A recurring revenue model is a business model where customers pay for a product or access to a service repeatedly rather than a single one-time payment.
Many businesses today are shifting to a recurring revenue model from the conventional one-time payment because it offers so many benefits.
Businesses can know more accurately what their revenues will be, can retain customers for far longer periods, and also make their products and services affordable for more people.
So what are the different kinds of recurring revenue models? What are some of the benefits and drawbacks of charging periodically? And what kind of businesses does a recurring revenue model make the most sense for?
Wondering if your business should try it out? In the rest of this piece, we answer each question so you can decide if the recurring revenue model is right for you. Let’s dive in!
- Many businesses are shifting to a recurring revenue model
- Recurring revenue is predictable and helps you plan well
- Businesses that adopt a recurring revenue model can easily retain customers and cross-sell/upsell
- There are several types of recurring revenue models and many businesses adopt hybrids – combinations of more than one
- Reseller hosting is a great example of a recurring revenue model (scheduled billing)
What is the Recurring Revenue Business Model?
We are in a recession and with the average spending power of people reducing, plus money losing its value with inflation, businesses have been charging recurringly to retain their customers.
A recurring revenue business model is one where businesses charge for access to their products and services at set intervals – monthly, quarterly, semi-annually, annually, biennially, and triennially.
The amount charged in a recurring revenue model is typically way lower than what the customer would pay if they had to pay for lifetime ownership of the said product or service. So why are businesses shifting to a recurring revenue model?
- Know how much revenue to expect in the future and can thus, calculate profits, create budgets, plan inventory, and organize the different aspects of the business that contribute to growth and scaling your business.
- Retain customers for much longer than with a traditional pay-once-and-for-all model. Customer retention is not the pay-at-once model’s strong suit. When a customer pays for your product or service, they get the solution they want and there’s no guarantee they will ever come back.
With a recurring billing model, however, your customers pay for access to your offering at specified intervals, and for as long as they need what you’re offering, they will continue to pay. This in turn leads to more customer loyalty and the opportunity to increase your revenue.
- Makes your offering available and affordable to more people. The amount you’ll charge for a single all-at-once payment is usually high and fewer people can afford them. With a recurring revenue model, however, you charge far less on a subscription-based model, allowing more people to be able to afford what you’re offering.
Examples of Recurring Revenue Models
One popular example of businesses adopting the recurring revenue model is how vehicle manufacturers like Audi, BMW, and Porsche are now offering their cars as a paid service.
Customers no longer have to pay upfront to own the cars. Instead, they pay a subscription fee to have temporary ownership of the cars – basically, the customer owns the car for the time in which they pay the said subscription fee.
Note that this is different from paying for the car in installments where you don’t own the car until your last payment is made. With a recurring revenue model, the customer never owns the car completely but only has access to use it.
Types of Recurring Revenue Model
The standard subscription model is one where your customers pay for your services at preset time intervals which can be weekly, monthly, or yearly. This is most common with businesses offering content-based services and access to non-tangible items.
The standard subscription is the most versatile and popular type of recurring revenue model. As a business, you simply charge your customers for access to your services which can be fixed or allow your users to choose the kind of sub-service they get.
A popular platform that uses the standard subscription model is the streaming service, Netflix. Netflix gives users access to its vast library of movies and videos for a recurring monthly fee.
Long-term contracts also known as hard contracts are a recurring revenue model where you charge a particular fee for access to a product or service over a particular period of time – the contract usually spans 6 months to a few years.
The hard contract model is designed to protect businesses against sudden cancellations and should a customer decide to end the contract, they’ll typically be required to pay a compensation fee as specified in the contract which is usually quite significant.
A popular example of long-term contracts is phone subscriptions.
Once the user signs up to the provider they’ll usually be provided with a phone for free or charged a discounted one-time fee for it, and then pay a preset amount for unlimited calls, data, text messages, downloads, etc.
Schedule Billing (Based on Product Usage)
The scheduled billing model (based on product usage) is a recurring model popular with Software as a Service (SaaS) businesses. Basically, you charge customers a fixed price for access to your core service and also set amounts of resources that they can use.
Most businesses that use the scheduled billing model will set different monthly prices that vary depending on the initial commitment period and get cheaper for longer-term commitments.
The best web hosting providers, in particular, use this model, especially providers that offer reseller hosting.
Reseller hosting, in particular, uses the scheduled billing model where the customer pays for access to a fixed amount of disk space, bandwidth, and a usually unlimited number of websites to host.
Customers will usually have to pay for at least a year upfront (calculated based on a monthly price). And if they decide to pay biennially or triennially, the monthly prices will be cheaper still.
Some reseller hosting providers also bill for resources on a pay-for-what-you-use model where you are charged for just what you use and not based on time or putting a cap on the resources the customer can use.
Another very popular type of the recurring revenue model is the auto-renewal subscription where customers are charged for access to a business’s products or services automatically at a set interval (monthly or yearly).
The customer provides their payment details – usually, a credit or debit card and is then billed automatically until they voluntarily cancel their subscriptions.
Many standard subscription services (like Netflix) usually bill automatically without the customer having to make any input or approve any invoice. The customer simply enjoys the services and everything else is handled by the business.
Domain registrars charging for domains you’ve registered with them. Most of them bill every year recurrently and renewals are automatic unless the payment method runs into a problem.
Subscriptions to standalone products are especially common with businesses that sell physical products that are usually consumable or need to be replenished with time.
People are creatures of habit and tend to want to continue using a product they like – e.g: a particular toothpaste brand, lotion, body grooming kit, or candle accents. Hence they would always want to buy the same products when they’re consumed.
The standalone product subscription model makes it easy for you to provide customers with the products they like or buy often. Customers will usually be billed automatically for the products and will have physical bundles and packages of the products delivered to them periodically.
A superb example of the subscription model used on standalone products is how an American company, Dollar Shave Club, delivers grooming products and razors via mail to their customers. Their customers are billed monthly and these grooming boxes are delivered to their homes.
Sunk Money Consumables
Sunk money consumables are products sold in a recurring revenue model where after an initial purchase of a core product, the customer continues to subscribe for complementary products that allow you to use the original core product you already have.
This recurring revenue model is very powerful as businesses can be guaranteed of future revenue – as long as the customers have and use the core product, they’d have to keep buying the complementary products to use it.
A good example of this recurring revenue model is how Burst Oral Care - a dental care business – sells an initial kit containing an electric toothbrush, charging base and other accessories. After that, the company will continue to supply replacement brush heads every 90 days (as recommended by doctors) that can only be used with the core electric brush.
Sunk Money Subscriptions
Sunk money subscriptions are very similar to sunk money consumables only this time, you are dealing with access to a service and not a physical product. In the sunk money subscription model, after paying an initial fee to gain access to a service, users have to pay continuously to access new content that is made available to members-only.
This particular model is popular with news websites and publications. Basically, users won’t mind paying the much smaller subscription fee that grants them access to the content they want that made them pay for access to the platform in the first place.
An excellent example of this business model in action is how Bloomberg, the media company, charges subscription fees to give users access to new content published on the platform. The Bloomberg Terminal, in particular, is used by traders, portfolio managers, and financial analysts looking for the latest news to inform their decisions.
The retainer is a monthly recurring revenue model that’s becoming increasingly adopted today and is mainly used by service providers, agencies, and freelancers. In general, deciding on the salary to pay a freelancer or agency can be tough for their clients, especially those who are not sure of the project scope yet.
That’s where retainers come in. For a fixed amount paid monthly, the client will get a predefined amount of work measured in hours of work, number of projects completed, number of days per month for full-time work, etc.
Charging a retainer guarantees the service provider of fair pay and also makes it easy to calculate monthly income and not have to try and figure out how much to charge every other month.
Freemium/Free Lifetime Access
The Freemium is a recurring revenue model where users can access a service for free for life and can even use some of the basic services at no charge. However, in order to use the premium features that are often far better than what’s offered as basic, they’d have to pay a subscription fee.
The Freemium/lifetime access model can be very effective in retaining and upselling more customers because they already have a good idea of how great your services are and are getting a lot of value free of charge. So when they need more functionality and it’s time to upgrade, they’d be more than happy to pay you.
A good real life example of the freemium/lifetime access model is how it’s used by VPN service, Windscribe. You can sign up to the platform free of charge and use their app in a number of countries. However to get extra features like way more locations, unlimited data, config generator, and ad block, you’d have to pay a subscription fee.
Spotify, the music streaming platform, also uses the freemium model. While you can listen to songs for free, you’d have to pay extra to experience zero ads and unlock new ultra-high-quality audio for smart players.
Per-User Subscription Model
The per-user subscription model is usually offered services used by teams and agencies where several people can gain access to the same environment. Think team collaboration software, video conferencing software, etc.
With a per-user subscription model, higher pricing tiers allow more team members to access the platform and also provide more tools to aid effective collaboration.
Some good examples are Zoom, Slack, and Grammarly - all popular tools that are charged based on how many members can be added to a single account. Zoom, for example, allows up to 100 attendees for its Free and Pro plans. On its Business plan, up to 300 attendees can join a video conferencing session and on its Enterprise plan, that number goes up to 1000.
Pros of Recurring Revenue
So why are businesses turning to a recurring revenue model? What benefits does charging on a subscription basis provide? Let’s see some of them:
Consistent and Predictable Cash Flow
Easily the most important benefit of a recurring revenue model is that it creates consistent and predictable cash flow.
A recurring revenue model is especially great because you know exactly what your expected revenue is based on the current number of customers you have – which is easy to get.
A one-time payment model, on the other hand, is not really predictable and you can know for sure whether a customer will convert or not. Using a recurring revenue model, however, you are calculating revenue with people who are already your customers… which is far more predictable.
Higher Customer Retention and Loyalty
Customer retention is a major hurdle for businesses that still run on the one-time-payment model. The recurring revenue model fosters customer loyalty and makes customer retention very easy. You already have a pool of customers who will continue to pay you predictably.
As time goes on and these customers continue to do business with you, they trust you all the more and in turn, become loyal to your brand if you continue to meet their expectations.
Widens Your Customer Base
Let’s face it. Not everyone will be able to afford your services. Even more so, when you are charging a premium one-time payment for it. That’s a dilemma the recurring revenue model solves.
By charging recurrently, the amount paid for your services is spread into much smaller prices that many more people will now be able to afford. Meaning, you can now appeal to more customers and less people would leave because of price.
The interesting thing about a recurring revenue model is that the overall amount charged over the lifetime of the customer is often more than what they’ll pay with a one-time payment model. However, since it’s spread over a long period of time, they can still afford it.
Provides Upselling and Cross Selling Opportunities
Upselling and cross-selling are excellent ways to increase the average customer value in your business, and using a recurring revenue model makes it super easy to implement them.
As a result of doing business with you for long periods, your customers already trust you and it’s easy for them to commit to buying other complementary products (cross selling) or upgrading their plans (upselling) to enjoy even more features and benefits from you.
With the traditional one-time purchase, you interact for much shorter time frames with your customer and selling additional products or trying to upsell them can be more challenging.
Makes Businesses More Attractive to Investors
Investors like to see numbers – your net profit, cash flow, average customer churn rate, expected revenue, ARR, etc. With a recurring revenue model, these numbers are very easy to calculate and predict accurately.
When investors see impressive growth in revenue and low churn rates, your business becomes very attractive and they will be more willing to stake some capital in your venture.
Cons of Recurring Revenue
Having recurring revenue is great but it also has its flaws. Let’s check out some of them:
Increased Customer Support Demand
More customer contact also means you must be ready to answer queries and inquiries of your loyal customers… and they’ll be asking them for a long time. You will have to build and invest in your customer support and make sure you have enough agents to handle your customer touchpoints.
Tracking Revenue and Profit Can be Tedious
Customers won’t all sign up at the same time. If your business is growing quickly, you’ll have customers sign up every other day and calculating your expected revenue and profit margins within a time frame can get very tedious quickly.
And as if that wasn’t enough, you’d also have different customers signing up to different plans, if you have different pricing tiers. This is where automation comes in but even with that, managing all that data is no small feat.
Pricing is Less Flexible
With a physical product or service you are charging a one-time payment for, changing your price is easy and your customers may not even notice as many of them are ‘first timers’. With a recurring revenue model, on the other hand, changing prices is not that straightforward as your customers are already used to paying a particular price and you don’t want to risk upsetting them.
Conclusion: Is Recurring Revenue right for your Business?
More businesses today are charging customers recurringly and selling products and services on a subscription-based model. It’s helping businesses better retain customers, create opportunities for cross selling and upselling, and also helping businesses expand their customer base.
The predictability of revenue from charging recurringly also gives businesses a good idea of important growth metrics and makes businesses attract investment opportunities.
If you are looking to start a business where you earn recurring, predictable income, reseller hosting is one of the best options for you especially if you are a website designer, agency, developer, or freelancer managing a number of client websites. Looking to get started with reseller hosting?
Next Steps: What now?
- Figure out the best reseller hosting provider for you
- Do market research and plan what marketing channels to use
- Choose a brand name and register a domain (comes with many hosting packages)
- Design your website with a website builder
- Choose a reseller hosting package and start from the basic plans
- Market your services on Google, social media, blog, etc.
- Set up customer support channels
- Automate your tasks and scale