Did you know that a business can have a recurring revenue business model or a non-recurring revenue business model? There's value in both options. The purpose of a recurring revenue business model is to encourage customers to subscribe to a service or a product that is paid over a specified term.
There are many big name orgnisations that are leading the way in the recurring revenue business model such as Netflix, Spotify, BirchBox, as well as those that originally worked on a lump some payment model but have made the switch to subscription, like Microsoft.
The recurring revenue model can be appealing because it shows where your business idea will generate its future income from, how you will finance short term growth, and retain customers.
What is a recurring revenue model?
A recurring revenue model refers to sales of a product or service that are expected to continue into the future. This means cash and profit projections are potentially more predictable because sales might be counted on to occur at set, regular intervals.
One of the key reasons why the recurring revenue model is attractive is because it allows you as the owner, as well as investors, and potential purchasers to see how your business will generate sales moving forward. This can help add some weight to financial forecasts with a clear potential window to future growth prospects.
There are 7 recurring revenue business models for you to consider:
1. Auto-renewal subscriptions
Auto-renewal subscriptions are ongoing until the consumer stops it. This is a useful method because the customer does not need to do any work to continue doing business with you, making it very easy for them and meaning they're less likely to go to a competitor.
Auto-renewal subscriptions are commonly used by software businesses that provide a service used on a regular basis and by insurance firms.
2. Sunk-money subscriptions
Sunk-money subscription is based on customers purchasing a platform that usually has specific content and exclusive access to services or content and publications. Why is this an effective model? It encourages people to keep renewing their subscription because they have already paid for the platform.
Bloomberg is an example of a sunk-money subscription. People have to buy access to the Bloomberg Terminal in order to subscribe to their financial publications.
3. Renewable subscription
Probably one of the most common and universally used methods of recurring revenue are renewable subscriptions. Customers will sign up, and they will usually pay a monthly fee, they will also have the option to renew their subscription at the end of the contract.
This method of subscribing tends to be the most cost-effective because it requires few resources and little infrastructure.
4. Sunk-money consumables
A customer has purchased your product and it's so unique that now they need to keep buying additional items from you to keep their initial investment working. A prime example of a sunk-money consumable is a home coffee maker.
Most machines require a specific capsule, requiring you to buy only that one type of product, providing the company with a continual revenue source. This is an effective way to meet consumer needs and to encourage them to buy your product.
5. Simple consumables
Simple consumables are goods that need to be replaced regularly because they are used up or worn out. This can apply to essential items like food, coffee and toothpaste. The model is effective because regardless of market trends people still need these goods regularly and so will buy them.
6. Long term contract
If you own property, for example, a method to generate a continual revenue stream would be to rent out the property using long term contracts. This will ensure that your revenue stream is continual and secure for the extended future.
Freemium is a lifetime plan that offers free services; however, you'll be offered upgrades to premium memberships, more space, or extra content. Many companies, including newspapers, magazines and file hosting services like Dropbox and Spotify, have adopted a freemium model because there are very few barriers to entry and it is quick way to acquire a sizeable customer base.
So why should you implement a recurring revenue model and why would it appeal to buyers?
Future revenue streams will be more predictable because customers will be paying a recurring fee, and people don’t usually cancel their subscriptions.
There will be higher customer retention because the subscription guarantees a regular sale. Your business will only need to keep the customer content and engaged with the product, rather than using resources to continually attract new customers.
The recurring revenue model is a more stable way of generating revenue. Therefore, there are more accurate metrics to calculate the value of the business, which is usually not the case with non-recurring revenue models.
Increased growth is also possible with recurring revenue because the business model is scalable, allowing the company to grow quickly without being forced to change its structure or acquire new resources.
This post was created on 21/08/2018 and updated on 25/10/2019.
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