Recurring billing happens when a merchant automatically charges a customer for goods or services on a prearranged schedule. This requires the merchant to obtain the customer’s information and permission, after which recurring charges will be made to the customer’s account without further permissions needed.
Any good or service that a customer subscribes to with regularly scheduled payments is a good candidate for recurring billing. Examples include cable bills, cell phone bills, gym membership fees, utility bills, and magazine subscriptions.
Key Takeaways
- Recurring billing occurs when a business automatically deducts a customer’s payment on a regularly scheduled basis.
- Any good or service that a customer subscribes to with regularly scheduled payments might be a good candidate for recurring billing.
- Business providers may require recurring billing and some providers may offer discounts when recurring billing is used.
- Recurring billing is advantageous for business providers as it reduces account receivable risks.
- For customers, recurring billing saves time as they need to sign up and provide their payment information only once.
Understanding Recurring Billing
Recurring billing offers the benefit of convenience. Instead of having to provide billing information repeatedly for routine charges, the customer authorizes the merchant to keep payment details on file. The merchant then charges the designated account each month that the service is in effect or each time the agreed-upon goods or services are delivered.
Businesses typically decide on payment options. Some require checking or savings accounts, while others accept payments from credit card accounts.
Example of Recurring Billing
Consider a customer and a pet store. The customer sets up an order with an online pet store to have three bags of dog food delivered every three months. Authorizing recurring billing allows this purchase to happen automatically on a regular three-month schedule with a charge to a designated credit card. Similar examples include electric bills, phone bills, and Internet services. Many companies offer a small monthly discount to customers who sign up for recurring billing, which helps lower risks of missed payments.
Types of Recurring Billing
Fixed Recurring Billing
In fixed recurring billing, the same amount is collected from the customer in every payment cycle. Businesses that provide services for a fixed price typically use this model. Examples include gym memberships and newspaper subscriptions. This model provides stable and continuous revenue for businesses.
Variable Recurring Billing
In variable recurring billing, the amount collected from the customer might change in every payment cycle. Depending on the customer’s usage of the product, a new, dynamic bill is created for each cycle.
Usage-based billing is a type of variable recurring billing where charges are based on service usage. Utility bills are a common example.
Quantity-based billing involves charging customers based on an agreed quantity, such as volume-based cloud storage services.
Advantages and Disadvantages of Recurring Billing
Advantages
- Many services only allow customers to sign up if they agree to recurring billing, aiding customer retention.
- Ensures prompt payment from customers, helping with cash flow.
- Lowers billing and collection costs and automates a portion of accounts receivable.
- Saves customers time as they don’t have to manually process payments each cycle.
Disadvantages
- Correcting billing errors can be troublesome as charges may go through before an error is noticed.
- Customers might overlook expenses and pay for services they no longer require.
- Scams are more easily conducted on vulnerable individuals like seniors.
- Services can be interrupted if a credit card payment is declined.
Recurring Billing FAQs
How Do You Set Up a Recurring Payment on PayPal?
With PayPal Recurring Payments, merchants can regularly bill their customers for goods or services. You must have a PayPal Business account and follow the instructions on PayPal’s website for setting up subscription plans.
How Do You Cancel a Recurring Payment on PayPal?
Customers can cancel recurring payments by logging into their PayPal account, navigating to “Settings” -> “Payments” -> “Manage pre-approved payments,” and following the instructions to cancel.
How Do You Cancel a Recurring Payment on a Credit Card?
To stop recurring payments on a credit card, contact the service provider directly, usually well before the next scheduled payment.
How Do You Cancel a Recurring Payment on a Debit Card?
To stop automatic debits, notify the company and your financial institution that you’ve revoked authorization. A “stop payment order” can be issued to further ensure payments are halted.
Related Terms: automatic bill payment, accounts receivable, usage-based billing, subscription services.
