The market for subscription payments, a type of recurring billing, is expected to grow to nearly $8 million by 2025. Given the growth of this business model, it’s worth considering whether your business should offer recurring payments and subscriptions to customers.

We’ll cover what you need to know about recurring billing and payments, including how they work, the different types of recurring payments, and how to start accepting them.

What’s in this article?

• What is a recurring payment?
  
• Types of recurring payments
  
• How do recurring payments work?
  
• What types of businesses use recurring payments?
  
• Benefits of recurring payments for small businesses
  
• How Stripe Billing enables businesses with recurring billing software
  
• Accepting recurring bill payments
  

What is a recurring payment?

Recurring payment is a billing model that allows businesses to charge customers repeatedly for products or services at predefined intervals. Recurring payment intervals can be weekly, monthly, annually, or on a customized timeframe.

Types of recurring payments

While all recurring payments store a customer’s payment method and obtain prior authorization from the customer to charge that method on a recurring basis, the payment-structure details can vary. There are three types of recurring payments:

Fixed

Also known as “regular recurring billing,” fixed payment structures charge the same amount every time the payment recurs; for example, a magazine subscription that costs $24.99 every month.

Variable

Also known as “irregular recurring billing,” variable payment structures charge amounts that can vary from payment to payment, usually based on usage. Within variable billing, there are two categories:

• Metered billing
  Metered billing involves charging customers a variable amount based on how much of a service they use during a billing cycle. Most consumers are familiar with some of the more widely known metered billing examples, such as mobile phones that charge per number of minutes used each month and utility bills that charge based on the amount of energy a customer uses.

• Quantity-based billing
  Quantity-based billing depends on the quantity of a good or service the customer uses. Unlike metered billing, which charges for usage that has already occurred, quantity-based billing typically charges the customer for a previously agreed-upon quantity. For example, a software subscription that charges per number of users on an account.

Hybrid

Hybrid billing is a combination of fixed and variable billing. This payment structure charges a percentage or additional fee on anything above a set threshold. For example, an internet service provider uses hybrid billing when it charges $10 per gigabyte after a monthly limit is exceeded.

How do recurring payments work?

Here is a summary of how recurring payments work:

• Customer signup and payment information collection
  During the signup process, customers provide their payment information (such as credit card details or bank account information) and authorize the business to charge them for future transactions, according to the agreed billing timeline. This consent is necessary for complying with regulations and maintaining trust with customers.

• Secure storage of payment information
  The business securely stores the customer’s payment information, often using a payment processing provider like Stripe. These providers use tokenization and encryption to ensure sensitive data is protected and stored in compliance with industry standards like the Payment Card Industry Data Security Standard (PCI DSS).

• Payment processing at predefined intervals
  Based on the agreed billing timeline—weekly, monthly, or annually—the business automatically charges the customer’s stored payment method. The payment processing provider handles the transaction, including verifying the payment details, checking for sufficient funds, and transferring the funds from the customer’s account to the business’s account.

• Confirmation and notifications
  After a successful transaction, the customer receives a confirmation (usually via email) detailing the payment amount, date, and any other relevant information. Businesses may also send proactive notifications before upcoming charges, payment failures, or payment method expirations to maintain transparency and customer satisfaction.

• Updating payment information and managing subscriptions
  Customers should have the option to update their payment information or make changes to their subscription plan, typically through a customer portal. This flexibility allows customers to manage their preferences and helps businesses maintain accurate billing information, reducing the risk of failed payments.

• Handling failed payments and disputes
  Sometimes, recurring payments may fail due to expired payment methods, insufficient funds, or other issues. Businesses need processes in place to handle these situations, which may include notifying customers of the failure, retrying the transaction, or providing customers with a grace period to update their information. Below, we’ll discuss how Stripe Billing automates many of the processes for preventing and responding to failed payments.

For a deeper explanation of how to accept recurring payments and best practices for recurring payment models, read our guide here.

What types of businesses use recurring payments?

Recurring billing is a popular payment model for any business that bills customers on a recurring basis for ongoing access to products and services. It is most commonly used by subscription businesses, including:

• Subscription-based businesses: Companies offering subscription services—such as streaming platforms, software-as-a-service (SaaS) providers, and membership-based platforms—can generate predictable revenue streams and improve customer retention using recurring billing.

• Gyms and fitness centers: Monthly or annual membership fees enable gyms and fitness centers to maintain a steady cash flow while providing customers with ongoing access to facilities and services.

• Digital and print newspapers and magazines: Subscription-based media outlets, such as newspapers and magazines, can generate consistent revenue by providing customers with regular access to content through recurring payments.

• Utility and telecom companies: Businesses that provide essential services—such as electricity, water, gas, internet, and mobile phone services—are a natural fit for a recurring billing model, since customers typically require these services continuously.

• Online courses and educational platforms: E-learning providers that offer ongoing access to courses, webinars, or learning materials can benefit from a recurring payment model, providing customers with continuous access to updated content.

• Managed services providers (MSPs): MSPs that offer IT, security, or infrastructure services to businesses work well within a recurring payment model, as they provide ongoing support and maintenance.

• Box subscription services: Subscription-based businesses that deliver curated boxes of products, such as meal kits, beauty products, or clothing, often use recurring billing models that build consistent revenue and better inventory management.

• Nonprofit organizations: For charitable organizations, a recurring donation model can provide donors with an easy way to contribute regularly and ensure a predictable income stream for the organization.

• Cloud storage providers: Companies offering cloud storage services can benefit from a recurring payment model, as customers require ongoing access to their stored files and data.

• Freelancers and consultants: Professionals who provide ongoing services, such as marketing, graphic design, or business consulting, can establish retainer agreements with their clients that operate using a recurring billing model.

Due to the benefits of recurring payments and growing consumer adoption of subscription-based services and products, many businesses whose core offering doesn’t naturally fit with recurring payments are launching new initiatives to generate this high-retention type of revenue stream. For example, a marketing consultancy might start a subscription-based newsletter that offers expert tips each week to subscribers who pay a recurring fee.

Benefits of recurring payments for small businesses

There are many benefits of recurring billing:

• Timely customer payments
  Most recurring payments happen on a predictable fixed schedule; for example, on the fifth day of every month or on January 1 each year. The automated nature of recurring payments makes it less likely that payments will be missed or late, which benefits both the business and its customers.

• Fewer failed payments
  Recurring payment software like Stripe Billing helps prevent failed payments through tactics like Smart Retries and preemptively prompting customers to update payment methods that are approaching their expiration date.

• Better customer experience
  Predictability and automated recurring payments result in a better, more seamless customer experience, while also benefiting the business.

• Predictable cash flow
  It’s helpful for businesses to know how much revenue will be coming in at any point in time. While it’s hard to precisely estimate the number of failed payments and subscription cancellations during any given payment cycle, recurring billing provides at least a rough approximation of cash flow, in comparison to one-off payment models.

• Increased customer retention
  While recurring billing doesn’t ensure that customers won’t cancel their subscriptions, it can increase retention. Unlike customers that make nonautomated one-off purchases, recurring billing customers don’t need to take action to continue payments.

• Automated, efficient processing
  Because businesses can usually automate recurring billing instead of manually processing payments, it can save internal time and resources.

• Lower billing costs
  Because businesses spend less time processing automated recurring payments, recurring billing brings in revenue that is cheaper to generate than revenue from manually processed payments.

Aside from these benefits, there are still challenges and potential extra administrative tasks that come with recurring billing. For instance, stored payment information will routinely need updating as cards expire, although this task can be simplified by sending automatic email reminders to customers when their payment method on file is close to expiring.

How Stripe Billing enables businesses with recurring billing software

Stripe Billing is an end-to-end billing solution for businesses that want to accept recurring payments or conduct invoice-based billing globally. When choosing recurring billing software, you’ll ideally want a product that has the following features, which are offered with Stripe Billing:

• Easy integration
  If your billing software doesn’t communicate seamlessly with your existing tech stack, then the friction of using it could offset any potential benefits. Stripe Billing is integrated with Stripe Payments, and everything is accessible through your Dashboard.

• Flexible billing models
  Even if you don’t currently use dynamic billing models—or your business only uses one billing model—setting up billing software with broader functionality will help you test new directions or accommodate future business growth. You’ll want flexible billing software that supports everything from per-seat pricing to metered billing.

• Support for coupons, free trials, prorations, add-ons, and overages
  Although a primary benefit of recurring billing is its predictability, not every payment or customer is the same. Make sure your billing software accommodates the deviations from normal billing that you’re likely to encounter.

• Churn-minimizing support
  Stripe Billing takes a comprehensive approach to preventing and solving failed billing, using Smart Retries, automated failed-payment emails, and an automatic card updater. In 2021, Stripe Billing helped businesses recover 38% of failed payments on average. Recurring billing is supposed to decrease the amount of time your team spends processing payments. If your billing software doesn’t address churn and failed payments, then you risk spending any extra time you saved troubleshooting these issues.

Accepting recurring bill payments

To accept recurring payments from customers, the first thing you need to do is get set up with a payment processing provider like Stripe. You can register for a Stripe account here.

Once you’re set up with Stripe, you can quickly start accepting recurring payments by using Stripe Invoicing to collect payments from existing customers or creating a payment link to promote subscriptions.