What Are Recurring Payments?

Jessica Velasco | Thursday, February 15th, 2024 | 15 minutes

Recurring payments are transactions charged at set intervals and on an ongoing basis. Merchants typically use recurring payments to bill customers for continued membership on a platform, access to software, or consistent delivery of products and goods.

As the subscription economy grows, customers are embracing recurring payment models and the flexibility and convenience they provide.

This detailed guide explains how recurring payments work, what benefits they provide to both your business and your customers, and how to mitigate any risks introduced by adding recurring transaction functionality to your shopping experience.

  • What Are the Different Types of Recurring Payments?
  • How Do Recurring Transactions Work?
  • Which Businesses Use Recurring Payments?
  • What Are the Benefits of Recurring Billing?
  • What Are the Disadvantages of Recurring Billing?
  • How Can I Reduce Risk for Recurring Transactions?

What Are the Different Types of Recurring Payments?

The type of product or service you sell or provide dictates the appropriate type of recurring payments that’s right for your business.


Fixed Recurring Payments

Fixed or regular recurring payments are transactions in which the customer pays a flat and consistent amount in each payment cycle. In other words, the customer makes equal payments throughout the length of the agreement, service, or subscription.

Insurance premiums and software subscriptions are common examples of fixed recurring transactions.

Prevent chargebacks with prevention alerts, Ethoca and Verifi

Variable Recurring Payments

Variable or irregular recurring payments are transactions in which the charged amount differs between payment cycles. A variable recurring transaction is often usage-based, fluctuating from payment period to payment period based on how much a customer uses a service or utility.

Examples of usage based variable payments include utility bills and some web hosting plans.

Variable recurring payments may also be quantity-based. With a quantity-based recurring transaction, customers are charged different fees from period to period based on how much of a product they’ve ordered.

Some subscription box services use quantity-based variable payments. For example, a wine subscription service may allow customers to choose different quantities of wine before each monthly shipment, potentially changing how much a customer pays from month to month.

kount icon card and lock

Negative Option Billing

Some recurring payments are classified as negative option billing. These types of arrangements occur when customers agree to automatically receive a product or use a service in exchange for making automatic payments. These payments continue until the customer cancels. Negative option billing may be used for either fixed or variable recurring payments.

Typical negative option transactions include club or gym memberships, subscription services, and even free or promotional trial offers.

Avoid penalties

Installment Billing

Installment billing is a type of recurring transaction in which a customer pays for the entirety of a larger purchase over a set period. “Buy now, pay later” options commonly offered during checkout are examples of installment billing. Other examples of installment billing include mortgages and other types of loans.

Though some installment plans are interest-free, others may require customers to pay interest over time, particularly in the case of larger purchases.

How Do Recurring Transactions Work?

Depending on your type of business and what you sell or offer, recurring transactions may be one of multiple payment options or the only choice available to your customers. In either case, recurring payments work as follows.


The customer agrees to recurring payment terms.

The first step of establishing a recurring transaction should be asking your customers to agree to your terms and conditions. The specific terms and conditions you outline may differ from other businesses, but can include:

  • Transaction amount (including the required payment for each billing period)
  • Payment intervals (such as per month, quarter, or year)
  • Billing dates (when payment is due)
  • The expiration date (for installment plans)
  • Interest rates and terms (for applicable purchases)


The customer provides payment details.

After deciding to set up recurring billing, customers must then input the information necessary to process the transaction, such as their credit card or debit card number, billing address, expiration date, and card security code.

This information is required for you to submit an authorization request to the issuer. If the authorization is approved, the recurring payment plan can proceed.

If you require payment at the time of purchase, you’ll charge the card immediately for the first of the recurring payments and store the customer’s information for future transactions. If the recurring billing plan includes a free trial or promotional period, payment details are saved for future use.


Future recurring payments are automatically processed.

Future payments are automatically charged to credit and debit cards at set intervals. Recurring payments are processed until the customer either cancels the arrangement or fulfills the terms of the agreement (as with an installment plan).

Which Businesses Use Recurring Payments?

Any business in any industry can use recurring payments — there aren’t usually restrictions on who can and can’t use this payment method.

But are they a good fit for your business model and needs? Make a list of answers to questions such as:

  • Are the products or services that I offer a good fit for recurring transactions?
  • How frequently do my customers purchase my goods or services?
  • Would I attract more customers by offering samples or free trials?
  • Could I improve the customer experience by personalizing my offers?

Depending on your answers to these questions, implementing a recurring payment model may make sense for your business. But what type of recurring business model is right for your business?

There are three different recurring payment models that are commonly used today:

  1. The curation model involves the creation of a personalized product or service based on your customer’s specific interests and needs. An example of the curation model is ButcherBox, in which each order consists of a variety of meats based on the customer’s preferences.
  2. The replenishment model aims to replace products your customers commonly use. An example of the replenishment model is Dollar Shave Club, which ships various toiletries to members regularly.
  3. The access model provides customers with access to an exclusive shop or service, and may even offer special discounts and promotions. SaaS services such as Adobe Creative Cloud or loyalty programs such as Walmart Plus are examples of the access model.

The following are some examples of brands and industries that commonly offer recurring payments:

  • Subscription services: Businesses that provide products or access to software on a recurring basis, including magazines, subscription boxes such as HelloFresh, SaaS such as Microsoft Office 365, delivery services such as DoorDash, streaming services such as Netflix or Hulu, and bookkeeping and accounting services such as QuickBooks or Gusto
  • Utility companies: Companies such as your local electric, gas, phone, sewer, and water utilities
  • Membership businesses and clubs: Continuing education courses, coworking spaces, gyms, and professional services
  • Financial services: Banks and lenders, investment accounts, and insurance carriers
  • Service providers: Landscapers, cleaners, lawyers, and pest control

Don’t worry if your business doesn’t fit into one of the above categories. Instead, consider how implementing recurring payments can help you innovate upon your current offerings and use recurring transactions to evolve and grow your business.

What Are the Benefits of Recurring Billing?

Offering recurring payments can have significant benefits for your business, both on your bottom line and in terms of customer satisfaction.


Recurring payments improve customer retention.

Customer acquisition can cost your business a significant amount of money and time. In contrast, improving your customer retention rate may increase your revenue by more than 80% within 18 to 24 months and reduce customer acquisition costs by more than 30%.

Recurring payments support retention by incentivizing customers to engage with your business. This can be accomplished through programs similar to Amazon Prime, in which participating customers receive discounts and perks in return for their loyalty.

Recurring transactions also simplify the payment process for your customers. The convenience of agreeing to recurring billing means it’s no longer necessary for customers to remember making timely payments. As a result, their deliveries, subscription, or access remain uninterrupted.


Recurring transactions stabilize cash flow.

Sales aren’t always predictable. They may fluctuate from season to season or in response to consumer trends. As such, your business revenue may be less predictable than you hope, complicating your budget and forecast or making it difficult to grow your business.

Recurring transactions can help stabilize your business’s cash flow. Because you have a baseline of customers making regular recurring payments, it’s easier for you to gauge revenue, even before accounting for single or one-time purchases.

For example, if 3,000 customers each make a recurring monthly payment of $100, you can estimate a base monthly revenue of about $300,000 on top of whatever you pull in from other sales. This makes it less difficult to generate forecasts, plan for growth, pay suppliers or vendors, or pay down business debt.


Recurring payments increase customer lifetime value.

Customer lifetime value (CLV) measures the total revenue brought in by a customer, minus acquisition costs, operating expenses, and costs of goods or services provided to the customer. In other words, the larger a CLV, the more money a single customer generates for your business.

Recurring payments help establish a relationship between your business and a customer after acquisition. As the retention period increases, income generated by that customer increases as well — and on a consistent basis without a correlating increase in the cost of customer acquisition.

For example, loyal customers make purchases from your business when they need to or when the idea strikes. Though these sales are welcome and contribute to CLV, they’re also infrequent. Offering recurring payments to those customers in exchange for steady delivery of your products or access to your services increases the frequency of sales. As a result, customer CLV increases more rapidly, boosting your revenue.

What Are the Disadvantages of Recurring Billing?

Despite the benefits of recurring payments, it’s important to consider — and mitigate — any potential disadvantages, too. Doing so can improve the success rate and results of a recurring payment program.


Maintaining recurring transactions can be time consuming.

Though recurring billing often simplifies payment processing, errors and mistakes may require significant effort to correct. Because incorrect recurring transactions occur after the customer is billed, correcting the error requires follow-up from you or your customer support team to try and update payment information, such as card number or billing address.

Rectifying a failed transaction may also require you to process a refund and issue a corrected bill or invoice. Even then, failing to accurately bill your customers may contribute to cancellations and chargebacks, reducing your revenue and resulting in chargeback fees.


Insufficient funds can lead to service interruptions.

From a customer standpoint, recurring payments are often seen as “set it and forget it” transactions. When customers initially establish recurring payments, they understand that they’ll be charged a defined amount on each billing date and put it out of their mind.

However, customers may forget a pending transaction, switch bank accounts, or simply run out of money. When it comes time for you to bill them, payment fails and their recurring payment plan is put on hold or canceled pending follow-up from you or your staff.

As a result, your business loses the revenue generated by that customer.


Subscription models aren’t one-size-fits-all.

Each subscription model — curation, replenishment, and access — offers unique benefits to your business and customers. However, recurring subscription models aren't without risk:

  • The curation model requires significant effort on your part to personalize and customize offers for each customer. In addition, the novelty of your product or service can wear off quickly, contributing to customer churn.
  • The replenishment model may result in thin profit margins if you hope to compete with other businesses by providing low prices and discounts.
  • The access model requires consistent development, improvement, and maintenance in lieu of upselling or cross-selling opportunities.


Recurring transactions are highly regulated.

Card brands, the Federal Trade Commission, and regulatory bodies in other locations enforce rules and regulations to protect consumer rights in the case of recurring transactions.

Failure to adhere to these regulations could cause you to lose your merchant account — and the ability to process transactions.


You may need a high-risk merchant account.

High-risk merchant accounts are classified as those more likely to cost a payment processor money compared to low-risk merchant accounts. Though qualifying factors vary on a case-to-case basis, some of the more common factors contributing to a high-risk classification include:

  • Processing card-not-present sales
  • Offering free trials or introductory perks
  • Providing recurring payments or subscriptions

If your business model results in your classification as a high-risk merchant, you may be required to pay higher fees and maintain a reserve account.


Customers may request chargebacks instead of cancellations.

The “set it and forget it” nature of recurring payments can contribute to customers receiving unexpected charges. When that happens, they might file a chargeback.

Chargebacks are transaction reversals in which customers dispute charges to recoup what they paid. There are several repercussions of chargebacks — many of which can be severe. Make sure you understand chargebacks and how they could impact your business.

How Can I Reduce Risk for Recurring Transactions?

Recurring payments are a viable and effective strategy that can help grow your business, though they’re not a risk-free option. Fortunately, much of the risk posed by recurring transactions and subscriptions can be mitigated by developing and following sound business practices.

TIP #1

Follow card brand rules and regulations.

In addition to following laws from your local government and regulatory bodies, familiarize yourself and comply with card brand regulations. You’ll also need to adhere to the terms of your merchant service agreements.

TIP #2

Write clear terms and conditions and cancellation policies.

Your terms and conditions and cancellation policies are valuable business assets. They play an important role in ensuring recurring transactions help — instead of harm — your bottom line.

  • Clearly define your terms. Your terms and conditions should be clear, easily understood, and highly visible. Outline exactly what customers agree to upon establishing a recurring payment.
  • Offer a user-friendly cancellation policy. Create a simple and streamlined cancellation process. Make sure it is easy to find — share it on your website and in any emails you exchange with your customers.
  • Ask for acknowledgement. Ask your customers to confirm that they have read your T&C and cancellation policies before you finalize the transaction. Consider adding a checkbox to your checkout page.
  • Communicate often and openly. Send a confirmation email after the initial transaction, and include a link to your policies.

TIP #3

Send reminders before upcoming charges.

In the days before a customer’s billing date, send an email reminding them of their upcoming charges.

  • Mention the date the card will be charged.
  • Remind the customer of the transaction amount.
  • Include a link to your cancellation policy.

TIP #4

Follow up with customer satisfaction surveys.

One of the key advantages of recurring payments is the ease with which you can communicate with your customers. Use this opportunity to engage with them to gauge customer satisfaction. This feedback can be leveraged to improve your products, service, or processes and reduce the likelihood of cancellations, refunds, chargebacks, and negative customer reviews.

TIP #5

Analyze and learn from chargeback data.

No matter how well you run your business, chargebacks are a fact of life and not entirely avoidable. Analyzing chargeback data lets you make intelligent and data-driven decisions proactively, helping to improve customer retention, increase CLV, and avoid costly chargeback fees — or worse.

These insights can also be used to find and rectify flaws in your T&C, cancellation, and refund policies.

Want help with this step? Kount’s automated technology can help you implement a chargeback management strategy and analyze all the data you collect. Sign up for a demo today to learn more.

Related content

See more related content


Jessica Velasco

Content Manager for Marketing

For nearly a decade, Jessica Velasco has been a thought leader in the payment dispute industry. She aims to provide readers with valuable, easy-to-understand resources.