Why recurring revenue is so in demand?
Imagine running your business based solely on one-off sales and not making any recurring revenue. You do well this month and fill your cash flow reserves. You’re elated. You have enough money to sustain the next month.
But then you hit a dead-end. No new sales in the subsequent month. How do you keep your business going when you’re not able to acquire new customers? What if, instead of making a one-time sale to your previous customers, you had given them a plan to subscribe to, for which they would have to pay a monthly fee?
You wouldn’t have to worry so much about your cash flow in that case, right? Even if new customers were nowhere in sight, you could still live off the incoming recurring revenue.
A B2B Company That Took That Leap Of Faith
Microsoft, a company known to almost everyone, is a classic example of the switch made to the world of recurring revenue. Initially, the company used to sell its enterprise software as a one-time package. There were highs and lows. Some months would see a spike in sales, whereas some months would be an absolute dud.
The company slowly realized the value it was providing and switched to a subscription model, bringing in recurring revenue. It worked in their favour that the users were already comfortable with their products, and didn’t want the hassle of adapting to new software.
What also helped was that the one-time package would cost around $400, but the subscription plans were available for as cheap as $9/month. Naturally, it was easier on the pocket to pay the lower amount every month than the lump sum.
Advantages Of Recurring Revenue
Recurring revenue helps your business in a multitude of ways, which is why more and more companies have increasingly been flocking to this mode of conducting business.
1. Predicts Incoming Cash Flows
You don’t know how much you’ll be able to sell in a particular month. But you do know how much money will be pouring into the system as a result of recurring revenue. This allows you to plan for your future operations, as you know exactly how much you will have to spare, even in the worst-case scenario of no new sales.
According to digital marketer Neil Patel, ‘The single most important metric that businesses should be tracking is the monthly recurring revenue. It helps you set your future goals, calculate the customer lifetime value, and predict steady incoming cash flows.’
2. Helps Attract Investors
If you’re looking for investors for your company, they’ll almost always want to see your recurring revenue statistics. The growth rate is a major factor in deciding whether or not to fund a company.
If you can indicate to potential investors that your subscribers are willingly paying for your product regularly, it instills confidence in them regarding your business model, increasing your chances of securing that funding.
3. You Can Weather Over A Storm
When you fail to acquire new customers, you don’t generate any additional revenue for your company. Instead of having to shut shop and strip your employees of their livelihoods, you can power through and continue to operate, if you’re bringing in recurring revenue from your already acquired customers.
With the right strategy and proper execution, the storm will pass and your company will flourish. But to hunker down during the bad weather, you’ll need the shelter of recurring revenue.
4. More Time To Focus On Growth
If you’re assured of a certain fixed income on a recurring basis, you can spend more time on research and development and come up with new products and strategies. In the absence of the recurring revenue every month, quarter, or year, you spend half your time and energy worrying about the cash flow required to keep your wheels turning.
With more time on your hands, you can truly focus on expanding your business in the recurring revenue model.
5. Constant Customer Feedback
When you have a relationship with your customers, you can gain valuable insights from them. You can learn what’s working and what’s not working in your product, and make changes accordingly to increase the prospects of future sales.
If there are additional features that your users require, you can develop those and upsell, filling up your pockets further.
Types Of Recurring Revenues
There are various types of recurring revenues that you can adopt for your business.
This is the most common type of recurring revenue and an increasing number of SaaS businesses have been turning their heads in this direction. Users can subscribe to your products or services and pay a regular fee for its usage, with the option of canceling whenever they want to.
Consider the case of warranties. When you buy an air conditioner or a washing machine, you can buy an additional warranty for a specified amount of time, during which all repair work will be free. Once the contract expires, you have the option of renewing it. The benefit that this model provides to business is the avoidance of unexpected cancellations while maintaining a revenue stream.
The auto-subscription model is similar to the subscription model, the only difference being that the membership renews automatically once it expires. Since users do not need to actively intervene to keep their subscription going, there’s a lower churn rate and your recurring revenue continues.
4. Sunk-money subscription
This is the model where once you have purchased a product or service, you end up buying additional paraphernalia to complement your previous purchase. A classic example is an i-phone, where you must then buy the smaller accessories that enhance and support the functionalities of your phone.
Transitioning To A Recurring Revenue Model
It may seem daunting to transition from your current revenue model to a recurring one. After all, you have been operating successfully until now. But the market has changed. Your consumers have changed.
Today, if you’re not making that switch to the recurring model, you’re risking being thrown out of the game. It’s easier to acquire customers in this particular model due to its low entry point costs, as compared to high costs involved in one-time purchases of valuable products.
Your competitors are doing it. You could choose to walk off the beaten path. But this is one scenario where a herd mentality is the need of the hour. You need to follow your peers and adopt a model that gives you enough money regularly while making it more sustainable for your users by reducing the upfront costs.