What exactly are recurring payments?
Let’s say you run a business which offers a service that people have demand for on a regular or periodic basis. You’re fine with receiving their payments for your products and services, whether it’s cash handed over the counter or via electronic transfers. But you sometimes wish that you could make the whole payment process smoother, perhaps a bit more manageable. You sense that customers get wary of constant visits to your shop or online store to get more of your service when it runs out; they won’t always remember to do this, and sending reminders to them beforehand (if you can afford to do so) is an extra burden to you. And, if they forget to come back for more of your product, they might as well forget about your business totally, and move on to some other vendor.
Isn’t there a way to sidestep this problem of customer fatigue over repeated purchases, and hold on to them for much longer?
Businesses all over the world are turning to the recurring payments model because it makes payments easier for their customers; by extension, it also makes it easier for these businesses to manage the process, and yes, keep their customers.
Here’s what recurring payments are about
The recurring payments system – also called subscription payments – is a system in which a customer pays for his use of a service on a periodic basis (say, weekly, monthly or annually). This differs from the more widely used pay-as-you-go system, in which people pay for the bit of product or service they purchase at a particular moment (e.g. you buy a mobile phone and pay for it as a single product).
A well-known example of the recurring payment system in Nigeria is the billing system used by cable television companies. People pay a fixed amount per month for viewing cable TV content on their television sets. You don’t have to make a huge one-off payment for the service (which most people wouldn’t be able to afford) or buy the service every single day. A single payment covers your use of the service for a stipulated length of time, typically a month. Before the period ends, you renew your subscription by making another payment for the coming period.
But recurring payments aren’t just for cable TV companies alone. The system was first used by newspapers and magazines. Today, it’s used by a wide range of businesses: internet service providers, software providers, mobile network operators, pharmaceuticals, and even laundry startups. Membership of certain organizations (such as labor groups) is also maintained on a subscription basis.
In fact, the number and variety of businesses adopting the subscription payment model are growing rapidly. The rise of eCommerce in Nigeria has opened up new opportunities for businesses on this front; they can now offer automated periodic subscriptions to their customers and have them make their recurring payments online. Whether you sell baby diapers, business consultancy or nursing services, you can integrate the subscription system into your business to make payments more convenient. PayU, an online payment service provider who asked us to write this article, is helping businesses manage their customers’ subscription payments when
accepting payments online.
How recurrent payment works
Customers’ payments for services they use over a given time period can be made via direct deductions from their bank accounts, or from their e-wallets if they have one. These deductions might be initiated directly by the customer, or automated in such a manner that transfers are made to the service provider (the business selling the product or service) without the customer’s intervention. Regardless of the approach, businesses can only successfully implement the subscription model if their customers are satisfied with it.
Subscription model types that could suit your business
The type of subscription system you adopt depends on the sort of service you render, and how you choose to manage your customers’ payments. Here, we’ll take a look at three commonly used subscription payment systems you can run with.
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Limited use subscriptions
Customers pay for the use of a limited number of products or services periodically. For example, a monthly subscription for limited data bundles, or a single payment for a specific number of issues of a magazine supplied to the subscriber in a month.
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Unlimited use subscriptions
Cable TV subscriptions are an example of this. People who pay for, say, a month’s worth of viewing can watch as much cable TV as they like, as long as the period subscribed for lasts.
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Basic access subscriptions
This sort of subscription gives customers access to some basic products or services, but they still have to make extra individual payments for other products that might not be covered by the subscription payment package.
What your business could gain from subscription payments
One good thing about recurrent or subscription payments is that it makes your revenue stream more stable and reliable. While the pay-as-you-go system allows customers to switch quite swiftly between different brands, the subscription model keeps them tied down to a single service provider – the one which offers the subscription. They have an obligation to use your product over longer periods of time and to pay for that extended use. Their payments are more regularised, and you’re more certain about what you will get from them, and when.
The comfort that subscriptions afford customers helps businesses in other ways. Customers are more likely to stick with a service provider if they have used its services over a period. There’s a big chance that they will continue with your business after the expiration of a subscription package they purchased from you if they are satisfied with it.
Actual revenues from subscriptions could also surpass those from one-time purchases for comparable periods of time. This is partly because of the sense of convenience that subscriptions bring to users. Many people would rather pay a single fairly significant sum for a product they regularly use than buy smaller amounts of that product several times.
Finally, the subscription model gives you an opportunity to build a strong customer profiling and feedback system. Because your customers will be making orders for services that stretch over longer time periods, you will be able to know what typical and individual customers prefer and tailor your services to suit their changing tastes.
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This article was first published on 18th January 2018
ikenna-nwachukwu
Ikenna Nwachukwu holds a bachelor's degree in Economics from the University of Nigeria, Nsukka. He loves to look at the world through multiple lenses- economic, political, religious and philosophical- and to write about what he observes in a witty, yet reflective style.
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