According to Digital Magazine, by 2022, more than half of all software revenue will come from subscription models. However, recurring payments are quickly gaining popularity in industries other than software, too. From airlines to car manufacturers to healthcare providers, companies in almost every sector are turning to recurring revenue models — and seeing great results.
If you're thinking of embracing the recurring revenue model as well, you may be wondering: what are the pros and cons of recurring payments? Keep on reading to find out!
Pros of Recurring Payments
The recurring revenue model has a lot of advantages. Below are just some of them.
Research shows that one of the main reasons businesses switch to recurring revenue models is to generate more income.
That makes sense. With recurring billing, you don't have to rely on intermittent customer orders. Instead, you charge customers automatically and repeatedly, which multiplies your profit and builds long-term profitability.
In addition to increasing top-line growth, recurring revenue also gives you a baseline. In other words, it guarantees a set amount of income each month.
Let's say you run a business that generates $10 million in sales, 60% of which is recurring. In that case, instead of starting from zero, you'll begin each year knowing that you'll make at least $6 million.
The above provides a high degree of certainty, makes financial planning more straightforward, and helps alleviate stress.
Higher business valuation
John Warrillow, the author of the Value Builder System for businesses, says that embracing a recurring revenue model could increase a company's valuation by up to eight times(!) compared to companies that use transaction-based business models.
Businesses with recurring revenue models indicate stability and are less prone to insolvency, so they're naturally seen as safer bets by investors.
Enhanced customer experience
Recurring payments enhance the customer experience. With recurring billing, customers don't have to keep placing the same order over and over again — it's automatically done for them. This can save them a ton of time and is overall more convenient.
Improved customer loyalty
Businesses that use recurring revenue models look to build long-term relationships with their customers, not just make a sale. As such, interactions between the company and the consumer are more relational than transactional. Unsurprisingly, this can go a long way in helping foster customer loyalty.
The customer relationship's contractual nature in a recurring revenue business model allows you to track consumer behavior, engagement, and trends more easily.
As well as informing your marketing strategy, these insights may prove invaluable when it comes to refining your product or service offerings. By removing issues that your customers flag quicker, you will create a better product, attract new customers, and ensure that your existing customers stick around.
Reduced costs of sales
Recurring revenue models also decrease the long-term costs of sales. That's because when you acquire a transaction with a recurring revenue model, you're not getting a single-one off purchase. Instead, you're obtaining a customer over the long-term.
Moreover, these customers repeatedly buy from you without you having to bring them back via retargeting, which significantly lowers retention costs.
Cons of Recurring Payments
Recurring payments are not without their disadvantages. Here are some of the cons you may want to think about before adopting a recurring revenue model.
In a recurring revenue model, renewals are a crucial driver of profitability. If a customer chooses not to renew their subscription, the result will be depressed profits.
It comes as no surprise that maintaining customer engagement and customer retention are the main challenges cited by businesses with recurring revenue models.
Runaway success may not seem like a disadvantage to some, but if you can't handle an influx of business, you're not going to get very far.
From failed transactions to expired payment methods, recurring charges can be more complicated than a one-time cost. As such, you'll want to make sure you're working with a payment gateway provider that can satisfy your and your customers' needs.
Setting up Recurring Payments
The pros of recurring payments far outweigh the cons. Besides, one of the cons — the billing process — is easy to overcome with the right recurring payment gateway. If you'd like to do a bit more research into all the available options, we recently wrote a blog post on how to choose the best recurring payment system.
Want to cut to the chase? We may be biased, but we think that TillyPay is your best bet. Not only is TillyPay secure, easy to set up, and has superb customer service, it also allows you to receive recurring payments with a simple web link. If you like the sound of that, look at how our system works or check out our pricing.