How we purchase products and services is rapidly changing, and so are the types of business models companies gravitate towards. Customers want convenience and predictability, and businesses want to increase revenue and reduce churn. The answer is for customers to make purchases on a subscription basis, and for companies to receive revenue period-to-period (while improving the customer experience). Certainly, the popularity of the subscription recurring revenue business model can’t be denied. In fact, growth expectations are forecasted to reach $1.5 trillion by 2025, more than double its current estimated worth of $650 billion.
Subscription vs. Recurring Revenue
Although the terms are often used interchangeably, there are subtle differences between subscription and recurring revenue. For starters, subscription is a business model based on customers signing up to receive products or services continually. Recurring revenue is the payment companies receive at regular intervals from their customers. In other words, subscription-based business models are a type of the recurring revenue model. Recurring revenue also includes other business models like long-term contracts and retainer services that aren’t necessarily tied to subscriptions.
While subscription and recurring revenue share similarities and are prone to overlap, there are some operational differences between the two – namely the industry. For example, subscription industries such as entertainment and music (Netflix and Spotify), eCommerce (Amazon Prime), periodicals (newspapers and magazines), books (Kindle Unlimited), subscription boxes (Hello Fresh and Barkbox), cloud services (Amazon Web Services and Microsoft Azure), gym memberships (24 Hour Fitness and Planet Fitness), etc. provide products or services to their customers who pay a recurring fee. The fee is nearly the same amount period-to-period (monthly, quarterly or annually). With the wide variety of subscription-based businesses, it appears that nearly all companies can join the subscription economy.
While many can and do, not all industries are applicable. Think utility companies – water, electricity, gas. While these companies charge on a recurring basis, customers don’t sign up for a subscription and the amount they pay on a recurring basis can fluctuate significantly. So we’ve focused on the subscription-based recurring revenue business model. We’ll dive into it’s growth and new entrants, subscription revenue pricing models, and subscription revenue business model benefits and challenges.
Exceptional Growth Attracts New Entrants
It’s no surprise that organizations worldwide are adopting the subscription recurring revenue business model. A quick look at the following supporting statements reveals some impressive statistics.
- Subscription businesses grew revenue five times faster than S&P 500 company revenues
- By 2022, more than half (53%) of all software revenue will be generated from a subscription business model
- The US consumes 53% of all digital subscriptions
- Mobile app spending is forecasted to reach $270 billion
- Software as a service (SaaS) is projected to double over the next five years to reach $370 billion by 2026
- Streaming services are expected to grow to $155 billion
The subscription economy is here to stay and a growing number of industries are jumping on this lucrative bandwagon. We’ll look at a few companies already offering their products or services on a subscription basis and some just beginning to take the plunge.
Companies Around the World Embrace Subscription Billing
From long lines, missed connections, and canceled flights, airline travel can be downright time-consuming and annoying. What if you could avoid the hassle and receive personalized service? For many, especially frequent travelers, joining a subscription-based air travel membership program such as offered by Surf Air, Wheels Up, FlyLine and others is well worth the membership fees.
Airline travel isn’t the only mode of transportation that has joined the subscription economy. Unlike buying, renting or leasing, a monthly subscription fee provides automotive subscribers with a selection of vehicles from an automaker or third-party service. Some companies that have already onboarded a subscription-based business model include BMW (BMW Access), Volvo (Care by Volvo), Porsche (Porsche Drive), and Ford (Canvas + Fair).
Aside from travel and transportation, other industries such in-home fitness companies such as Peloton, Fitbit, Mirror, and Tonal; gaming – GameStop, Xbox Game Pass, and EA Access; health & wellness – MDVIP, Happify, Sleep Cycle, and Headspace; and education & professional development – Codecademy and LinkedIn Learning – to name a few – now offer subscription-based services.
With the number of Americans ages 65 and older projected to nearly double from 52 million in 2018 to 95 million by 2060, it should come as no surprise that providing care and assistance to an aging population through a subscription-based model is making an entrance. Companies such as Papa and Umbrella provide elderly subscribers with consistent assistance to aid in transportation, chores, home repairs, etc. A more recent industry to enter the subscription economy is that of camping, which provides discounts or free stays at campgrounds and RV parks, as well as retail discounts.
Boost Revenue with the Right Recurring Pricing Model
To start, you need to determine the recurring pricing model that gives a fair exchange of value between the products and services provided to your customers and the amount charged on a recurring basis. To narrow it down, here are the top six recurring revenue pricing models and their advantages and disadvantages.
1) Freemium: Provides access to specific functionality at no cost
- Advantages: Don’t think of freemium as giving your products or services away. Instead, this pricing model provides prospects and customers with a low-entry barrier. Then once they’ve signed up you can up-sell to the next tier or cross-sell additional features and functionality. Alternatively, you can set up your freemium plan to be available for a set period of time. At the end of the freemium period, you’re automatically upgraded to the next pricing tier.
- Disadvantages: If you don’t monitor your freemium plans or put stopgaps in place, it’s possible that you can lose revenue. In addition, if your freemium customers are taking too much time and energy to service and maintain, you may find yourself in a situation where you don’t have the bandwidth to provide your profitable customers with the attention they need.
2) Flat–rate: This is perhaps the simplest recurring revenue model. Customers get charged the same amount on a weekly, monthly or annual basis for a fixed set of features or services.
- Advantages: Provides pricing assurance, which is more attractive to potential customers. In addition, given its consistency, sales forecasting and profit estimates are easier to calculate.
- Disadvantages: This pricing model makes it difficult to adjust pricing if your costs are higher than originally projected. In addition, when you find yourself with an overage of product, flat-rate pricing isn’t conducive to selling off extra inventory.
3) Tiered: Typically consisting of between 2 and 5 tiers, pricing scales depending on products or features used. When the limit of a tier is reached, customers are upgraded to the next tier with more functionality or usage.
- Advantages: This pricing model provides wide customer appeal since it meets various needs.
- Disadvantages: If too many tiers are offered then it gets complicated quickly.
4) Per user/per unit: Also known as consumption-based pricing, this model charges customers based on usage such as API calls, transactions, number of seats, etc.
- Advantages: Delivers a predictable revenue stream over the long term. It also provides the ability to scale to meet the changing needs of growing businesses.
- Disadvantages: It may not completely align with the value of your products or services, which means that you could leave money on the table.
5) Dynamic: A pricing model that gives you the freedom to offer creative pricing options such as formula-based, time-based, demand-base, or event-based.
- Advantages: Enables you to maximize profits by adjusting pricing based on demand, time, costs, etc.
- Disadvantages: As the name implies, pricing is dynamic. This may alienate customers who believe they’re paying more than their counterparts, or those that prefer a set price.
6) Hybrid: Provides the ability to maximize revenue by combining a variety of pricing models such as one-time charges, usage, tiered, subscription, overages, etc.
- Advantages: Gives you the ability to overcome the disadvantages and constraints of a single pricing model, and enables you to better align pricing with value.
- Disadvantages: Complex by nature, this pricing model requires internal effort to ensure it’s easy for customers to understand.
Choosing a subscription recurring revenue pricing model isn’t easy. However, the goal should always be to provide customers with a fair exchange between value and price.
Reap the Benefits of a Subscription Recurring Revenue Business Model
70% of business leaders say subscription business models will be key to their prospects in the years ahead – are you one of these companies? If so, you need a billing solution that supports even the most complex recurring revenue business relationships. BillingPlatform’s cloud-based solution enables you to easily manage any combination of pricing models – all on a single platform.
The subscription economy isn’t slowing down. Neither is the opportunity for you to roll out innovative business models and capture new revenue. Are you ready to reap the benefits of a subscription-based recurring revenue business model? Let the BillingPlatform team show you the platform in a free 14-day trial.