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The opportunity to manifest money through sales is endless with recurring revenue. There are many business model options, whether it be one-time sales options, renting assets, or the increasingly popular recurring revenue models such as subscriptions. With recurring revenue models, business owners can improve their success in the long term rather than focusing on short-term gains. In the last decade, eCommerce sales have more than tripled. Because of this business owners have been focusing on opportunities to reach more consumers online and building customer loyalty.
Recurring revenue is an effective model to use alongside advancements in technology and consumer behavior trends. But what is it, and how can you harness its power to increase your bottom line and build trust with your customers? Read on to find out more about recurring revenue models and how they can create a foundation of steady growth for your business.
What is Recurring Revenue?
Recurring revenue is the profit a company can rely on earning from consistent repeat transactions it anticipates will occur or are scheduled to. The best example of the recurring revenue model is monthly subscriptions. Subscriptions create the opportunity for businesses to generate consistent revenue in exchange for a convenient product or service.
Many different types of businesses have found success, from monthly pet subscriptions to clothing dropshipping and food delivery services. For example, say your customers enjoy cooking, but due to work and family obligations, can only cook four days out of the week. A company that offers meal delivery service three days a week for $150/month would be a great solution to save time and feed their family on those days. By joining a subscription service for weekly dinner delivery, customers receive a service (meals delivered to their home), and the company providing the service can rely on regular payment for it.
Recurring revenue is a product of successful recurring payments. The more you are able to convert customers into repeat customers the more you’ll profit from recurring revenue. Though subscriptions are a highly popular business structure for this type of revenue, there are several different types of businesses that follow this model.
The Different Types of Recurring Revenue Models
There are four types of recurring revenue models worth mentioning. While some models overlap with one another, others stand alone. Here are the different types of recurring revenue models available to you:
With subscriptions, a customer pays a company a flat rate for a good or service that comes periodically in a given time frame. For instance, weekly food delivery or a monthly product box. Subscriptions are often marketed around the convenience of a product or service, whether that’s clothing, food, lifestyle, or more. In many cases, you can leverage subscription negative option billing to make the most of the business model’s unique structure. In other cases, the customer must manually make the periodic payments.
Many companies decide to sell their goods or services under contracts. The contract will often last for a minimum period of a year and will lock the customer into using their services for the specified term. Resultingly, the customer makes monthly payments until the contract is fully paid. Customers can revise their terms to extend, terminate, or renew contracts after they’re made. An important point to note is that these contracts often come with stringent terms regarding early termination. Therefore, make sure you read and understand any fees that may arise in this regard.
Return clientele/recurring customers
Recurring customers are highly predictable and are likely to keep buying from your business for the long term. This recurring revenue model incorporates the use of contracts, subscriptions, or simply loyalty. The method of payment is input once or stored for future transactions. If there is a recurring billing aspect, customers are repeatedly charged every month thereafter.
Supplementary goods are two products that must be used together. For instance, buying a sturdy and well-crafted shaving razor is an investment that provides value. This one-time initial purchase (can often cost upwards of $20) is only one component of the overall experience. After a week or so, the blade that comes with the razor will dull and need replacement. This disposable item that is required in order to make use of the purchase is what is called a supplementary good. A consumer can choose to purchase a recurring service for a razor blade company that will supply them with a discounted price on razor blades if they choose to sign up for their service on a continual basis. Creating a need that only your business can fill is an excellent business strategy to consider.
What is Negative-Option Billing?
Negative-option billing is a billing option where the customer agrees to be billed on a recurring basis or a product of service. For example, a business may charge a customer after a trial period is over, and continue to do so until they cancel. This is the most common type of billing for recurring revenue models.
Negative-option billing is one of the main components for frictionless recurring revenue. Businesses that are constantly having to ask for billing information run the risk of repeat customers changing their minds.
5 Benefits of Recurring Revenue Models
Because this business model has led to such increased success, it’s no surprise that many Fortune 500 companies have switched or plan to switch to recurring revenue models. Here are a few of the reasons why this model is so appealing to consumers and business owners alike:
- Predictable Income Stream. One-time sales rely on finding and converting new customers. Steady income from recurring customers is much more lucrative in the long-term.
- Flexibility. Consumer behavior goes hand in hand with the ever-changing market. With a steady stream of income and a loyal customer base, businesses can quickly adapt to changes with new offerings or pricing options.
- Supports Scalability. Consumers are quite specific about their needs and demands. Because of this, businesses can easily tailor their goods and services to their niche audience. They can do this through packaging, presentation, and product sourcing.
- Increases Customer Value. By increasing retention rates and customer satisfaction, each individual is likely to spend more over their lifetime for your products or services.
- Improves Customer Relationships. By using technology and consumer profiles, business owners can create customized touchpoints to reach their customers in various ways. For instance, a customer reaching a year with their subscription service can trigger a discount on their next payment. People love to feel like they are receiving a custom message. Not only that but by improving customer satisfaction, you can also increase customer loyalty.
There are many benefits to recurring revenue models. Make sure to review the pros and cons to see if it’s right for your business.
Is Recurring Revenue Right for You?
If you need more time to grow your business, maintain a positive cash flow, and dig deep into customer insights, recurring revenue models could be right for you. Recurring payments save time. Therefore, get an idea of how many of your customers opt for a recurring revenue model. Then, use the time you would’ve spent trying to get those sales improving your product or services, expanding your offerings or marketing reach, and getting more recurring customers. It’s important to understand your budget and maintain a positive cash flow. Doing this helps you cover routine expenses.
If you enjoy learning about the behavior and needs of your customers, find out what they value most. Analyzing and using that data to further customize your offerings will lead to even more success. Developing a strong relationship with your customer base can decrease your subscription decline rate. It can also lead to innovative ideas that improve your customers’ lives.
All of these factors can help you decide which model will best serve the needs of your customers. Additionally, they can help you choose which route your business should take.