The small business enterprise is in the middle of a major evolution.
Today’s buyers are becoming more interested in paying for subscription-based models instead of ownership. For that reason, many business sectors have transitioned from an ad-hoc sales model to a recurring revenue business model.
The recurring revenue business model allows organizations to earn a steady and consistent income by providing ongoing access to their products or services in exchange for scheduled payments.
Remember when this business model was once exclusive to music, newspapers, and gyms? Now the recurring revenue system is penetrating industries such as groceries, retail, entertainment, and more.
The recurring revenue business model isn’t going anywhere anytime soon with enticing advantages like continuous cash flow and increased customer retention. This blog post will discuss the need-to-know aspects of this model, including its definition, types, and benefits for small businesses.
What is a Recurring Revenue Business Model?
The recurring business model is the inspiration for subscriptions businesses and membership services. It is when a company gives access to its product or service in exchange for a regular fee. Most commonly, customers are charged at scheduled intervals such as monthly, quarterly, or annually.
It flips the traditional, one-off sales business model on its head. Instead, businesses can look forward to predictable cash flow and a steady profit margin as customers consistently make payments. Additionally, the recurring revenue model establishes a stronger and more trustworthy relationship with buyers resulting in increased customer retention.
Example of a Recurring Revenue Business Model
A new adapter of the recurring revenue business model is the auto industry. Car drivers can now subscribe to vehicles as a service instead of purchasing or leasing.
For instance, Nissan launched an “on-demand driving” program. It is a subscription service model called Nissan Switch. The monthly subscription includes the car, cleaning, insurance, roadside assistance, and regular maintenance.
Additionally, customers are allowed to switch their vehicle (as often as a new vehicle each day), unlike long-term leases. Plus, there is no long-term contractual commitment, just like other standard subscription services for television and music.
The recurring revenue business model benefits Nissan by establishing an additional channel for predictable income as well as quickly adjusting to changing buyer demands.
Types of Recurring Revenue Business Model
The distinctive feature of this model is that customers are locked into pre-determined charges until the contract period ends. When the contract period ends, customers can choose to continue the service with a rolling monthly contract.
However, if a customer wants to cancel their contract early, they will be charged a fee in most cases. Doing so ensures future profits for the business against unanticipated cancellations or delays.
The best example of the hard contracts business model is phone contracts. Once customers sign on, they are charged a fixed amount for calls, text, and data until a specific period.
The auto-renew model is also known as evergreen subscriptions — because the subscription can go on forever. A customer must voluntarily cancel their subscription to stop the business from charging them. Subscription services such as Netflix or Spotify are excellent examples of this model.
As you probably could have guessed, this model defines billing customers for their product or service usage. It is advantageous to customers because they are not charged for irregular use. However, from the business’s perspective, it means unpredictable revenue because of customer usage fluctuations.
This pricing model is based on different levels of use. It is commonly featured in sales and marketing platforms such as email, CRM, and website software.
Based on the user’s needs, they can choose from pricing structures such as Basic, Professional, and Enterprise. Each comes with different access and feature levels. Therefore, as a business grows, so will their need for a higher pricing package.
Benefits of the Recurring Revenue Model
Perhaps the most significant draw to a recurring revenue business model is that it brings in steady, predictable income. Revenue is subject to market-based fluctuations. For this reason, many companies that run on a one-time sales model are prone to cash flow challenges and downsizes. On the other hand, having predictable revenue helps organizations budget expenses and invest in expansion.
High customer retention
In a typical business model, organizations acquire a customer, sell their product, and hope that they come back for another sale. While earning new customers is essential in initiating sales, it is easier to sell to existing customers than new ones. Not to mention it’s five times cheaper to keep an existing customer than to acquire one.
Creating a recurring revenue business model helps with customer retention. For example, businesses can measure customers’ purchasing behaviors and predict their needs in advance. Then, based on their buying patterns, they can send personalized emails and targeted ads to recommend products buyers would most be interested in.
Widen your customer base
The recurring revenue model offers the pricing flexibility many customers need. Smaller payments eliminate the price barrier for potential buyers and make purchasing a product or service more accessible. For instance, it is less intimidating to make a monthly payment of $25 than a lump sum of $300.
Learn About Crowdz Recurring Revenue Financing
Crowdz is a competitive invoice marketplace on a mission to gives small and mid-sized businesses the upper hand. We recently launched a recurring revenue financing platform to eliminate cashflow challenges for businesses everywhere.
The financing solution connects business owners and entrepreneurs with qualified investors who provide upfront capital in return for the ongoing total gross revenue. The benefit? You can get a lump sum amount by exchanging unpaid invoices and subscription contracts.
Learn more, here.