Recurring payments have worked their way into thousands of popular subscription services. While subscription models are nothing new, e-commerce has driven innovation in new directions. Integrating online payments in customer-friendly ways is now a top priority for many firms. Video and music streaming giants popularized the trend and now companies are increasingly using these lessons to sell consumer goods. Just how seamless a payment provider integration often means the difference between happy customers or cancelations. Here’s a brief overview of recurring payments and ways to capitalize on the trend.
Recurring payment subscription is a business model in which cardholders pay automatically at regular intervals for a product or service. According to Mercator Advisory Group, e-commerce, bill paying, as well as subscription models are factors underlying rapid payments development. In this model, customers give their permission to automatically withdraw funds from a bank account or credit card.
A 2018 report from the consulting firm McKinsey found that the subscription market grew 100% per year for the previous five years. Nearly half of all subscriptions are video or music streaming services. Among the most famous examples of companies that use recurring payments model to fuel their growth is Amazon, whose revenue rose from $7 billion to $10 billion in recurring billing after launching its service Amazon Prime. Other examples of such global players are streaming services Netflix and Spotify. In the second quarter of 2019, Netflix reached a record-breaking 150 million paid subscribers. Spotify meanwhile, has 108 million.
Currently, you can split recurrent payments models into two types. Curated choice takes user interests to pitch personalized content while replenishment fills routine items at specific intervals.
- Curation — This is the most popular according to the McKinsey survey. What attracts customers in this category are the positive emotions linked to receiving exotic or otherwise personalized items. For example, Try the World.
- Replenishment — This model helps to optimize shopping for routine items such as razors, like Dollar Shave Club.
- VIP club — Members can access premium products, discounts or free delivery otherwise not available to regular customers. Amazon’s Subscribe and Save is among the most popular.
Managing recurring subscription billing and existing systems
In many services, customers can adjust their recurring payments schedule according to their needs. When a customer pays a set amount of money for the product or service, this is a fixed subscription. This payment schedule is widely used by different kinds of streaming services when a fixed membership fee is charged from the customer’s bank account regularly. There is also a variable amount model in which the price that the customer pays is not stable. You can see this schedule applied when your account is charged for utility bills which differ from month to month.
Benefits and challenges of recurring payments
Among the most obvious challenges is convenience and comfort of use for both customers and merchants. Customers using this method often stay longer than traditional one-off transactions. This gives the company a much better idea of revenue and makes supply ordering much easier. In this way, the company can keep more customers. This method can also lower the cost of billing, help to receive payments without delays and reminders.
For consumers, this billing method allows them to save time on entering card data each time when purchasing goods. Subscription models can also reduce the anxiety and indecision that some consumers feel as they try to make a perfect purchase. Moreover, subscription packages can cause more positive emotions in comparison to traditional shopping because of the less effort and time spent on choosing the right product and element of surprise.
Besides some obvious advantages, some caution should be exercised with a recurring payments plan. First of all, it is more difficult and time-consuming to troubleshoot some potential issues or errors. For companies, there are still some administrative costs left. Moreover, according to the McKinsey report, churn rates of such businesses as subscription boxes are quite high and companies should have a unique competitive advantage to attract buyers.
Recurring Payments Perspectives
Recurring payment methods besides some resistance is becoming widely accepted and used. According to the Gocardless survey, which surveyed 4,000 people, 52% of respondents preferred direct debit. In the UK and Germany, the number of respondents enthusiastic about direct debit was even higher reaching more than 60%. Other recent survey conducted on almost 12,800 participants from different countries showed that Canada is the leading nation willing to make automatic payments with credit cards. 27% of the respondents declared that they are likely to use it to pay for offline subscriptions whereas 26% for bills and subscriptions online. The survey found similar results for American consumers. In the US alone the recurring billing method is expected to increase to $473 billion by 2021.
Blockchain as a decentralized recurring payments system — a future of recurring payments
First services offering recurring payments using cryptocurrency were Coinbase and PumaPay. In August 2019 Monarch announced their decentralized blockchain-based recurring payment system. The advantage of this subscription business model includes better security in comparison to centralized billing systems. Recurring billing smart contracts is what allows users to hold their own private keys and seed. The system sends the amounts of cryptocurrency for the particular wallet address according to the particular billing plan.
The question arises whether this system will be the future of recurring payments. What we know for sure is that it opens wide perspectives for businesses with its improved security and possibilities to create personalized subscription plans.
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