Subscription services have taken off in recent years. As a result, more and more of what we eat, listen to, watch, and read are available on a subscription basis. This recurring revenue model works on constant, repeated revenues from subscriptions for goods and services.
According to a recent article in Business Wire, “customers are more loyal and spend more money with brands that they subscribe to.”
Is it time for your company to jump from a traditional sales model to a recurring revenue one? What are the benefits and the risks? Keep reading to see if the recurring revenue model suits your business.
Related: The Online Sales Tax Landscape
What is the recurring revenue business model?
The recurring revenue business model is where a vendor provides a service or a product for a fee charged at scheduled, regular intervals. Typical payment schedules are monthly, weekly, or yearly. In addition, the vendor can provide discounts to customers who subscribe upfront for a longer-term.
This model works on the predictable income generated by the subscriptions and the relative certainty that these subscriptions will continue.
The predictability of the recurring revenue model allows business leaders to stabilize expenses, maintain a constant cash flow, and make investments regularly.
Due to the length of subscriptions, the recurring revenue model allows businesses to form closer relationships with their customers, leading to increased revenue and higher customer retention rates.
What types of businesses fit well with the recurring revenue model?
As subscription services become increasingly popular, the recurring revenue model is expanding into verticals that were once in the traditional, transactional sales model.
However, there are still types of businesses that can move to and thrive in a recurring revenue model quickly and easily. Let’s look at some types of business ideally suited for the recurring revenue model.
In the digital age, content is still king. Amazon Prime, Netflix, and Spotify were early adopters of the subscription model that drives recurring revenue. Now nearly all streaming services work on a subscription model, including Hulu, Sling TV, Apple TV+, and Disney+.
Content providers are bundling their services together to attract viewers interested in different platforms at reduced rates.
Customers like subscription-based content because it allows them to view an incredible, almost unlimited amount of content from different vendors. Customers can also subscribe and unsubscribe to these services as movies or shows they want to watch become available.
Software as a Service (SaaS) Based
Like streaming providers targeted content-starved consumers, Software as a Service (SaaS) companies targeted the enterprise customer. One needs to go beyond Salesforce and Microsoft to see how popular software services have become with enterprise and government customers.
CRM, payroll, productivity, service, and collaboration software providers have all jumped from the software in a box to the SaaS model. However, few business verticals today don’t rely on SaaS software to run their daily operations in nearly every department.
APIs and integrations allow many programs to communicate and pass data from one platform to another, seamlessly connecting departments that were siloed in the past.
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Executive & Professional – Productized Services
Suppose you’re an entrepreneur looking to start your own business. In that case, a productized business is the easiest type to start because you don’t need a lot of capital to start one up. However, the burden falls on you to prospect, educate, and close leads for your business.
Design and video editing, SEO and content writing, and marketing services are all niches that are perfect for productized services.
The top productized services like Scribe, HubSpot, and Design Pickle thrive because they found specific niches like self-publishing, design, and inbound sales. They then systemized the delivery of their complete packages.
Tiered pricing allows customers only to select the services they need right away and upgrade their services as they grow.
E-Commerce – Product Based
According to an April 4, 2022 article in MarketWatch, the subscription box market is expected to grow from $22.7 billion in 2021 to $65 billion by 2027.
Customers can subscribe to monthly box subscriptions in categories from wine, personal care, men’s and women’s clothing, meals, and jewelry, to name a few.
It’s not just subscription boxes that have grown in popularity. Specific e-commerce items like printer ink, razor blades, and even video games have switched to monthly subscription services.
The recurring revenue model isn’t all bright and rosy as companies must continuously address significant challenges.
Churn is a four-letter word in the recurring revenue model. Competition is fierce, and getting and keeping customers is more challenging than ever. Non-stop competition from competitors is why subscription-based services focus on excellent service and rewards for customers to keep them once they have them.
Companies constantly bombard consumers with subscription offers after subscription offers. As a result, many consumers pay for services, like a gym, that they never use and sour on the subscription model.
People make mistakes, and products fail. Poor public relations moves and poor reviews can quickly drop subscriber rates. Staying on top of their field and being technologically relevant is a constant challenge for subscription-based companies.
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It’s tempting for companies to look at the success of the recurring revenue model and want to take a hard look at moving their current sales model in that direction. However, it pays to take the time to look at your current business model and assess the benefits and the risks of making the jump.
Suppose your company is content-based, SaaS, e-commerce, or can be productized easily. In that case, a recurring revenue model might be a good fit.
In addition, your business can take advantage of a changing market where more and more consumers are looking to purchase goods and services on a subscription basis.