How Merchants Can Leverage Recurring Payments

The prevailing sentiment among consumers, particularly in younger generations, is access is more important than ownership. The subscription-centric sales process turns the traditional sales model on its head, and merchants wishing to take advantage of the recurring payments paradigm must pivot to take advantage.

How Recurring Payments Through Subscriptions Drive Business Growth, a new report by Craig Lancaster, Payments Analyst/Content Specialist at Javelin Strategy & Research, examines the powerful benefits of the recurring payments model and details the strategies businesses can use to leverage it.

The Bowtie Model

The sales process has traditionally been viewed as a funnel. At the top, merchants make consumers aware of their product. Then, businesses engage customers, help them discover the product they need, and at the bottom of the funnel is the purchase and the hope for customer retention. Afterward, merchants keep in contact with customers and hope they come back when they need the product again.

The recurring payments model is shaped like a bowtie, with the left-hand side as the traditional sales funnel. Merchants must still attract customers, nurture the relationship, convert the sale, and maintain a relationship, but the process doesn’t end with a closed sale. In a successful implementation of this model, the customer commits to an ongoing relationship, so at the hub of the bowtie is the customer experience.

“One of the major differences in this model is the customer’s journey, which is described in the right side of the bowtie,” Lancaster said. “The longer customers remain in the recurring payments model, they slowly advance from product adoption to brand loyalty. Eventually, they increase their advocacy until they become brand ambassadors.”

Compelling Benefits

Merchants have compelling reasons to adopt the model, as well. Chief among them is revenue reliability, because consumers enter a long-term relationship. The recurring payments model also reduces barriers to entry for customers who leverage offerings like software-as-a-service models to ramp up their own endeavors.

Businesses, for example, don’t necessarily have to invest substantially in infrastructure before they get their products to market. In the case of software-as-a-service subscriptions, there also isn’t the need to build inventory before launch. Once launched, companies can easily upgrade their products behind the scenes.

Merchants still have responsibilities in a subscription model, however. Businesses must continue to upgrade their product, and they can never take customers for granted. If merchants aren’t serving customers’ needs, there are plenty of companies vying for customers’ subscription dollars.

“There are many entities ready to disintermediate the relationship,” Lancaster said. “Aside from competitors, companies like Experian can collate customers’ subscriptions into a list that allows them to track and manage their subscriptions. Merchants must actively maintain consumer relationships, so they’re not swept out to sea if their customers decide to cut back on costs.”

In the end, the benefits of adopting the model are considerable. The recurring payments model increases revenue reliability, supports consumer choice, and can be leveraged to reduce churn.

Finding the Balance

Subscription models, in and of themselves, aren’t a magic wand. In the traditional cable TV model, there were many tiers of subscriptions. Customers were forced to subscribe to all the channels in the tier chosen, even though they often didn’t need or want it.

In response, consumers moved away from cable to streaming services, where the subscription is presented more efficiently and users have much greater control over the programming they want.

If companies can find the right balance in their recurring payments programs, there can be a significant impact on merchants and consumers. Lancaster’s report cited an automatic car wash charging $12 for its basic, bottom-tier wash, but a basic monthly unlimited subscription for $30. At first glance, it might seem at cross-purposes to set the monthly rate so low compared with a single wash.

“First, it isn’t $30,” Lancaster said. “It’s really $360 because the subscribers are paying it every month. Even if a customer decides to get their $30 worth and send the car through every single day, the business is already staffed and running, so there are no added costs. Car washes recycle their water, so the nominal cost of an extra car wash isn’t very high.”

For the customer who values a consistently clean car and wants the convenience of a car wash, $30 a month is manageable. For the company, especially a car wash where business is often subject to the vagaries of weather, reliable revenue can have a major impact.

Creating Lifetime Value

One of the gold standards of the software-as-a-service subscription model is Adobe Creative Cloud. In the past, consumers would buy each piece of software, install it, and run it for as long as they possibly could before investing again.

Since Adobe transitioned to a subscription model, customers pay on a per-month or per-year basis and all the programs are updated, or even replaced with the newest versions, seamlessly in the background.

The model can dramatically boost the lifetime value of an individual customer. Adobe charges $54.99 monthly for full access to its creative suite, so long-term users are making a sizable investment. However, it’s an investment they’re largely willing to make.

“On a per-month basis, it’s not a budget-breaker for many customers,” Lancaster said. “Adobe’s products are excellent at what they do, and they’re consistently upgraded, like adding new font families to give creators greater capabilities. Customers see the value, so they maintain the relationship. Adobe has identified a need for consumers and catered to it, and that’s really the key.”