Discover the significance of recurring revenue, its advantages, and strategies for cultivating it, as entrepreneurs aspire to foster a loyal customer base that consistently engages in monthly purchases.
What's in a business model? Why would you choose one over another? What's the key attribute of a smart business model?
For many people, it's recurring revenue.
Getting paid in advance every month to supply a product or service sounds too good to be true, but that's what you get with a recurring revenue business model.
This article defines recurring revenue, explains why it's essential, and answers the questions most frequently asked about the pricing model.
What is recurring revenue?
Recurring revenue refers to the income that can be consistently generated and collected at regular intervals. Also called repeating or subscription revenue, recurring revenue is a defining feature of the subscription business model.
In a subscription business model, customers subscribe to receive particular products or services at a predetermined frequency, making regular payments in return.
'Recurring' means that you collect revenue repeatedly, from time to time. Under the model, customers commit to buying your product at regular intervals over a long period.
Therefore, following a recurring revenue model makes sense for businesses with repeat customers. These customers have long-term problems or needs that force them to buy repeatedly.
Some examples of recurring revenue are:
- Rental payments for a commercial or residential property,
- Income from a monthly gardening service that you provide,
- Cellphone contracts for data and airtime,
- Subscriptions for audio and video streaming services like Spotify and Netflix.
Consumers who have a recurring need for something often choose one trusted supplier. They select a supplier that guarantees consistent product and service quality. To be that choice is an excellent advantage for a business because it guarantees recurring sales and revenue.
The opposite of recurring revenue is non-recurring payments, meaning one-time sales to customers who may or may not buy from you again. You cannot predict those sales and use them for future planning because their recurrence is uncertain.
Why is recurring revenue important?
When you receive sales from the same customers every month, it becomes easier to predict your sales revenue. With predictable revenue also comes stable cash flow.
Customers develop loyalty to your business by relying on you to meet their recurring needs. This loyalty strengthens your relationship with them, making them a valuable asset to your business.
A higher customer lifetime value indicates people's satisfaction with your product and service quality. It allows you to predict revenue more accurately over a long period, minimising your risks when pursuing opportunities to scale the business.
How to create recurring revenue.
There exist various recurring revenue models that you can adopt. The model you choose depends on the nature of your product or service, the frequency with which your customers buy, and their loyalty.
The best types of products to sell through a recurring revenue model are those with the following qualities:
- Essential - necessary for success, sustenance, or safety
- Habit-forming - used for hobbies
- Bought frequently and in predictable quantities
- Have complimentary products that you can add to increase order value.
If your customers make occasional purchases, your sales income cannot be classified as recurring. Similarly, if your products are non-essential and are not related to addictive or habit-forming hobbies, or if they are not necessary for work success, safety, or sustenance, then they do not contribute to recurring revenue.
To collect recurring revenue, you must decide on a business model, choosing between offering your products as subscriptions or rolling contracts.
Whatever recurring revenue model you use, the goal is to establish an agreement with customers where they pay a recurring fee to receive your products or services. The recurring payments are collected weekly, monthly, or annually, usually in advance.
Below, we explore the types of recurring revenue models and what products you can sell with them:
1. Rolling contracts
Rolling contracts are practical in situations where you offer utility services or supply essential commodities, and switching providers is challenging due to the customer's investment in enabling infrastructure The best examples of this are utilities like electricity, water, piped gas, and internet broadband.
For a rolling contract to be sustainable, you should be able to predict average consumption or have a way to track and cap it. Therefore, a rolling contract forms a tight relationship you can only get out of at its expiry.
2. Standard subscriptions
In a standard subscription, customers pay a fixed recurring fee to receive your services, access your platform, or use your product.
The model is commonly used for digital products like newsletters or news websites. An example is The Athletic, a sports news website accessible only with a weekly or yearly subscription.
Another example of a standard subscription is the SaaS model commonly used to sell software tools. Through this model, customers pay a subscription amount per week/month/year to gain access to specific features of a digital product.
Some SaaS companies use a seat-based pricing model where the subscription amount is based on the number of users accessing the product. The model is most suitable for enterprise software providers who want to make their software easily accessible to team members and boost their revenue simultaneously.
3. Product-as-a-service.
Product-as-a-service is a consumption—or usage-based business model in which customers pay a recurring fee for actual usage of a product and its associated services.
The model allows manufacturers to use their physical products as services and earn recurring revenue. Instead of buying the product, customers sign up to use the product in exchange for a recurring fee. Essentially, customers pay for performance or desired outcome.
The manufacturer retains ownership of the product and full responsibility for its repair, maintenance, and replacement.
The PaaS model can be synthesised further into subcategories depending on the customer needs the product meets. Examples of the PaaS model include:
- LaaS - lightning-as-a-service,
- CaaS - cooling-as-a-service,
- TaaS - transport-as-a-service.
4. Subscription boxes
The PaaS recurring revenue model fits high-value equipment that customers don't buy as frequently and those to which the manufacturer can add service plans.
Physical products that are inexpensive, frequently purchased, and either consumed entirely or require regular replenishment are not well-suited for the Product-as-a-Service (PaaS) model. . They are more suited to a subscription box model.
Subscription boxes are specially curated packs of products that customers receive periodically for a set recurring fee. They are weekly or monthly deliveries of niche products like vegetables, meats, toiletries, or hobby supplies.
5. Memberships
Memberships are when people pay a recurring fee to become part of a community. They differ from standard subscriptions, where one pays a recurring fee to receive a product or a service.
Memberships attract people with common interests who share valuable information, making them good places to network. Some of this information can't be obtained anywhere else, so the people who start these communities can leverage that advantage and charge a recurring fee to those who want to become members.
In the past, memberships were primarily offline and often centered on exclusive sports clubs such as golf and tennis. The internet, however, has made it possible to start a membership around any pastime.
The best thing about membership websites is that their most valuable asset is the user-generated content, which is mostly free. Beyond the membership fee, you can also bundle in extras like courses, events, and merchandise to charge a higher membership fee and boost your revenue.
The best way to create a membership is to add one to a popular blog, especially if yours has a large email list. Popular blogs with email lists include Mark Manson, Copyhackers (Copy School), Be More With Less, and Book Riot.
Recurring revenue FAQs
What does monthly recurring revenue mean?
Monthly recurring revenue (MRR) is the total fees a business collects from repeat customers monthly. Because the payments are recurring (charged every month), the revenue they generate is predictable.
If the billing cycle is yearly, MRR becomes ARR (annual recurring revenue). Both are fundamental metrics investors use to evaluate a business's revenue stability.
What is the difference between recurring and reoccurring revenue?
Recurring revenue is generated from the same customers at predefined intervals, i.e., weekly or monthly, through subscription, rental, or membership fees. Reoccurring revenue is generated from repeat customers but is not guaranteed to come regularly.
What is the difference between recurring revenue and profit?
Recurring revenue is sales you expect to get from repeat customers every month, while profit is what you are left with after subtracting production, distribution, and other costs from your sales revenue. In other words, profit is the gain or positive difference between your revenue and what you spend and give away to generate it.
What is another name for recurring revenue?
Recurring revenue is sales income generated periodically and consistently. It is also known as subscription revenue, repeating income, or continuity income.
Although not technically correct, you will also hear recurring revenue described as passive income, residual income, or monthly recurring revenue.
Streamline recurring revenue collection with automatic billing.
Generating recurring revenue guarantees you predictable income and stable cash flow. However, without an efficient revenue collection system in place, you risk frustrating customers with billing errors, processing delays, security concerns, and other manual billing issues.
Automating your billing will streamline your workflows, minimising errors, lowering your costs, and speeding up your collections. Intasend's automatic billing software also includes subscription management tools, completing your tech stack if you intend to follow a subscription business model.
Sign up for an Intasend business account to explore our automatic billing software and business payments and disbursements tools.
