If you’re like most business leaders, you’re probably interested in increasing your sales revenue.
There are many different ways to make that happen — you can expand your product line, raise your prices, or search for new customers. Those are all great approaches. But one of the best ways to increase revenue is to adopt a recurring revenue model, which supplies you with a steady, reliable income.
In the guide, you’ll learn everything you need to know about the recurring revenue model, including what it is, why your company can benefit from it, and strategies for implementing the business model.
What Is a Recurring Revenue Model?
A recurring revenue model is a business model in which a company provides goods or services on an ongoing basis, in return for a regular, reliable stream of income from customers.
Subscriptions are an example of recurring revenue. To understand the value of the recurring revenue model, it may be helpful to consider how magazine subscriptions work.
Imagine that you’re a devoted reader of a gardening magazine. You usually buy it from your local newsstand — but sometimes you forget, and sometimes the newsstand sells out of copies before you get there. In that case, you don’t buy the magazine — and the magazine’s publishers miss out on the revenue they would otherwise have gotten from the sale.
Now, let’s imagine that you decide to buy a subscription to that magazine. The publishers may offer you a deal on the magazine so that you pay a lower rate per issue. It’s worth it for them, though, because now they have a steady stream of revenue — the cost of your subscription. They can rely on it and include it in their budgetary considerations.
Not all recurring revenue comes in the form of subscriptions, of course — there are several other common recurring revenue models. We’ll get to those in a moment.
What Are the Benefits of a Recurring Revenue Model?
The benefits of a recurring revenue model are enormous. Below are five reasons why recurring revenue is one of the fastest-growing trends in eCommerce.
Generates reliable, predictable revenue
A recurring revenue model provides businesses with predictable cash flow.
This makes an enormous difference when it comes to budgeting resources. In fact, it can represent a shift in your whole approach to expenses.
Maintaining a positive cash flow allows businesses to settle their debts and pay their vendors and suppliers in a timely fashion, thereby saving money on late fees and penalties. A predictable cash flow also means that companies can return money to their shareholders, thereby encouraging new investors to get involved in the business.
Minimizes customer churn and builds loyalty
When you work with a one-off sales model, your business is continually over-strained trying to seek out new customers. The process involves a lot of expensive marketing and can be a drain on your employees’ time.
A recurring revenue model, however, doesn’t rely on seeking out new customers. Instead, it focuses on keeping current customers satisfied. Instead of dealing with endless turnover and marketing efforts, your goal shifts to creating an ever-better product so that you can meet the needs of your ongoing customers.
You’ll also be able to focus on creating a better customer experience. By building up strong communication with your customers, you’ll create a virtuous cycle: your customers will tell you exactly what kinds of products and services they need so that you can provide them with offerings that meet their needs. In doing so, you’ll build up strong brand loyalty — and you’ll probably get some quality word-of-mouth advertising, too.
Learn more: Guide to Increasing Customer Loyalty.
Drives more revenue
Not only does a recurring revenue model provide a steady source of income, but it can also lead naturally to fresh sources of revenue.
Here’s why: As you develop regular customers, they become interested in your business’ other products and offerings. After all, this is an audience that already knows and trusts your business.
It’s relatively easy to upsell and cross-sell to your loyal customers. Research shows that existing customers are 50% more likely to try new products and spend 31% more, compared to new customers.
Remember that you’ve also developed strong lines of communication with your customers so that you can stay aware of what they appreciate about your products, and what they’d like to see change.
It can be useful to think about upselling and cross-selling in terms of value realization, too. Once a customer recognizes the value of your product and feels that they’ve optimized that value, they are ready for upsells or increased selling.
Offsets customer acquisition costs
Marketing isn’t cheap, and neither is acquiring new customers.
You can calculate your customer acquisition costs by dividing the sum you spent on marketing during a certain period by the number of new customers you brought in during the same period.
So, if you spent $1,000 on advertisements in November and you brought in ten new customers, you’ve spent $100 for each new customer.
A recurring revenue model lets you neatly offset that expense. Let’s say each one of your 10 new customers signed up for a year-long subscription to your cake of the month club. At $25 a month, that means it takes just four months for the customer to offset the cost of your marketing campaign. And of course, you’ve also netted a new loyal customer who may soon be interested in your other products.
Before long, you’ll also be able to reinvest some of that new income in customer acquisition and innovation.
Builds investor confidence
It can be difficult to attract investors, especially when you’re a small or midsized business. That’s because investors are wary of putting money into a company that doesn’t have a proven track record of success.
However, when investors see that your business has a reliable income stream, in the form of recurring revenue, they are likely to find investing with your business more attractive. According to Salesforce, companies with recurring revenue models are valued 8X greater than companies with transaction-based business models.
How Can You Generate Recurring Revenue?
We’ve already talked about using subscriptions to generate recurring revenue. Briefly, it’s worth remembering that there are many different forms of subscription and that, no matter what your business sells, you can likely turn it into a subscription service.
Fruits, chocolates, and wines can all be sold as subscriptions. So can clothing, hair and beauty products, books and games, and virtually anything else. The possibilities are limitless. Subscriptions also come with the built-in benefit of introducing your customers to a broad range of your products, which may tempt them to branch out and buy more from your business.
Learn more: Everything You Need to Know About Subscriptions
Everyone loves a good surprise, and that’s what curation delivers.
Curation, also known as discovery boxes, are subscriptions that seek to delight and thrill consumers by appealing to their sense of curiosity. They’re usually designed to fit a theme and to mesh with a customer’s special interests or hobbies. Some curation boxes are specifically geared for children and have an educational focus. They may center around science projects, arts and crafts, or geography.
Other curation boxes are aimed at adults — they can focus on puzzles, games, foods, or just about anything. The most important feature of curation is the sense of curiosity and adventure that they generate. You want your customers to feel excited when they get your box in the mail. That’s how they’ll build up a strong, positive association with your brand.
Amusement parks, not-for-profits, and cultural institutions all offer memberships — and no wonder. Selling memberships creates a great source of recurring revenue, often at very little added expense to your organization.
Typically, members enjoy some perks. They may get free entry to your location, for example, or a steep discount on admission. They may also get a discount on merchandise or food. Or, you may choose to offer them perks like free merchandise.
Supplementary Goods/Add-On Products
Some companies sell a line of products that can only be used with other products from the same line. This can lead to predictable, recurring revenue in the months or years to come.
Many single-brew coffee machines, for example, only work with one brand of coffee cups. Some cleaning products come with parts that need frequent replacing and can only be replaced by that company. Water purification systems need to have their filters replaced regularly, and only one brand of filter will fit.
As long as customers are happy with the product — and as long as it’s easy to order or shop for the replacement products — that’s a constant source of reliable revenue.
Making Life Easy for Your Customers
When done right, a recurring revenue model not only benefits your business, it also makes your customers’ lives easier by making shopping, selecting new products, and upgrading their existing products far more convenient.