What CFO doesn’t love the predictable cash flow associated with all types of recurring revenue? What CRO doesn’t love repeat customers?
Five Common Types of Recurring Revenue
While most types of recurring revenue are often just labeled as a “subscription,” they aren’t always. Recurring revenue comes in many forms. Here are the five most common types of recurring revenue:
1. Negative-option perpetual subscriptions
You are likely most familiar with these popular types of recurring revenue. Negative option plans bill the customer a fixed amount at a set interval, such as monthly or weekly, indefinitely until canceled voluntarily by the subscriber or involuntarily, such as by payment failure.
Examples: Netflix, Spotify
2. Positive-option subscriptions
Positive-option subscriptions are similar to negative-option perpetual ones, except they come with a set expiration date. Merchants must reach out to the subscriber at the end of each term and billing continues only after confirmation from the customer.
Examples: Magazine Circle
3. Installment plans
With these plans, the purchase amount is distributed into multiple payments over a given period of time. These may or may not include service or finance charges. The plan ends after the last payment is made.
Examples: Any Buy Now, Pay Later (BNPL) solution, such as AfterPay, OpenPay, Klarna, PayPal Credit
4. Usage-based services
With these types of recurring revenue, the customer is billed only when a product or service is utilized. Billing can be made after each use or in the aggregate, covering usage over a period of time.
Examples: Uber, Utilities
5. Other card-on-file
This recurring revenue method refers to purchases that are made using a payment mechanism already on file with the merchant.
Examples: Kroger app, Candy Crush
Countless variations exist regarding the examples described above, including hybrid versions that combine subscriptions with usage-based revenue models. One example is Grubhub+, a monthly membership program that provides unlimited free Grubhub delivery for orders of $12+ but does not include the cost of the food itself.
There is one very important common thread among all of these recurring revenue types: each has a known customer and a payment mechanism stored on file. This simple combination unlocks incredible opportunities. Purchases become “frictionless” due to automatic payment because a customer doesn’t need to pull out their wallet each time. Merchants may evolve their model over time or combine different approaches to meet a customer’s wants and needs.
Recurring Revenue Challenges
Every recurring revenue model has its own challenges. For example, the FTC recently began looking into allegations that some subscription companies that utilize the negative option make it too difficult for customers to cancel, often by using confusing and ambiguous language in their terms of service. As a result, the FTC has ramped up enforcement on companies they feel have not been compliant with fair practices. In a 2009 report, the FTC outlined five general principles to guide merchants that implement a negative option plan:
- Merchants should disclose the material terms of the offer in an understandable manner
- Merchants should make the appearance of disclosures clear and conspicuous
- Merchants should disclose the offer’s material terms before consumers pay or incur a financial obligation
- Merchants should obtain consumers’ affirmative consent to the offer (e.g., should require consumers to take an affirmative step, such as clicking “I agree”)
- Merchants should not impede the effective operation of promised cancellation procedures
Any recurring payment method, whether a negative option or otherwise, will have its own rules and regulations that need to be addressed, such as PCI compliance. There is also a series of rules based on a card brand’s Stored Credential Framework. These rules dictate how credit card numbers can be captured and used and mandate customer consent. Many companies are under the false impression that their acquirer and/or payment gateway solely manages credit card compliance. In truth, the merchant is on the hook, too.
Rebar Makes All Types of Recurring Revenue Easier to Implement
Although the potential potholes are perilous, the recurring revenue road is paved with gold. Knowing all the options and potential hazards when starting a recurring revenue business isn’t necessary, but awareness can keep you from steering into “tech debt” that limits agility and speed to market. You just need someone to help drive you safely and toward the highest rewards. That’s where a company like Rebar Technology comes in. As subscription billing management experts, we work with companies of all sizes, providing insights and guidance that make subscription billing easier and helping choose the types of recurring revenue that make the most sense for your business. To get started, contact us and speak with one of our payment navigation experts.