What is a Recurring Revenue Business Model?
This blog provides an in-depth look at the recurring revenue business model and reasons why you should employ it.
In this blog post, we’ll discuss the recurring revenue business model, its types, and businesses suited for this model. Furthermore, we’ll examine the benefits and demerits of the model. Let’s dive in.
Recurring Revenue Business Model – Explained
The recurring revenue business model is a continuous fund-generation approach by businesses. In other words, it’s a financial model companies use to generate revenue by charging their customers some amount at certain times.
So, businesses charge per week, month, quarter, or year instead of charging customers a one-time fee. When repeat sales occur at these frequencies, the business will generate more predictable revenue
What types of Recurring Revenue Business Models are there?
Different businesses adopt several types of recurring revenue models. A company’s recurring revenue model depends on its industry, product, or service. Here we will discuss the seven models available.
- Auto-Renewal Subscriptions
Here, recurring revenue businesses renew their customers’ subscriptions automatically. Once a customer subscribes to a plan, the company charges them periodically. The periodic deductions depend on the selected time of renewal. For example, if a person subscribes to a monthly plan, the company will charge them automatically for the following month once the current plan expires. The automatic renewal continues until a customer opts out of the subscription. An excellent example of a business that has this model is Ubersuggest.
- Hybrid Billing
Hybrid billing is a combination of two or more revenue models. If a business uses a one-time offer and a recurring model, it is using the hybrid model. For example, Nintendo sells the Nintendo Switch game console for a one-time payment. They also offer a monthly subscription to Nintendo Switch Online, which enables your devices ability to play online with users from all over the globe. The combination of these models is hybrid billing.
- User-based Billing
Many companies use this model to charge their customers per user or seat. This means that the more people use the service/product, the more they will be charged. For instance, if three people want to use a Mailchimp account, they will pay more than when only one person uses it.
- Freemium
With this model, users have access to the free plan of a particular service but with limited functionalities. Users can enjoy this plan until they change their minds about subscribing to a paid plan. The free plans on Grammarly or Spotify are an example.
- Long-term Contract
A recurring revenue model is common with mobile phone companies. These companies make their customers enter a paid agreement that remains effective for some time. It covers phone bills – calls, texts, and data. Then, even though it’s a long-term contract, a customer can terminate it with a cancellation fee.
- Product Usage
In product usage billing, a business charges its customers per how much it uses its products or services. This model applies to products or services with different plans/tiers. For instance, when a service has basic, standard, and premium plans, each one usually has a limit. So, when a customer reaches the limit of one plan, the service will upgrade them to the next. The higher plan often costs more and has more functionalities. An example of this recurring revenue model is Unbounce.
- Complementary Selling
Complementary selling is the sale of two matching products by the same company. This method helps to increase one of these products sold together. For example, if a company sells a particular design of earphones for your phone, that’s complementary. The implication is that other earphone designs will not work with the customers’ phones.
What Businesses are Well Suited for Recurring Revenue Business Models?
- Product-focused Companies
Companies in this category sell products to their customers. Also, the customers subscribe to get a certain amount of products.
- Service-focused Companies
Service-based companies that charge their customers periodically fall into this category. Instead of doing a one-time service, they charge their customers monthly, quarterly, or yearly. Most SaaS companies are in this group. They offer specific services, provide updates, etc., to customers.
- Content-focused Companies
Companies in this category provide customers with different kinds of content. This could be movies, books, music, etc. In addition, they allow access to premium and unlimited services through paid subscriptions.
Benefits of Recurring Revenue Business Model
With a recurring revenue business model, a company now has a fixed revenue source. It does not have to worry as much where its next revenue will come from. If a business gets a few monthly subscriptions, it can rest assured that it will pay its bills.
This revenue model establishes a significant relationship between a business and its customer. That is, instead of a one-time sale, a recurring revenue business model brings the company in close contact with its customer at every point of purchase. As a result, the business can make new recommendations and share the latest updates with its customers.
Furthermore, subscribers enjoy flexibility. With different billing options available, customers can make a choice instead of being forced to buy a one-time plan. This helps a company to retain its customers as well. That is, beautiful service delivery will keep subscribers coming back for more (renewing their subscriptions).
Drawbacks of Recurring Revenue Business Model
One of the major challenges customers face when under this money-making model is that they might run at a loss in the case of auto-renewals. For instance, a person might subscribe to a SaaS but not get to use the service that month due to specific issues. As a result, that month’s subscription will go to waste.
In addition, a customer might begin to experience subscription fatigue. Subscription fatigue sets in when a user feels overwhelmed by too many subscriptions. When this happens, the subscriber might begin to cancel its subscriptions. However, there’s a way out of these issues.
Key Takeaways
A recurring revenue business model is a practical approach to revenue generation. As it comes in different forms, it helps customers to choose based on its company structure and goals. It allows companies to generate income without fearing where the next paycheck will come from.
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