What is a Recurring Revenue Business Model?
The revenue models of numerous digital stores are built on single purchases.
This is a one-time payment a customer makes when buying a certain item or hiring a particular service, such as a plush toy or language translation. Generally, the association between a purchaser and a seller ends after a single transaction.
In order to generate a steady income stream, you need to secure customers who make repeat purchases. Merchants offer admission to goods or services in exchange for a fee, an regularly scheduled, reoccurring expense. Think Spotify, iCloud, or Adobe software.
There are a number of different ways to generate consistent income: memberships, agreements, and subscriptions. The list is endless! The advantage of having a steady source of income is that it enables business owners to forecast their future earnings more dependably. Envision having an exact comprehension of how much your customers are going to spend monthly!
Let’s check out some of the widely used income models that are repeated over time.
What are the Most Popular Recurring Revenue Business Models?
Multiple types of revenue models that could fit your business and your requirements exist. It’s probable that you will discover an option that will fit the needs of your business due to the multitude of examples present.
Subscriptions
In most cases, subscriptions have an end date. Incorporating memberships into your company may be an option to consider if you are selling products or granting access to certain platforms. At the conclusion of a subscription, those who have already been engaged in it can typically opt to extend the duration or terminate it.
Furthermore, there are subscriptions that are automatically renewed, like Neil Patel’s UberSuggest, that give you regular access to the system until you decide to discontinue your subscription. LinkedIn Learning, Spotify, and Netflix are all forms of services that have automated recurring payments.
Consider product subscriptions as well. This is for those who have a tendency to buy the same items regularly, such as socks, underwear, or even liquor in bottles.
Contracts
In the majority of circumstances, agreements include mobile phone plans, broadband packages, and other predetermined arrangements. Typically, when the agreement has been fulfilled, the services remain the same with a monthly agreement in place until the services are altered or modified on a monthly basis.
Customers are bound by a contract until its expiration – if they try to terminate it before it is finished, they will have to pay a penalty. Because contracts are less likely to change, businesses are able to forecast their future income with greater precision.
Sunk Consumables
Products that require additional expenditure after the original purchase is referred to as sunk costs. Nespresso, Brita, and Gilette are prime illustrations of products that are intended to be quickly used up.
These models are akin to subscription-based models, in the sense that customers are required to constantly buy items. For instance, if you would like to keep using your Nespresso machine, then you need to purchase Nespresso pods. These recurring revenue models generally create lifetime customers.
Retainers
The idea of product-oriented vendors not always being applicable does not just relate to items being sold, but also to services rendered. By using a retainer, your company is ensured to make a regular income. But what is a retainer?
Basically, your customers will be charged a repeated monthly cost and they will get something in exchange – either labor hours, fulfilled tasks, or consulting services.
Graphic Designer
Think about capitalizing on your graphic design abilities by making prints, internet graphics, or offering services to organizations and firms. In order to increase your sales, create an online shop for physical items as well as digital products.
Memberships
Memberships offer opportunities for community, content, and coaching/consulting. When an individual enrolls, they must submit a fee that could possibly be a repeating charge or a one-time payment.
Freemium
The use of the Freemium system is increasing in frequency as an effective method for generating ongoing financial income. This model gives the product or service away at no cost, but extra features or capabilities are only obtainable at an extra expense.
Contemplate the comparison between Spotify Free and Spotify Premium, or some of the commonplace video games on your phone’s App Marketplace.
Hybrid Models
If your business seeks to integrate two or more of the stated income sources, then you are exploring a combined invoicing method.
You can buy underwear from MeUndies on a subscription basis if you like, but there are also options to buy it as a one-off purchase.
Pros and Cons of Recurring Revenue Models
Shifting to a new way of operating can bring forth various advantages of recurrent income, but there can also be some difficult issues to overcome. Let’s dive deeper into the advantages and disadvantages of revenue models that generate income on a recurring basis.
Recurring Revenue Pros
Consistent Revenue
Using a recurring revenue model can give you a sense of steadiness when forecasting your income. A steady flow of money can be extremely beneficial for your future investments.
Deeper Loyalty
If an individual is a consistent shopper and has been with the company for a while, they probably perceive the organization to be a source of relief to some of their struggles.
Once your customer has been with you for a significant time period, it is even more difficult for them to move to a rival! Using repeating models can help stop your customers from having to purchase the same item over and over again, establishing a little bit of loyalty in them.
Growth Benefits
Having laid out a reliable system in order to foretell your stable cash flow, and having loyal patrons who love your products or services, it is clear that you have a business that can brainstorm creative ideas.
You can launch new items, initiatives, or offerings to an existing client base. If you can tell that the recurrent income approach is effective, you can turn your attention to entirely new products!
Recurring Revenue Cons
Higher Customer Expectations
With a long-term relationship, comes all the baggage. Your dependable customers who have come back to you will need your help, and they have earned it. Be sure that you are always able to fulfill the requirements of the business model or devise an alternative route if it looks like you won’t be able to deliver.
Complex Revenue Tracking
If you have already established your recurrent income, you may be in charge of managing a multitude of billing accounts, each in a different stage of the subscription process. This is different from single purchases!
You must take into consideration any additional variables such as contract duration, churn rate, and any other measurements that assist you in recognizing your income more clearly.
Inflexible Pricing
Recurring revenue can make updating your pricing more difficult. If you modify the price of a subscription or a retainer abruptly, your clients could be surprised and question why the increase has occurred.
Keep in mind that adjusting your costs involves more than modifying one particular price, it entails revising the amount that is billed each month.
Revenue tracking can become complex
You could potentially have hundreds or even thousands of clients at various stages of their subscription at the same time with recurring income. That’s a lot of data to manage.
You must keep track of the time period of contracts, departure rates, and other figures that will display the health of your business at any time. You must have this data to correctly predict what lies ahead.
Ease of setup
It’s simple to comprehend the effects that your marketing and sales initiatives will have on your income with one-off revenues.
It comes with a straightforward revenue formula:
If [number] individuals purchase the item at [price], our business can generate [revenue].
You can analyze the influence of every campaign right away depending on how well your lead generation went and your sales team’s rate of success in sales.
A simpler sales pitch
Potential customers can quickly recognize the advantage of purchasing from you. Since you’re not requesting a lengthy commitment, you can streamline your sales presentation and rapidly and competently address any queries or apprehensions.
As such, customers could be more likely to complete the sale. You don’t need to worry about signing up for a long commitment if you’re buying only one item.
10 different recurring revenue models
The possibilities of an income that continues to come in on a regular basis are immense, and many sectors are embracing it. A recent survey of retail executives suggested that the vast majority (77%) of current or potential providers of recurring revenue programs view this as a necessary feature of conducting business.
Let’s look into some of the most popular methods you can use to establish recurring income as the basis of your business.
1. Standard subscriptions
Customers sign up to pay regularly for your product or service via a subscription model, with rates per week, month, or year. Take a look at National Geographic as an example.
Source: National Geographic
Customers purchase the magazine on a regular monthly basis throughout the year. At the conclusion of the year, they decide if they want to re-establish.
2. Hard contracts
Cell phone packages and agreements are a prime illustration of stringent agreements. When registering for a plan, you can get a handset at no cost (or with just a small initial payment). You then pay a monthly fee to use it. The duration of these contracts may range from a minimum of six months to a maximum of two or three years.
Source: Mint Mobile
At the end of the contracted period, you usually keep taking advantage of the service in the same manner with an automatically renewing monthly plan (meaning that the regular monthly revenue continues arriving even though the definitive agreement has expired).
3. Ongoing, auto-renewal subscriptions
The customer can continue these plans until they decide to stop them. These subscriptions typically renew on a monthly basis, but can sometimes be obtained for an entire year.
Some examples of auto-renewal subscriptions include:
Software as a Service (SaaS), such as Xero’s accounting system or Pipedrive’s Customer Relationship Management (CRM) platform.
Streaming services, like Spotify or Netflix
Learning platforms, like Skillshare or LinkedIn Learning
Fitness subscriptions, like ClassPass
Subscription boxes, like Birchbox or Barkbox
4. Subscriptions on standalone products
Certain companies have become aware of the fact that customers tend to purchase the same items repeatedly, prompting them to generate a sustainable and consistent revenue source through the introduction of product subscriptions.
Companies like Dollar Shave Club and MeUndies provide customers with a wide variety of items including shampoo, socks, and shaving products, as well as the ability to purchase individual items or sign up for regular subscriptions.
5. Sunk money consumables
When someone puts money into an item that needs further investments to work right, it’s referred to by John Warrillow (author of Built to Sell ) as “sunk money consumable”.
6. Sunk money subscriptions
Investments into non-refundable subscriptions operate in the same fashion as investments into one-time-use products. Instead of spending money on something physical, consumers pay for a membership fee.
Warrillow points to the Bloomberg Terminal as an illustration of expenditure on a subscription service that cannot be recouped. Wall Street traders have invested in a system, so they are continually purchasing the data – Bloomberg’s financial reports – to make sure they gain a reward from their expenditure.
7. Service retainers
Freelancers and agencies can guarantee a steady source of income by providing retainers. The customer pays a regular monthly charge and receives a particular result in return.
It’s usually a predefined number of:
These documents usually come out once a month, but depending on the services, the frequency might not be the same.
8. Online memberships
A membership site is a platform that gives users access to significant information, creates a sense of community, and offers teaching, advisement, or guidance on a bigger scale than individual instruction.
Here are some examples of existing online memberships:
A collection of carefully chosen Instagram hashtags and a tutorial for utilizing Instagram, known as “The Hashtag Files”.
Tech Ladies is a Hashtag File gathering for individuals in the tech sector who are female. They are given the opportunity to engage in networking, webinars, job listings, and a variety of other activities.
9. Usage-based subscriptions
Customers are charged according to their usage with usage-based subscriptions.
Think about a pay-as-you-go phone contract as an example. You only have to remit money for the telephone calls, message exchanges, and data that you manage to consume. No set fee needs to be paid ahead of time, and people can pay for any extras that they may need.
The subscription approach is convenient for customers who want to save money, however, it is difficult for you to calculate your monthly income precisely.
Consider what would happen if your customers utilized your service for an entire month, resulting in a large boost to your profits. Who can guarantee that they will consume the same amount the following month? It is more difficult to predict and increase the size of your subscription enterprise as a result of this.
10. User-based subscriptions
Subscriptions that are based on user usage charge customers based on the number of users that are accessing the product or service through a single account. This model is popular amongst companies that use software-as-a-service; for instance, Slack utilizes it. The cost of their services is calculated on a monthly basis, depending on the number of people actively using it (when paid for annually).
Certain companies may levy an extra charge for every user, while others could have limits on pricing depending on the amount of users.
For example:
1-5 users = $29.99 per month
6-10 users = $49.99 per month
11+ users = $64.99 per month
Leave a Reply