Recurring revenue is revenue generated from the repeated sale of a product or service. One recurring revenue model is a subscription business model where a company earns money by providing customers regular access to products and services in exchange for a recurring fee charged at scheduled intervals (monthly, quarterly, annually or bi-annually basis). Companies that employ a recurring revenue business model can predict a steady cash flow for the foreseeable future.
The recurring revenue business model provides a large number of benefits. It’s main benefit is that it helps businesses make revenue predictable, regular, and stable.It also gives businesses the ease of understanding that their revenue for the future is specific and established.
One of the key reasons the recurring revenue model is attractive is because it enables you, as the owner, investors, and potential business partners, to see how your business will yield sales moving forward. It is also appealing because it demonstrates how your business idea will generate future revenue, short-term finance expansion, and retain clients.
The benefits of establishing a recurring revenue model
We know that the recurring revenue model adopts a strategy that allows companies to make money regularly. This revenue can be made in membership plans, contracts, subscription plans and other repeat-purchase payment styles. As such, let’s glance at the various advantages of setting up a recurring revenue model.
With the help of the recurring revenue model, your business can retain many loyal customers who trust your brand.
Up-selling and cross-selling are much easier with a recurring revenue model, as companies have ongoing long-term relationships with customers. Constant contact with customers builds trusts, making it easier to sell additional products and services.
Your flow of cash will be steady and consistent with the use of a recurring revenue business model. This gives you more precise metrics to estimate the value of your business, which is usually not the case with non-recurring revenue models.
Using a recurring revenue model decreases the risk associated with the growth opportunities.
The recurring revenue subscription model ensures revenue at scheduled intervals. This predictability helps the business budget expenses, stock inventory, and invest in growth and expansion.
Proposing the products under a recurring revenue model with different payment options can be available to more consumers, thus developing the customer base.
Different and the most important type of recurring revenue subscription model that works
Let's look at the various recurring revenue business models you can employ to ensure a steady cash flow even in unpredictable times. Choosing the most suitable model to our business and your consumers can help you stand out from the crowd.
Sunk-money subscriptions
Sunk money subscriptions are based on customers purchasing exclusive access to a platform that usually has specific or consistent content. Purchasing recurring access to a streaming service or a gym would be an example of sunk-money subscription. Because consumers desire consistent access to a platform's content, they want to renew their subscription through a recurring fee model. Customers who make the initial payment are less likely to have scruples about recurring payments since they actively seek the company's content or services. In addition, because customers have already previously paid for the platform and sampled its content and services, it motivates them to keep renewing their subscriptions.
Hard contracts
The hard contracts business model requires customers to adhere to fixed service agreements for long periods for long periods of time. Cell phone providers are a good example of companies that utilise such payment models. A fixed contract could last anywhere between one and three years.
With cell phone providers, customers can continue using the phone service on a monthly or quarterly subscription basis for the same price after the contract expires. This can generate additional revenue after the hard contract has expired.
Moreover, companies that use a hard contract business model have cancellation clauses that customers are legally bound by. This means that if a consumer chooses to break their hard contract early, they may be required to pay a cancellation charge or the entire value of their subscription upfront. This revenue can still be deemed as recurring because the business will receive what was promised in the contract, even though it has terminated.
Standalone product subscriptions
The Standalone product subscription is a new recurring income model that businesses have embraced. Some brands have noticed that consumers are repeatedly buying certain products, so they realised in a new way to create a more predictable revenue stream- standalone product subscriptions.
For example, if customers buy a particular product for a distinct purpose, say a specific brand of body lotion, shampoo or any deodorant, they’d innately want to make use of the same product at regular intervals. This is where a subscription would come to their aid.
Customers are then unlikely to cancel such subscriptions because it is something they use regularly and would have purchased regardless of whether they were on a subscription plan or not.
The standalone product subscription is a thoughtful recurring revenue model strategy that companies can use. It’s based on customer loyalty, predictable behaviour, mutual trust and doesn’t usually disappoint.
Sunk-money consumables
When a customer buys a product from you that’s unique and distinctive from any others on the market, they’ll have to keep buying other replacement items from you to keep their initial investment working. This is known as a sunk-money consumable. It’s an effective way to meet consumer needs and encourage them to buy your product. In addition, with this recurring revenue model, you can earn continuous revenue by offering subscriptions to the replacement products your customers will need.
A great example of this would be an at home coffee machine with uniquely shaped coffee pods. To keep producing coffee from the coffee machine (their initial investment) they’ll need to purchase the coffee pods you produce so that they fit in the machine. The consumer must regularly purchase the exact product parts in the example above to function correctly.
Auto- renewable subscription
One of the universally used and most common methods of recurring revenue is auto renewable subscriptions. The auto renewable subscription is a recurring revenue model where subscriptions auto-renew until a customer willingly terminates the subscription. On occasion, businesses establish auto-renewal subscriptions that bill on a monthly basis but with a yearly contract. Although customers will sign up and usually pay a monthly fee, they will also have the chance to renew their subscription at the end of the contract. This recurring revenue model involves minimal resources and infrastructure, making it the most cost-effective subscription model. Examples of this type of regular revenue model are most audio and video streaming services such as Amazon Prime Video and Netflix.
Freemium
A freemium model gives its customers lifetime access to the product or service free of charge, but allows them to upgrade to a paid plan to get extra content, more space or advanced features. Youtube, Spotify, and several video streaming platforms utilise this b2b recurring revenue model to onboard paid members by promising ad-free services with high-quality audio and video to add to the mix. For example, you can use Spotify for free to listen to music and create playlists. However, if you want ad-free listening and high-quality music, you'll have to upgrade to the subscription plan.
Conclusion-
If you’re considering setting up a payment system involving a recurring revenue business model for your business, you remember that whatever payment system you select has to deliver some form of value to your potential customers. As a result, the recurring revenue business model has become an appealing choice for customers and business owners. Furthermore, the recurring revenue business subscription model is attaining a lot of attention and consideration, across a wide range of industries. Thus, when implemented rightly, the recurring revenue subscription model can help you predict revenue, plan development, develop your market, retain more customers, and finally improve your profits.
Whatever your subscription business model, Billsby can assist you in simplifying your Billsby your revenue operations by facilitating reliable recurring with recurring billing software. At Billsby, you can mount your subscriptions painlessly with flexible plan management, pricing models, trials and discounts. Want any type of help? Book a free consultation with Billsby today as we have assisted in building 1000’s of subscription businesses.