Deciding on the right model for your business is one of the biggest decisions a company can make. With traditional sales models slowly becoming old news and one-off payments to access a product or service fast becoming passé, many online businesses are leaning toward a recurring revenue business model.
In this post, I’ll answer some key questions about the recurring revenue business model. First things first…
What is a recurring revenue business model?
The recurring revenue business model is one that encourages a customer to pay a certain amount over a specific period of time. Depending on the offering by a business, this can range from six months to a year — or, more frequently, until customer cancellation occurs. Payments are almost always collected on a month-by-month basis.
Recurring revenue is sometimes known as a subscription-based model and the main elements that businesses focus on are customer acquisition, customer retention, and the monetization of current customers.
What are the benefits of a recurring revenue business model?
When used correctly, the recurring revenue model has many benefits, including predictable and measurable revenue, higher levels of customer retention, access to growth, and increasing sales and profit margins.
Predictable revenue streams
A business that uses recurring revenue as its model will have predictable and measurable monthly revenue. Why? Because subscribers will be paying a fee for using the product or service each month and this allows a business to predict its revenue on a monthly basis.
Higher customer retention
Businesses that use the recurring revenue method generally have a higher retention rate than those that don’t. This is because the hardest part of running a business is making a sale. With subscriptions, the sale has already been made on a regular, monthly basis. All a business has to do to retain customers is keep them happy and engaged with the product or service being offered.
Growth when using a recurring revenue model happens because the model is scalable. Once a customer is locked into a subscription or monthly payments, a business can grow and expand faster — mainly because a business needn’t spend time on retaining customers.
Increase in sales and profit margins
Each month customers are already locked in and invested in your eCommerce or SaaS business. By offering your existing customers upgrades, add-ons, expansions, and other useful, payable perks, businesses are able to help generate higher profits.
As with any business, it’s imperative to know your metrics. With a recurring revenue model, the key ones to consider include customer lifetime value, churn rate, customer acquisition cost, and monthly recurring revenue.
What businesses are suited for recurring revenue model?
Recurring revenue is usually best suited to a business that has a product or service that is needed on a regular basis.
SaaS companies are a given; customers need to use the software in order to accomplish their job or reach life goals respectively. Yet other businesses are starting to catch onto the recurring revenue model. For example, Amazon recently launched its Subscribe and Save initiative that encourages customers to pay a recurring fee for those “always on the to buy list” items such as groceries, household items, pet food, and beauty products.
Microsoft and Adobe have also moved toward a recurring revenue model, with both companies offering customers their Office and Creative Suites on a monthly retainer.
And it’s not just the big guns that are pulling out all the stops to get onboard the recurring revenue model. Unconventional businesses, such as Loot Crate — who dish out monthly packages made up of geek-centric paraphernalia — have tapped into the recurring revenue business model.
If you have a product or service, no matter how niche, that people will want to use or buy on a regular basis, recurring revenue could work for you.
How can I learn, determine, and access maximum revenue?
Not only does recurring revenue provide measurable and predictable profits, it also allows business owners to educate themselves and learn about their customers. This in turn can help to maximize revenue.
A great example of this is Netflix. The film and television subscription service tracks the viewing habits of each individual subscriber. By doing this, Netflix is able to optimize their customer lifetime value. The optimization occurs through recommending titles that suit the customers viewing, creating subsections entitled “just for you,” and informing on new releases that may be of interest to a customer’s viewing habits.
By knowing the customer’s habits, Netflix is not only able to learn more about customer lifetime value, but also encourage customers to engage more with their service. Customers who engage more with a service have a tendency to be happier and, therefore, have a longer relationship with a business, which equates to higher profits, growth, and more sales.
What are the challenges of a recurring revenue model?
While there are many benefits to choosing recurring revenue for a startup business, there are also challenges associated with this model.
A main area that businesses struggle with is growing too quickly and being unable to cope with the challenges this presents. For example, a business will need to suddenly be flexible with pricing, upgrades, downgrades, or other customer-orientated ideals that can prove challenging when growth occurs too quickly. International expansion can also be problematic as businesses get to grips with differing languages and taxation laws.
Credit card expiry or other payment issues on the customer end may occur. Chasing these can be time consuming and expensive for a business.
The recurring revenue trend is one that isn’t slowing down, especially as customers are realizing that paying a monthly fee to access a product or service can be more cost-effective. As more and more businesses tap into the benefits of the recurring model, how long will it be before most eCommerce businesses restructure into providing a recurring revenue model for their customer base?
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