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Creating Recurring Revenue

Every form of company, even the ones identified as non-profit, rely on revenues. To justify the fixed and variable operating costs, the business must produce sales. Wouldn’t it be great if this income was streaming in on a recurring basis?

We will explain the revenue, the different forms of income, and how they function in this article and include examples to clarify.

The total earnings generated by your company is known as revenue. It could be through its primary activities, such as selling goods or services, rent on the land, interest on borrowings, and others, minus any discounts or returns. 

Ice cream vendors will make money by selling ice cream, barbers will make money by selling their services, and banks will make money by charging borrowers interest on their loans. Service or sales revenues are the most common terms for your company's revenue, recorded on the first line of your income statement. After subtracting your taxes, revenue is the sum you receive from clients and consumers.

Revenue Strategy Defined

A revenue strategy is a business strategy that focuses on raising revenue by optimizing both short-term and long-term sales opportunities. Getting a committed plan like this is crucial to your long-term success.

Types of Revenue Strategies

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Nowadays, many businesses are suffering due to lower sales volume during these challenging periods of lockout during the COVID-19 crisis. Since they have developed recurring business models, some companies have become more resilient in sustaining continuous revenue models.

There are two types of revenue strategies to generate revenue: recurring revenue and non-recurring revenue.

The backbone of Software-as-a-Service (SaaS), such as Adobe and subscription-based businesses, is recurring revenue. Customers buy a service daily from these firms, enabling them to predict potential sales more reliably. For a good view of the company's potential profits, recurring sales can be measured using churn rate and user growth rate measures. This level of predictability is essential.

Non-recurring revenue is made up of one-time payments that may not occur again. Consider the following scenario: a SaaS company hosts an event and sells 50 tickets. Since it is impossible to predict whether visitors will visit the following year, this event's revenue is non-recurring (if there is a next year).  Grocery stores and short-term housing providers are examples of these. While recurring revenue typically follows a subscription model where clients are paying monthly or quarterly over a contract period of years which gives the company predictable recurring sales. 

For this article, we will dive into creating recurring revenue.

Advantages of Recurring Revenue

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Predictability

Knowing future cash flow allows for improved capital distribution and future investment planning; having a buffer of stable cash inflow allows for a higher-risk portfolio with the potential for higher future growth and returns. Predictable revenue increases creditworthiness when applying for loans and makes the businesses more appealing as an investment target.

Higher margin potential

Once fixed expenses are covered, the cost of serving new users is typically low in comparison to the increased revenue they generate.

High return on investment

Many recurring revenue services are offered as an add-on to a previously purchased product or service. The financial and human capital resources needed to complete this regular revenue sale are significantly lower than those required to produce and sell a new, unrelated product. It increases the return on investment for this form of selling.

The disadvantage of Recurring Revenue

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The drawback is that creating a fixed marketing, operational, and service infrastructure to deliver recurring revenue requires time and resources.

Before hitting breakeven, you will need to budget to retain a recurring revenue customer for several months. In the case of software development, for example, a 9-month breakeven timeline is standard. The majority of the costs are upfront, with software development costs to pay, followed by some lower recurring costs for software upgrades and operation.

Most Common Types of Recurring Revenue

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  1. Hard contracts

Under this model, consumers are provided with a service for a set period for a fixed price. It protects the company's potential sales from unforeseen cancellations and delays.

An excellent example of this model is mobile phone contracts. When a customer signs a contract, they agree to pay a certain sum for a data plan for a certain period. Customers may be required to pay a small one-time charge in addition to the annual contract fee when signing up for specific mobile contracts.

A hard contract's distinguishing characteristic is that the consumer is locked in before the contract period ends; if they wish to cancel early, they must generally incur a termination charge, which can be considerable. With a rolling monthly contract, the customer will usually keep using the service at the same or similar rates after the contract duration has ended. Even though the hard contract has ended, the business's monthly recurring income will continue in this manner.

  1. Sunk money consumables

Consumers buy a product or invest in a network, then make ongoing transactions that enable them to use the product or service indefinitely.

A common example is Gillette razors. The company's founder came up with the concept of selling the razors themselves for a low price and profiting from purchasing disposable blades regularly. Customers develop a habit of buying blades, disposing of them, and replacing them with new ones in this manner, resulting in lifelong consumption of the commodity.

  1. Simple consumables

Do you crave a grande, three-pump cinnamon dolce, soy, no whip, and no foam latte? Maybe just a cup of drip coffee? In any case, if you are a regular Starbucks customer, you will return for more of the company's goods on a fairly predictable basis.

  1. Auto-renewal subscriptions

The company receives revenue automatically in this model before the customer cancels their subscription voluntarily. Auto-renewed subscriptions are also known as evergreen subscriptions because they will last indefinitely. This model can be used in streaming services like Netflix and product box subscriptions like Birchbox.

  1. Usage-based subscriptions

Customers with usage-related subscriptions are billed at predetermined intervals based on their product usage. For example, MessageBird offers enterprise customers an API service for SMS and voice calls. Users are charged on a schedule according to how many SMS messages they send and how long they talk on the phone.

  1. Tiered billing

There are several rates or levels of usage in this pricing system. When a customer's use exceeds the amount permitted in one tier, they advance to the next, which usually includes more features and used units. Tiered billing is popular in SaaS products with multiple pricing levels, such as Basic, Professional, and Enterprise plans.

  1. User-based billing

The consumer is billed based on the number of users who use the product per month or year in the user-based or per-seat billing model. The fees increase in direct proportion to the number of users.

This model is used to create recurring revenue for whole teams' software products, such as Customer Relationship Management (CRM) apps and team communication apps like Slack.

  1. Hybrid billing

A hybrid billing model is created when the features of two or more revenue models are combined. Birchbox, a customized beauty box delivery company, operates on a hybrid model that mixes recurring and one-time sales. The company charges a $30 monthly membership fee and also sells items such as brush kits and makeup bags on a one-time basis.

  1. Freemium

Customers can use a freemium model to get lifetime access to a product or service, but they must switch to a paid plan to get new or advanced features. For example, you can use Spotify for free to listen to music and create playlists. However, you'll need to switch to the paid plan to get extra features like ad-free listening and high-quality audio. 

Ways to encourage recurring revenue

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Encourage your clients to take a continuous solution rather than limiting your bid to a narrow one-off product. Setting up preventative maintenance contracts, selling access to future updates and planned maintenance, offering subscriptions to access advanced information and advice related to your product, or providing “on-call” services are all examples of ways to do this.

Suggestions for Increasing Recurring Sales

  • Create faith in good policies, products, and customer service
  • Bill your customers automatically and regularly
  • Educate your sales staff on recurring revenues 
  • Have simple and clear cancellation policies

Special Considerations

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Recurring revenue is regarded as a highly desirable quality by many industry experts. They make an organization more stable and predictable, both operationally and financially, reducing the likelihood of a dramatic change in business from month to month.

Stability typically comes with a price tag. Investors are often willing to pay more for recurring revenue companies' earnings because their estimates are thought to be more accurate. Of course, this means that any indication of a drop in revenue will cause even more anxiety. Contracts expire, and company fortunes and market strength will change over time as customer tastes shift and new rivals enter the battleground.

Businesses ideally suited for the recurring revenue model

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Content-based

The recurring revenue model has proven to be very popular for businesses that provide access to media content such as audio, video, and books. Some well-known examples include Netflix, HBO, and Spotify.

Service-based

Instead of one-time purchases, several tech companies provide subscription-based access to their applications (SaaS). The cost of initial software setup and the complexity of introducing product changes are eliminated with SaaS. While the conventional one-time sales model makes it difficult for app developers to offer product updates to end-users, the SaaS model simplifies and automates the process.

Product-based

Subscription boxes are a typical example of the product-based subscription model. Consumers sign up to receive boxes of a specific type of product at predetermined intervals. It could be weekly, monthly, or quarterly. These boxes are divided into two groups based on demand: comfort and curated.

Conclusion

The recurring revenue business model has become an enticing alternative for business owners as well as consumers. If you wish to have a pre-determined amount of income at regular intervals, consider creating recurring revenue streams. If utilized properly, this model can help you anticipate revenue, expand your market, retain more customers, plan growth, and increase your profits.