Increasing Business Profits by Adding Recurring Revenue Models

The business landscape is constantly changing. As a business owner, you must be willing to adapt to these changes. Over the past decade or so, we’ve seen many industries begin to incorporate recurring revenue through subscription models. The model that was once reserved for periodicals and insurance sales can now be found in doctors’ offices, car washes, and even restaurants. But what are the benefits of adding recurring revenue models to your business? What are the drawbacks? That’s what we will explore in today’s entry.

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This week on The Financially Simple Podcast

• What is recurring revenue? (2:31)
• Subscription-based with auto-renewal (4:00)
• Long-term contracts (5:12)
• Cross-selling or supplementary products (6:40)
• Why does recurring revenue matter? (9:10)
• Financial predictability (9:34)
• Added stability (11:23)
• Deeper customer relationships (12:50)
• Easier customer experience (16:21)

Recurring Revenue Models

A recurring revenue model is one where revenue is predictable, continuous, and stable. According to Investopedia, recurring revenue models are very attractive to investors because “they make a company more stable and predictable, both operationally and financially, lowering the risk that the business will take a drastic turn from one month to the next.”

Recurring revenue streams aren’t just popular with investors. Consumers like them too. But there are many options to choose from. Knowing what they are and how they work could help you decide which model is best for your business.

Subscriptions with Auto-Renewal

Chances are, you’re using at least one auto-renewed subscription service in your personal life. Basically, this model offers consumers access. Businesses that use this model have a product or service library that they give customers unlimited access to for one monthly price. Streaming services like Netflix, Hulu, and Apple Music use this model to great success. In fact, Netflix’s total revenue for 2021 was approximately $30 Billion. 

However, the subscription-based recurring revenue model isn’t reserved just for streaming platforms. This model has been used for quite some time in digital and print subscriptions. Even restaurants are beginning to apply subscription models to their businesses. P.F. Chang’s recently announced a premium tier to their loyalty rewards program. For a monthly fee, Platinum Rewards members receive more points per dollar spent and other exclusive benefits.

It may require a little creativity to implement such a revenue model in your industry, but the subscription model is no longer just for media.

Long-Term Contracts

This model has been used by cellular service providers and cable companies for a long time. Typically, businesses using this model will lock customers into multi-year contracts that include early cancellation penalties. This enables the company to record future earnings, as they’re almost guaranteed by the legally-binding contract. Similarly, the business can estimate the early cancellation percentage, allowing them to accurately forecast revenues from contracts. 

How could you utilize long-term contracts within your own business to generate repeating income?

Cross-Selling Supplementary Products

In addition to subscriptions and long-term contracts, you can create repeating revenue streams by selling a product that only works with another product you offer. For example, Apple makes cell phones, laptops, etc. The same is true of their competitors. However, Apple’s products are the only ones that will operate on their proprietary operating system.

Friends, we see this all across the retail sector. Think about the way you buy razors or even Swiffer mops. Both of these items are sold as a “starter kit” which includes the permanent hardware (the handle). After that, you have to purchase that brand’s refill kits and cartridges. They’ve created a recurring revenue stream by providing a limited-use element that only fits their proprietary hardware.

These are just a few examples of the repeatable revenue business models out there. So, there are several ways that you could add recurring revenue models to your business. But what are the pros and cons of a recurring revenue model?

Benefits of Recurring Revenue Streams

Although there are many benefits to creating a recurring source of revenue for your organization, I’m going to focus on a few of the most practical ones. Companies with recurring revenue models are often very attractive to investors. This is because they offer financial predictability and stability. Let’s take a closer look at how.

Financial Predictability

With a reliable and consistent revenue stream, you have a greater ability to accurately forecast the business’s annual income. For example, if you own a $10MM business and 80% of your annual revenue is received on a recurring basis, then you know you’re going to receive at least $8MM each year. This is extremely helpful when budgeting. You will almost immediately know if you need to tighten up on your expenses or if you can allocate more funding toward your product development and marketing efforts.

Increased Stability

Investors don’t like to take unnecessary risks. The more stable, predictable, and scalable your business is, the lower the risk. The lower the risk associated with your organization, the more attractive it becomes. Recurring revenue businesses offer greater financial stability because they’re never starting from zero. You can always rely on the Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR).

Additionally, recurring revenue models help create deeper customer relationships. But how?

Deeper Consumer Relationships

In a traditional one-time payment model, the business and consumer go their separate ways once the transaction is complete. Of course, repeat customers are a thing, but reaching them, again and again, requires a great deal of effort and money. Harvard Business Review estimates that acquiring a new customer is anywhere between five and 25 times more expensive than retaining an existing one.

On the other hand, a recurring revenue model only requires you to make the initial sale one time. After that, you only need to provide continued value to the customer for them to continue. Because the relationship is almost built-in, you can focus more on retention and developing deeper relationships with your customers. Now, you might be saying, “This is all well and good, Justin. But what about growth opportunities?” Well, I’m glad you asked!

Business Growth

Creating a recurring revenue stream offers real growth opportunities. According to research by Global Banking & Finance Review, 75% of business leaders believe that subscription-based business models are key to growth. Similarly, Grand View Research expects the global video streaming market (an industry founded on recurring revenue models) to expand at a Compound Annual Growth Rate (CAGR) of 21% between 2021 and 2028.

Of course, there are cons to implementing recurring revenue streams. Let’s explore what to watch out for.

Dangers of Recurring Revenue Sources

Customer churn is definitely something to consider if you’re thinking about adding a recurring revenue model to your business. Recurring revenue doesn’t work without renewals. Therefore, you’ll need to make your service valuable and easy for your customers to use.

Billing can also become a challenge when working within a recurring revenue business. You’ll undoubtedly encounter failed transactions from insufficiently funded accounts and expired debit and credit cards. Working with a payment gateway provider can help you manage some of the hassles that come with recurring models.

Finally, extraordinary success may not seem like a con, but if you’re not able to keep up with the sudden influx of business, it can get away from you in a hurry. You can avoid this by slowly rolling out your recurring model. Ease your way into this model and ensure you’ve got the appropriate staffing levels, systems, and processes in place to handle the transition.

Wrapping Up…

Folks, we all like to make money. As business owners, there are always new opportunities to explore, new consumer trends to tap into, and plenty of ways to improve your organization. Creating a recurring revenue source can really  help improve your top line numbers, enabling you to positively affect your bottom line profits. But knowing which model to use, and how to implement it in your business can be a challenge. That’s where a business consultant can help.

Life is hard and trying to incorporate a new business model into your company can be frustrating. But life is good and choosing a recurring model for your company doesn’t have to be frustrating. Set up a meeting with your business advisor to discuss your best options and make it at least, financially simple. Let’s go out and make it a great day!

Are you interested in creating a repeatable and reliable revenue stream for your business, but aren’t sure where to begin? Reach out to our team. We have qualified business advisors and coaches across the country who are eager to help you reach your goals.