While recurring revenue business models provide predictable revenue at regular intervals, not all recurring revenue business models are created equal. Think of it as the steps of a ladder where the higher you climb, the more valuable this type of business model is to your organization. However, the playing field is becoming increasingly competitive as a growing number of companies, across virtually all industries, begin to adopt this business model. A recent Salesforce and CFO Research survey revealed that 52% of companies receive at least 40% of their revenue through recurring models, and that over the next 5 years 55% of businesses expect that 40% of their revenue will come from recurring sources. So what are the best recurring revenue business models to help you stand out in the crowd?
Climb the Recurring Revenue Business Model Ladder
When you’re considering which are the best recurring revenue business models to implement, it all comes down to two interwoven strategies. Making it difficult for competitors to snatch your customers and then creating the kind of customer loyalty that makes churn undesirable. Let’s go through each of the recurring revenue business model steps, what they are, and what it takes to move up the ladder.
Customer stickiness at this level can be fleeting. These types of businesses include restaurants, bakeries, grocery stores, coffee shops, airlines, hotels, etc. Let’s face it, one of the biggest disadvantages that companies at this level face is that there’s nothing stopping customers from going to a competitor. In order to develop a loyal customer base you need to raise the bar on customer service, far surpassing your competitors’ customer experience initiatives. In addition, try incorporating customer loyalty programs in order to add a personal touch and provide customers with the sense that you value their business.
Commonly referred to as the network effect, this level uses the power of an increasing number of customers to improve the value of the products or services you sell. Numerous and varied organizations call this rung home like eCommerce sites (eBay, Etsy, Amazon), ticket exchanges (StubHub, Ticketmaster), rideshares (Uber, Lyft), food delivery (Grubhub, DoorDash, Uber Eats), and social media (Facebook Twitter, Instagram, LinkedIn). Although what they sell is diverse, the benefits each of these companies receive is in providing improved experiences as more people participate, and in its inherent ability to onboard new participants (customers).
Is it possible to move from step 1 to step 2? Yes, by way of network externalities. Although similar, they have distinct differences and in some situations network externalities can lead to a network effect. Let’s take two of our examples from step 1 – restaurants and grocery stores. In each case, whether a grocery store parking lot is filled with cars or a restaurant with people lined up outside waiting to be seated, it will signal others that this is the place to shop or eat. By boosting customer engagement, critical mass are now purchasing your goods or services, enabling you to reach the next rung on the ladder.
The third rung, the sequential revenue model, encourages customers to consistently upgrade or purchase complementary products or services. A common recurring revenue model used by SaaS companies the world over, customers may begin their relationship with you by purchasing the lowest available tier or in some cases a freemium plan, however the goal is to up-sell and cross-sell additional products and services. Take for example Apple TV that provides various streaming tiers beginning with basic, no cost access. But once logged in, a library of premium shows and movies are presented that require a monthly or annual subscription. eCommerce companies use a similar strategy in that as a purchase is being made, a list of products that others have also bought is promptly displayed.
This ‘good until cancel’ step, also known as ‘auto-renewal’, requires customers to opt out of the products or services you are providing to them. By putting the burden of cancellation on the customer, you have set yourself up for recurring revenue over the long run. eCommerce companies listed in step 2 such as Amazon (Prime) and streaming services such as Netflix, are frequent users of the ‘good until cancel’ clause. Other industries in this category include meal delivery companies, insurance agencies, and bank and credit card companies.
This is where a contract comes into play. Referred to as ‘recurring revenue with a contract’, the top rung of the ladder provides companies with a higher level of recurring revenue predictability than the previous 4 steps. While in step 4 the burden to sever ties with a company is the customer’s responsibility, step 5 makes it financial inconvenient for a customer to go to a competitor. Think about the early termination fees that cable and satellite companies charge or the contract you signed with your mobile phone carrier. Considered hard contracts, customers are locked-in to your services until the expiration of the contract, unless of course, they are willing to pay the early termination fee.
Where you end up on the ladder is largely dependent upon your industry and your strategies. Can a typical step 1 business reach step 5? Most likely not, however they can progress to step 2 and even step 3. Conversely, some industries in step 2 can make their way to the top of the ladder. However, it’s not just about reaching the highest rung in the ladder, there are other considerations such as how you bill for your products or services.
Get the Biggest Return from Your Recurring Billing Strategies
While not every industry can use all of the billing strategies we’re going to cover, the majority of companies can incorporate at least one or offer multiple pricing options.
Charge a certain amount each month for a predetermined set of features, functionality or services. Example – Dollar Shave Club enables customers to customize their monthly box of products and charges the customer according to the products selected.
Offers a variety of packages that contain different levels of functionality, features, usage, etc. When a customer exceeds the quantity allowed by their chosen plan they move to the next tier and are charged accordingly. For instance, you may offer basic, professional, and enterprise plans or starter, growth, scale, and custom tiers. Example – Widely used by SaaS companies such as Salesforce.
Enables you to move beyond simple subscription-based billing, allowing customers to pay for only what they use. This billing strategy gives you the flexibility to bill and rate any aspect of your products such as clicks, API calls, downloads, seats, text messages, minutes, bandwidth – virtually anything. Example – Collaboration software companies such as Asana, Teamwork, Slack, etc. are typical users of this pricing model.
This pricing model gives you the freedom to bill based on a number of formulas or factors. A few examples of dynamic billing include:
- Formula-based pricing: Calculate product or service pricing based on conditions or attributes. Example – The postal service will both measure and weigh your package to determine the shipping cost.
- Time-based pricing: Use time of day and/or certain dates such as holidays to determine the charge rate. Example – Electric companies raise and lower their rates depending upon the time of day or night, as well as holidays.
- Demand-based pricing: Also called surge pricing, this pricing model enables you to fluctuate pricing based on customer demand. Example – Hotels and airlines will raise their prices during peak travel seasons.
- Event-based pricing: Automatically send invoices in response to specific events that are defined based on usage or other related account or product changes. Example – Home renovation companies typically invoice for a certain percentage when the contract is signed, another percentage once a completion milestone is reached, and the remainder at the conclusion of the renovation.
Use any combination of one-time charges, usage, tiered, subscription, overages, etc. to create even the most complex pricing schemes. Examples – Subscription + On-Time Fees, Subscription + Pay-As-You Go, Subscription + Overage, Multi-part Pricing.
Remaining profitable requires you to frequently review your recurring pricing models and make adjustments to ensure that you’re not leaving money on the table. To get the most from your recurring revenue pricing plans you may want to increase your prices, eliminate or scarcely offer freemium plans, sell features à la carte, and remove anything that’s unlimited from your bundles and pricing packages.
The value of a recurring revenue business model is indisputable and companies such as Adobe, Microsoft, Hubspot, Salesforce, Gillette, etc. are reaping the benefits.
Cash In on Recurring Revenue Today
So how do you determine the best recurring revenue business models to implement at your organization? Remember that with the numerous pricing models to choose from, you’re able to provide attractive choices that your customers will love while generating a steady stream of regular income.
No matter which you choose to implement, BillingPlatform’s BilllingCloud is the only billing solution on the market today that gives you the flexibility to support them all. That’s any business model with any combination of one-time charges, subscription, consumption or hybrid-based billing – all on a single platform. If you’re ready to easily develop a variety of innovative billing models that will support even the most complex recurring revenue relationships, talk to our experts today.