiple payments over time. 

Key Takeaways

Recurring billing is truly all around us. It’s increasingly grown in popularity because of the perks it provides for both consumers and businesses. As an easy, convenient, and cost-effective route for everyone, it’s not surprising that our lives are now dominated by this payment model. 

If you’re looking to bring recurring billing to the next level with a dynamic subscription offering, Smartrr is the perfect partner. We utilize our innate understanding of the recurring payment model and elevate it with tailored subscription offerings, LTV touchpoints, and a transformative brand experience to provide significant value to your end consumer. 

‍Send us a note to learn more.