By Jun 10, 2021 External CFO News

One of the best strategies to ensure your business is generating predictable revenue is to develop a recurring revenue stream. Under this model, the customer or client is billed at a predetermined interval (for example monthly), often at a fixed price, in return for regular and ongoing access to products or services. 

Examples include subscriptions for streaming such as Netflix or Spotify, or software as a service (SaaS) subscriptions for Xero, the Google Suite or design software Canva. Many products offer a regular delivery service such as fruit and vegetable boxes, magazines, wine or toilet paper. Even your mobile phone plan is a form of recurring revenue for your carrier.

The recurring revenue model has benefits for both the business providing the product or service as well as for the customer or client. Businesses benefit from predictable revenue which helps with cash flow, budgeting and inventory management. Customers and clients are retained for longer, which drives down customer acquisition costs and creates more opportunities for cross-selling and up-selling. There is also an opportunity to attract a higher volume of customers or clients given the lower barrier to entry. At the same time, customers and clients benefit from the convenience, time savings and lower costs of having ongoing access to a product or service. 

If you’re interested in exploring adding a recurring revenue stream to your business, there are several options which may be suitable: 

 

Subscriptions

The subscription model involves the customer or client paying a fixed fee, usually each month, in return for access to a product or service. 

This model works well for content-based services such as newspapers, books, music, movies or streaming. However, it is also being increasingly applied to a range of product industries such as beauty, clothing, groceries, coffee, wine, alcohol and much more. Even the automotive and furniture industries are now exploring subscription models. 

Software is also increasingly offered via a subscription model known as software as a service (SaaS). Rather than needing to invest a high one-off fee for software, only to be stuck with that same cost again when it comes time to upgrade, SaaS gives customers ongoing access to the software at a lower, regular cost. This lowers the barrier to entry but also gives customers easy access to continual software updates and upgrades throughout the life of their subscription. Most software providers now provide access to software via SaaS including Microsoft 365, email platform Mailchimp, CRM software Salesforce, storage software Dropbox or communication platform Slack. 

Subscription models, whether they apply to a product or service, can often be subject to auto-renewal. In this model, the subscription will continue indefinitely until it is cancelled by the customer. There is no fixed contract period and the customer can cancel at any time. Businesses benefit from lower customer churn and customers benefit from the convenience of ongoing access to products or services without being locked in.

Other subscription models will be based on usage. The subscription may set a maximum usage amount, with additional charges to be applied when usage exceeds this limit. Examples include mobile phone plans which set limits on SMS, data or calls, or retainer arrangements with service providers (for example marketing agencies) where the client is billed a regular amount each month for a defined number of hours of work. 

Other subscription models will involve tiered billing based on usage or features. For example many SaaS products will offer basic, professional and enterprise level plans. Others will be priced according to the number of users or licenses on the plan such as timesheet system Harvest or project management software Jira. 

 

Memberships

Membership models are similar to subscriptions in that they provide ongoing access to products or services for a regular fee, however a selling point of the model is that the customer or client is joining a like-minded community. Often memberships revolve around a shared special interest such as cars, wine, fitness or a sports club. Gyms have been using this model for decades. They may also involve an education or professional development component such as industry associations, mentoring groups or networking organisations. 

 

Fixed contracts 

Fixed contracts lock the customer or client into a contract for a predetermined period of time, often requiring cancellation fees should the customer or client exit before the end of the contract period. 

Examples include mobile phone contracts, especially if the user is paying off the cost of hardware. Many SaaS companies will make fixed contracts (for example for 12 months) available at a lower rate, with unfixed contracts costing more to the customer each month. 

 

Sunk money consumables

In this model, the customer pays for the product or service and then makes recurring purchases to allow for the continual usage of the product or service. For example, if you buy a razor you will need to buy disposable blades that fit that razor. If you buy a pod-based coffee machine, you will then need to purchase the correct pods for that machine. 

Similar to this is the concept of refills. Many soap, beauty products or fragrance brands will sell refills at a cheaper price point in different packaging. Not only does this generate ongoing purchases, it also has the added benefit of being better for the environment through reducing plastic usage and landfill waste. 

 

Freemium

A common approach for apps or software is the freemium model. This gives the customer free access to the most basic version of the service. In order to unlock more features or remove advertising, the customer will need to upgrade to a paid plan. Examples include Spotify where in order to remove ads, users must upgrade to a paid plan. This is also a common strategy in mobile phone games. Many SaaS products will include a free option, or at a minimum a free trial. Many apps operate according to this model where they can be downloaded for free (or sometimes at a low cost), but in order to access all app features it will require additional in-app purchases. 

 

Is adding a recurring revenue stream right for my business?

Before you start looking for alternative products or services to offer via a recurring revenue model, start by looking at your current products or services. Is there an opportunity to shift how that product or service is offered via a subscription, membership or other recurring revenue stream model? 

Let’s look at a hairdressing salon as an example. Many of us don't book our hair appointments as often as is recommended. We might delay our next appointment by a couple weeks or even months. If offered a subscription service which would incentivise us to visit the hairdresser more frequently, but with each cut or style costing less than it otherwise would, we may be inclined to visit more frequently. As the customer, we may pay more overall but we’re getting better value by paying less per visit. Meanwhile the hairdressing salon is not only earning a predictable income every month, they’re also increasing the value per customer while reducing churn. 

When considering if a recurring revenue model is right for your business, ask yourself the following:

  • Are my customers or clients already making repeat purchases of my products or services?
  • Would my customers or clients appreciate the convenience of paying a regular fee for continual access to my products or services rather than making multiple one-off purchases?
  • Is there enough demand for my products or services to warrant shifting to a recurring revenue model?
  • Would my customers or clients feel too locked into a recurring revenue model?
  • Are there any value-adds I can offer customers or clients to sweeten the deal in a recurring revenue model?

 

Final thoughts 

When considering whether a recurring revenue model is right for your business, start by stepping into the shoes of the customer or client. Just because you would like to offer your product or service this way, doesn’t mean the customer or client will respond favourably to it. 

Should you decide to explore this model, make sure you do your due diligence. Do your research into different options, survey your customers to find out if the model interests them, review your data on repeat business and value per customer and scrutinise your competitors. It may make sense to introduce a new recurring revenue stream as a pilot to assess how it resonates with your customers or clients first before rolling it out across the entire business. 

Remember, not all businesses will find that adding a recurring revenue stream is right for their business and that’s ok. There are other ways to maximise customer or client retention and secure more consistent revenue such as through investing in nurturing your customers or offering products or services with high demand and longevity. 

The important thing is to do your research and weigh up all of your options. Even if those options for a recurring revenue stream don’t eventuate, at least you’ve looked at it from all angles and can have the peace of mind that you’re pursuing the best course of action for your business.


At Keeping Company, we’re not just accountants, we’re business people too. With our counsel, your business can reach its full potential. 

We have a team of experts; Cloud Accountants, Business Advisors, Finance Specialists working together and ready to help, contact us today.

1300 533 787

service@keepingcompany.com.au

 

For all media enquires please contact Tracy Miller, CMO, Keeping Company 0414 898 452.

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained. 

Leave a Reply

Your email address will not be published. Required fields are marked *