Recurring payments in SaaS: A guide with common types for subscription businesses

In SaaS, recurring payments have emerged as a cornerstone of business success. But what does recurring payment mean, exactly? 

It's the automatic, scheduled collection of payments from customers for ongoing access to your solution and services.

This guide will explain the benefits of recurring payments for SaaS businesses. We’ll also explore the inner workings of this payment system and provide a detailed overview of common recurring payment methods.

Read on to learn:

• Why recurring payments are essential for SaaS growth
• How these payment systems operate
• The most common recurring payment methods (credit cards, ACH, digital wallets, and more)
• How to choose the right recurring payment methods for your business

Before our list of recurring payment types, let’s explore why SaaS companies are using this billing method. 

Why SaaS business use recurring payments

As stated before, recurring payments have become an integral tool for SaaS businesses. But what makes this billing model so compelling? Let's dive into the specific advantages that drive SaaS companies to embrace recurring payments:

Financial forecasting and stability

One of the key benefits of recurring payments is the ability to predict future revenue. With a predictable recurring monthly payment schedule, SaaS businesses gain a clear view of their incoming cash flow. 

This foresight allows for better financial planning, budgeting, and resource allocation. Instead of scrambling to cover expenses during lean months, businesses can invest in growth. They do so with the confidence that a steady stream of revenue is on the horizon.

Operational efficiency and automation

Recurring payments streamline operations by automating the entire billing process. This approach eliminates the need for manual invoicing, payment reminders, and tedious follow-ups. 

By reducing administrative overhead, SaaS companies free up valuable resources. These can then be redirected toward core business activities. Think product development, customer support, and marketing. Increased efficiency means cost savings and a more agile organization.

Better customer relationships and retention

Recurring payments foster a sense of trust and transparency between SaaS businesses and users. The convenience of automated billing, coupled with predictable recurring monthly payments, contributes to a better customer experience. 

When customers feel valued and satisfied, they are more likely to remain loyal to your service. Stronger customer relationships lead to higher retention rates, less churn, and more profitability. 

Minimized late payments and credit risk

Late payments can disrupt cash flow and create managerial headaches for any business. Recurring payments mitigate this risk by automating the payment collection process. With automatic deductions from customer accounts, the likelihood of missed payments is much less. 

Recurring payments improve cash flow stability. They also minimize the need for awkward collection efforts, preserving valuable customer relationships.

Fueling growth and expansion

Recurring payments provide a solid financial foundation for SaaS growth opportunities. With a predictable recurring revenue stream, companies can invest in research and development. They can even expand their marketing reach and explore new markets. 

This stability allows SaaS businesses to take calculated risks, innovate, and scale. 

Note: To learn more about recurring payments, read our blog post on recurring revenue and how to boost it. 

How does a recurring payments system work?

Now that we’ve answered the question, “What are recurring payments?” it’s time to explain how they work. Let's break the process down:

1. The customer subscribes: It all starts with a customer signing up for your SaaS product and choosing their preferred plan. They provide their payment information, typically credit card details or a bank account link, and agree to your billing terms.
   ‍
2. The recurring payment cycle: Once the customer subscribes, the automated billing process starts. Your billing system securely communicates with the payment gateway on the scheduled billing date.
   ‍
3. The payment gateway takes over: The payment gateway acts as the intermediary. It securely transmits the payment request to the customer's bank or credit card network.
   ‍
4. Funds are moved: Upon authorization, the funds are transferred from the user's account to your merchant account. 

That’s pretty much it. The recurring payment system stops the need for manual invoices and reminders, making life easier for both you and your customer. 

Remember: A robust billing software is vital to manage the entire process without a hitch. That software should provide accurate billing, handle payments, and have built-in reporting to keep you in control. 

11 Common types of recurring payment methods for SaaS companies

Choosing the right recurring payment methods can significantly impact your SaaS business's success. Here's a closer look at some of the most popular options:

1. Credit and debit cards

Cards remain a dominant force in online payments, including recurring SaaS subscriptions. Their widespread acceptance and ease of use make them a popular choice for both businesses and customers. Let’s go over some benefits and considerations:

• Benefits: Integration with payment gateways like Stripe, PayPal, and Braintree enables automated recurring billing. 
  ‍
• Considerations: Processing fees can vary depending on the card type and payment gateway. Security and PCI compliance are crucial for handling sensitive card information.

2. Direct debit (ACH/SEPA)

Direct debit offers a way to collect payments straight from a user’s bank account. ACH (Automated Clearing House) payments are common in the US. SEPA (Single Euro Payments Area) transfers are common in Europe. 

Let’s analyze this type’s benefits and considerations:

• Benefits: Reduced processing fees compared to credit cards. This advantage makes it cost-effective for businesses. There’s also better payment reliability due to direct bank account access.
  ‍
• Considerations: Setting up direct debit may require extra steps for customer authorization. Handling failed payments or insufficient funds requires careful management as well.

3. Digital wallets

Digital wallets like PayPal, Apple Pay, Google Pay, and Amazon Pay are gaining popularity as convenient and secure payment methods for recurring SaaS subscriptions. Let’s take a closer look at this method’s benefits and considerations:

• Benefits: Simplified checkout experiences for customers, increasing conversion rates. There are also better security measures and fraud prevention tools offered by wallet providers.
  ‍
• Considerations: Transaction fees can vary depending on the digital wallet provider. Integration with your billing system may require specific APIs or plugins.

4. Bank transfers

Bank transfers provide a secure and reliable method for handling high-value recurring payments. That's why they are often favored by enterprise SaaS businesses. Here’s a closer look at some of this type’s benefits and considerations:

• Benefits: There are usually no transaction fees or lower fees compared to other methods, especially for large payments. There’s also less risk of chargebacks or payment disputes.
  ‍
• Considerations: Processing times are slower compared to card payments or digital wallets. May require manual reconciliation or integration with accounting systems.

5. Mobile payment systems

Mobile payment systems like Venmo and Cash App are quite popular. This method is ideal for clients who have grown used to handling money through these apps. Let’s see why you’d prefer using this method over others:

• Benefits: You can tap into a growing customer base comfortable with mobile payments. Offer a convenient and accessible payment option for recurring subscriptions.
  ‍
• Considerations: Transaction limits may apply depending on the mobile payment provider. Integration with your billing system may require specific APIs or partnerships.

6. Buy Now, Pay Later (BNPL)

BNPL services like Klarna and Affirm allow customers to spread the cost of their SaaS subscriptions into smaller, more manageable installments. Let’s look at some benefits and considerations to keep in mind:

• Benefits: This method increases affordability for potential customers. It also attracts customers who may hesitate at a large upfront cost. Plus, you can potentially reduce churn by offering flexible payment options.
  ‍
• Considerations: BNPL providers typically charge fees to businesses. Integration with your billing system is crucial for seamless payment processing.

7. Cryptocurrency

Cryptocurrency payments are entering the SaaS landscape. Bitcoin, Ethereum, and stablecoins offer an alternative for tech-savvy customers. They also enable cross-border transactions. Here are some benefits and considerations when using crypto for recurring payments:

• Benefits: Cater to a growing segment of crypto-users. Reduce transaction fees compared to traditional payment methods.
  ‍
• Considerations: The volatility of cryptocurrency values can impact revenue predictability. Secure storage and management of cryptocurrency assets are crucial.

8. Invoice-based payments

Invoice-based payments are common in B2B SaaS. They provide a structured approach for recurring billing. Let’s dive into this type’s benefits and considerations:

• Benefits: Clear and detailed invoices facilitate tracking and reconciliation. You get the flexibility to accommodate various payment methods, including manual payments and bank transfers.
  ‍
• Considerations: Manual invoicing can be time-consuming and prone to errors. Automated payment reminders and follow-ups may be necessary to guarantee timely payments.

9. Subscription management platforms

Subscription management platforms like Recurly offer solutions for SaaS businesses to handle recurring billing, automate tasks, and gain valuable insights. Let’s check out some benefits and considerations to have with these platforms: 

• Benefits: Streamlined subscription management. Think billing, invoicing, and customer communication. These platforms also support various payment methods and integrations with other business tools.
  ‍
• Considerations: Platform fees can vary depending on the features and usage. Migration from existing billing systems may require planning and technical expertise.

10. Prepaid subscriptions

Prepaid subscriptions allow customers to pay for a defined period of service upfront. This method provides cost certainty and potentially attracts budget-conscious customers. Let’s zoom into this method’s benefits and considerations:

• Benefits: It eliminates the need for recurring billing and reduces the risk of failed payments. It also provides an alternative payment model for customers who prefer upfront payments.
  ‍
• Considerations: Using prepaid subscriptions may require adjustments to your revenue recognition model. Renewal reminders and incentives are key to encouraging continued subscriptions.

11. Postpaid billing

Postpaid billing is common in usage-based SaaS models. It involves charging customers based on their actual consumption of the service. Here are some benefits and considerations to keep in mind:

• Benefits: You can align costs with usage, providing transparency and fairness for customers. You’re also opening the door to using flexible pricing models that adapt to customer needs.
  ‍
• Considerations: Accurate usage tracking and metering are crucial for accurate billing. Invoice presentation and explanation should be clear to avoid customer confusion.

Accept more recurring payment types with the help of Orb

So far, we've explored various recurring payment methods in SaaS. Now, let's talk about how Orb is the definitive tool to simplify and elevate your recurring revenue strategy.

Orb is a done-for-you billing platform designed to empower SaaS businesses of all sizes. We provide the tools and flexibility you need to manage recurring payments with ease and confidence.

Here's how Orb can help you optimize your recurring billing processes:

• Integration with payment gateways: Orb integrates with leading payment gateways. We help you accept a wide range of payment methods, from credit cards and digital wallets to ACH and bank transfers. 
  ‍
• Support for various billing models: No matter the billing model you choose, Orb provides the infrastructure to handle them all. Our platform adapts to your billing needs, guaranteeing accuracy and billing for every customer.
  ‍
• Easier management of pricing structures: With Orb, you can manage complex pricing scenarios. Think volume discounts, prepaid credits, and tiered pricing. 
  ‍
• Better customer experience: Orb's invoices and flexible payment options improve the customer experience. By providing transparency and convenience, you can build trust and reduce billing-related friction.
  ‍
• Data-driven decision-making: Orb's reporting capabilities provide valuable insights into your recurring revenue streams. Track key metrics, find trends, and make informed decisions about your pricing and growth plans.

Ready to make the most of your recurring revenue strategy? Explore our flexible pricing plans to find an option that fits your business needs and budget.