Revenue Recognition

What Is a Recurring Revenue Business?

February 01, 2021

A common misconception of businesses large and small is the belief that all revenue is created equal. Nowhere is this notion more challenged than in the recurring revenue business model. Unlike other business models, recurring revenue provides companies with a constant and predictable revenue stream, while increasing customer lifetime value (CLV).

The question becomes – are all recurring revenue businesses the same, and if not what are the differences?

Scaling the Recurring Revenue Business Pyramid

An article in Inc. uses the analogy of a pyramid to explain five recurring revenue business models and their value. With level five the top tier, here’s a brief synopsis of each of the levels.

Level 1 – The Repeat Customer

With limited ability to create customer stickiness, this is the most risky of the recurring revenue business models. Regardless of the size or profitability of the company, businesses with this type of recurring revenue model are always in jeopardy of customer churn. Let’s take a look at companies of varying sizes that are at this level. From a small and medium-sized business (SMB) perspective, local coffee shops and family run stores provide excellent examples. At the opposite end of the spectrum are large enterprises, such as airlines and restaurant chains. Typically these types of companies rely on repeat business, and it’s easy for customers to go to a competitor.

Level 2 – Repeat Revenue, the Network Effect

As we scale the pyramid, the next recurring revenue business model relies on customers repeatedly using your products or services. Referred to as the network effect, this recurring revenue business model touches nearly every industry. For example, Apple, Skype, Zoom, and even some restaurants and stores are great examples of companies that are successfully using the network effect. As more customers use your products or services, there’s an increase in people that are drawn to your business. This of course, results in a surge in customers, exponential growth, and brand loyalty.

Level 3 – The Sequential Revenue Model

As the name suggests, the middle tier of the pyramid is about increasing recurring revenue by cross-selling and upselling products or services. For instance, Mailchimp offers 4 pricing options, including a freemium model, which limits the number of contacts and emails. As your business grows, you will inevitably need to subscribe to one of their subscription-based services. Taking a look at this recurring revenue business model from a consumer perspective, think toilet wands that require brand named replacement scrubbing brushes, shaving sticks that need customized razors, and coffee makers that can only use specific cups.

Level 4 – The Good Until Cancelled Recurring Revenue

Based on customers remaining with the company until they ‘opt out’, this is an effective recurring revenue business model. There are countless examples of this model, including, Amazon Prime, home and car insurance companies, meal delivery services, etc. While there’s always the possibility that the customer will terminate the relationship, the majority of customers pay their monthly invoices automatically, which adds a layer of security for the business to continue receiving recurring revenue. With the responsibility of cancellation on the customer, recurring revenue from this model can be long term.

Level 5 – Recurring Revenue with a Contract

At the top of the pyramid, this recurring revenue business model is similar to level 4, however a contract is involved for a set period of time. If the customer cancels the subscription prior to the conclusion of the contract, there’s typically an early termination fee. For example, cable and satellite companies charge an early termination fee that is prorated, which can amount to hundreds of dollars. Types of companies that are in this tier include, home security companies, mobile phone companies, internet providers, etc. This model provides organizations with the ability to retain subscribers for a longer period of time, as well as to forecast both short-term and long-term revenue with more accuracy.

While recurring revenue can appear different depending on the industry and even the business, the one thing they all have in common is the ability to capture predictable revenue. Albeit with various levels of certainty.

Capturing Recurring Revenue

The value of a recurring revenue business is indisputable. As demonstrated by the various pyramid tiers, there are a variety of reasons why customers remain with or return to a company. Some for the convenience, others because of contractual obligations, and the most sought after group – out of loyalty.

Regardless of the reason that customers remain with a company, the fact that they do provides a monetary competitive advantage. Research conducted by Ventana Research revealed the top three business drivers for companies to adopt a recurring revenue business model:

  • Increasing top line revenue – 51%
  • Enhancing the customer experience – 51%
  • Increasing customer loyalty – 46%

To consistently capture recurring revenue over the long term requires putting the customer at the center of your business processes. As explained by Ventana Research, the model provides companies with an ongoing opportunity for satisfying customer interactions that drive loyalty. However, they had better be sure to follow through on it. Companies that fail to provide competitive services or fall short in service delivery will lose customers with little hope of ever getting them back.

Put Your Recurring Revenue Stream on Autopilot

Consistently delivering on customer expectations requires flawless execution of the entire quote-to-cash processes. BillingPlatform enables you to effortlessly automate quote-to-cash processes, putting your recurring revenue stream on autopilot. Our cloud-based platform allows you to easily adapt to any business requirement or billing need, providing you with the time to deliver the type of customer experiences that will drive customer loyalty. Curious if BillingPlatform is what your recurring revenue business is looking for? Reach out to our team today and let’s find a solution that fits your needs.

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