What is a Recurring Revenue Model?

What is a Recurring Revenue Model?

Recurring revenue is predictable by nature, which provides major business advantages. Thanks to predictable revenue, business planners can make recurring investments, keep expenses stable, and maintain a consistent cash flow.

However, not all businesses can support recurring revenue models. If your business model is selling one-of-a-kind custom items at a high price point, it will be difficult to generate recurring revenue. On the other hand, if you are selling mass-produced goods or content to the same group of customers on a regular basis, you will find it easier to set up a recurring subscription processing business model.

This article will help you understand what recurring revenue is, which subscription models work best in practice, and how you can leverage them to your advantage.

What is a recurring revenue model

Recurring revenue is any repeating revenue that is distributed across regular intervals over a set period. It is an established way to generate recurring revenue for specific products, niches, and business types. The main benefit of thinking about recurring revenue in terms of models is that you can try them out and see how they work for your business.

If you are selling cars, you can’t really hope to sell a car to the same customer every month. But if you’re selling coffee wholesale to bars and restaurants, you’re likely selling consistent volumes to the same group of clients. This is recurring revenue in practice.

6 Types of Recurring Revenue Models

Recurring revenue is predictable by nature. The implementation of such a business model is where things get less predictable.

The question is what can you sell to customers and clients on a regular basis. The key to making recurring revenue work for your business is to determine if the product you’re selling piecemeal at irregular intervals, can be sold over time on a regular basis. This is where recurring revenue models come into play.

Below you can find six typical recurring revenue models.

1. Subscription Membership

Subscription membership

Subscription-based models are common in the publishing industry. A subscription provides the recurring customers with new content each month. Digital publishing has pushed this idea further, so in addition to new releases, customers typically receive access to an archive of past publications.

Subscriptions are the most basic recurring revenue model. If you can sell a product or a service as a subscription, you can make recurring revenue. Subscriptions typically cover month-long or year-long periods.

Subscription-based businesses typically offer tiered membership model to cover different customer segments. The basic subscription usually offers limited features and no customer support, but is typically free of charge. Higher tiers offer expanded features and customer support, with an increased price tag.

Online learning platforms are a classic example of subscription-based monetization. In exchange for a recurring fee, students gain access to learning materials (video lectures, articles, ebooks, etc.), live chat for student support, interactive lectures and webinars, etc.

If you are interested in the subscription industry, learn what you need to start a subscription business.

2. Sunk Money Consumables

Sunk money consumables is a recurring revenue model where a consumable is needed to keep a related product functional. For example, printers need ink in order to print, so companies need to purchase ink cartridges on a recurring basis to keep their printers working.

The way to leverage sunk money consumables is by manufacturing both the product that needs consumables, as well as the consumables themselves.

What makes or breaks this model is how you define your consumable. For example, if a car manufacturer made tires that only lasted for a month, their customers would quickly switch to a different manufacturer.

3. Sunk Money Subscriptions

Sunk money subscriptions is another revenue model where a permanent purchase is accompanied by a recurring one. In this case, the recurrent aspect doesn’t come in the form of an additional product, but as a supplementary service required to make the original product or service work.

This model is common in the video game industry. After a one-time purchase of a game console, users need to subscribe to an online service. Through the online service, users purchase and play games, receive updates, and access multiplayer game servers.

4. Hard Contracts

Hard contracts

Hard contracts are service-level agreements with strict conditions in terms of billing and services provided. According to the hard contract model, services are provided to customers over a given time period in exchange for charges set in advance. Hard contracts rely on legal force to set up recurring revenue.

Internet service providers typically rely on this model of recurring revenue. Once a customer signs a contract, they are eligible to receive internet access for a fixed time period with a recurring monthly fee, possibly with limitations expressed as a data cap. The costs for breaking the contract are often substantial, so customers usually wait until their contract is up to renegotiate.

5. Auto-Renewal Subscriptions

As a recurring revenue model, auto-renewal subscription relies on the fact that customers want a hassle-free experience with their service providers. So instead of nudging the customer to renew their subscription at set intervals, the subscription gets renewed automatically and the revenue keeps rolling in.

Content distributors such as Netflix use auto-renewals to great effect. Netflix correctly assumes that once a customer is hooked on a particular series or genre, they’ll want unrestricted access to the service. A subscription that renews automatically is the perfect payment solution in this context.

6. Online Membership Programs

Instead of relying on a single product or service for recurring revenue, you can sell a bundle of related services for a recurring fee. The advantage of this model is that you give customers multiple ways to extract value from your offer, instead of forcing them to pick a single service.

The standard model here is to build a membership website where users can access a variety of features for a monthly or yearly admission fee. Some users might gravitate towards networking with like-minded users in a safe environment, some might prefer browsing the knowledge-base to find valuable data, and others might do a little bit of both in addition to using a free template or app provided on-site.

Learn everything you need to know about Subscription vs Membership.

Advantages of Using a Recurring Revenue Model

There are many advantages to using a recurring revenue business model.

Consistent Cash Flow

Consistent cash flow

Recurring revenue models allow you to predict your cash flow with greater precision, which in turn makes it easier to plan and keep track of your finances as a business. You can make long-term investments without worrying whether you’ll be able to meet monthly costs.

Safe Investment

The predictable nature of recurring revenue models attracts investors. Recurring revenue leads to stable growth over time, so investors are guaranteed to make a profit with minimal risk.

Customer Loyalty

Recurring revenue models support customer retention strategies, which lead to more loyal followers over time. Once customers become accustomed to using your services, they will be reluctant to switch to another provider.

Disadvantages of Using a Recurring Revenue Model

Disadvantages of recurring revenue model

Recurring revenue models have a number of unique disadvantages. They are less obvious than the advantages, but no less important.

Vulnerability to Technological Breakthroughs

Recurring revenue models work on the assumption that a given product or service can be sold continuously, without compromising the value they provide to customers. But with the emergence of new technologies, these models can quickly become obsolete.

If what you’re selling as a service can suddenly be replaced with a one-off purchase, customers will have no reason to use your solution.

Complacency

Recurring revenue is potentially harmful if it affects company culture and leads to complacency. If revenue just keeps rolling in, some organizations tend to start neglecting customer service, product development, and other growth engines.

Customer Lock-in

Recurring revenue requires you to maintain close relationships with customers and clients. These kinds of relationships can become suffocating over time. The customers notice if they has invested too much of their assets into your company, leading them to consider using a less personal, less invasive solution for their needs.

Processing recurring payments from customers requires you to adhere to certain rules and regulations. Below are some things you must consider when developing a recurring revenue business model.

Opt-In/Opt-Out Option

You must ensure that you have full legal disclosure when signing customers up to auto-renewals. Otherwise you expose the business to potentially 12 months of chargebacks if you haven’t properly secured the approval of the cardholder upfront.

Refunds

In case of service outages or part payments, your refund policy must be crystal clear before the cardholder signs up. You must have the right buy-in from the cardholder in advance. 

Is Recurring Revenue Right for Your Business?

Recurring revenue is beneficial for any business that can implement it right.

If your business model is geared towards one-off sales, it might be difficult to implement a recurring revenue model in a way that makes sense. Customers won’t pay for something multiple times if they can get the whole package up front, with no strings attached.

However, if your business can successfully transform into a long-term service, you get a lot of mileage from recurring revenue as a monetization model.