The recurring revenue model approach is a beneficial and practical way to keep your business flourishing. These models create a safety net and keep money flowing into your business regularly.
Unlike one-off sales, recurring revenue models include memberships and subscriptions. In such models, your customers pay a price to use your product or services for a definite period. Payments can be done weekly, monthly, or annually for the subscriptions. By the year 2025, the subscription economy will hit $1.5 trillion.
To learn about these models, their types, and several of the best tips that will make your recurring revenue model successful, read ahead.
What is a Recurring Revenue? (and Why Creators Need It)
Let’s understand what recurring revenue means by splitting the words, ‘recurring’ is what reoccurs or comes back, and ‘revenue’ means income. This means that when your business has a predictable, assured income in upcoming months, it is called recurring revenue.
Advantages of the Recurring Revenue Model
As a business owner or creator, you must know the following benefits of recurring revenue:
- Consistent Income: The anticipated income comes at regular intervals, and you can better manage your cash flow in and out of the business. This also brings stability to your business's revenue.
- Attracting Investors: As you have stable and recurring revenue, investors can see you as a worthy prospect and will approach you and ask for your business deck.
- Customer Loyalty: Your regular customers will buy your services, and their long-term relationship with your company will benefit from increased sales in the future.
- Business Growth and Upgradation: With consistent income, you can plan your new launches and upgrades for customer engagement.
- Future Earnings Prediction: Once you have an idea of your MRR or ARR, you can also predict your future sales and earnings.
Hence, it becomes vital to select the correct recurring revenue model for your business, as detailed in the following section. Additionally, understanding cross-platform options such as does Square process recurring payments can help streamline your payment processes and improve customer service.
Choose the Right Recurring Revenue Model
Choosing the right model will help you plan your company’s future goals and targets. There is a scope to skyrocket your business because only 24% of businesses are executing subscription models at present.
Types of Recurring Revenue Models
There are many types of recurring revenue models. Some of those are given as below:
- Fixed Rate Model: The customer pays a fixed amount for the service for a specific period. In case they cancel the subscription, they are bound to pay a cancellation fee.
Example: Basecamp model
Source: basecamp
- Automated Renewal Model: Subscriptions that continue automatic payments until the customer withdraws the subscription. For example, Netflix's auto-renewal model
- Pricing Tier Model: Your customer will be given several billing options based on feature usage that you can choose according to your needs. This model is commonly used in mobile application examples, where users can choose from free, basic, and premium plans. For example, Netflix
Source: Netflix
- Per-User Billing Model: The charge depends on the number of individuals utilizing the specific benefit. This type of recurring revenue model is best for teams, collaborations, etc.
Example: Canva model
Source: Canva
- Per-Feature Billing Model: This model works when the customer pays for new features such as upgrades and add-ons in their subscriptions. For example: Hubspot model
- Usage-Based Billing Model: The customer pays according to the features and product usage, and a different amount is set for the defined service.
For example, Zipcar model
Source: Zipcar
- Purchases and Rentals Model: Within subscriptions, customers need to pay for a certain product as a rental.
For example: Amazon prime model
Source: Amazon Prime
- Freemium Model: The user can have lifetime free access to the basic plan for a certain price. However, to use any upgrades, they will have to pay additional fees in intervals.
For example: Mailchimp, LinkedIn
Source: LinkedIn
Five Tips for Designing Successful Recurring Revenue Models
We have listed some tips for designing a successful recurring revenue model:
Determine Your Service Type
Let’s say, you run a business that doesn’t divide the customer base, for example, a movie streaming platform, then you can opt for renewal subscriptions or rentals. If you provide SaaS, which has a global market worth $197 billion and may include beginners and experts, you can choose a pricing tier model, usage-based billing model, etc.
Customer Experience
Prioritizing your customers' needs should be at the top of the list. Analyze your customer experience and make upgrades with product recommendations and pricing. Keep your billing options flexible, which can help customers change or choose other options.
Hybrid Model
Combining one-off revenue and subscription-based revenue leads to a hybrid model of recurring revenue. The hybrid model establishes security in your business during fluctuations in markets and economic downturns.
Pricing Strategies
- Cost-Plus pricing: the sum of customer acquisition cost (CAC), cost of goods sold (COGS), and your intended profit margin.
- Skim pricing: Setting a high price value and gradually decreasing for new launches and upgrades.
- Prestige Pricing: Luxury pricing is set for the first purchase, giving the impression of a prestige purchase.
- Value-based pricing: A pretentious pricing method that will change later according to market trends.
Customer Matrices
- Customer Churn Rate: The number of customers who have stopped purchasing products or services from you over a finite time duration. You can calculate the customer churn rate by using the given formula:
CCR = (Lost customers divided by the sum of customers at the beginning of the period) * 100
- Customer Acquisition Rate: The number of new customers gained during a specific period. The formula to calculate the customer acquisition rate is:
CAR = Total cost of sales and marketing divided by total number of new customers acquired.
- Customer Retention Rate: The number of repeat buyers or customers that come back to buy your product or services. You can calculate the customer retention rate using the given formula:
CRR = Ending customers - New customers divided by beginning customers
Conclusion
Catering your customers with the best user experience will help you decrease the churn rate. Additionally, your customers can experience the gated content through free-ups. Design your recurring revenue based on the subscription type, and pricing, and keep the risk factors in consideration. Lastly, do not complicate features and keep them easy to use.