Is Recurring Revenue the Best Business Model?
If you read our blog you’ve probably heard me use a favorite phrase used by marketers when describing the value of building an email list, “the money is in the list”, and for most businesses that’s true.
In this post I’d like to look beyond that somewhat narrow scope and talk a bit about what revenue models work best for your business, and more specifically, the benefits of instituting a recurring revenue model.
The Benefits of Recurring Revenue
The main benefit of recurring payments for anything you sell is self-evident by its very nature.
You get paid more than once, and it’s cash flow that your business can count on. Not rocket science.
Knowing the financial baseline of what your business takes in every month allows you to more easily plan your growth in several key areas.
- Can you hire more employees?
- How much can you spend on advertising this month?
- What is the financial outlook for the rest of the year?
Knowing these things will put you ahead of your competitors and give you the freedom to be proactive in your approach to business growth.
But don’t forget to also pay close attention to the churn rate (or attrition rate).
What is Churn Rate?
In the simplest terms:
Churn rate (sometimes called attrition rate), in its broadest sense, is a measure of the number of individuals or items moving out of a collective group over a specific period of time. It is one of two primary factors that determine the steady-state level of customers a business will support.
Not sure how to calculate churn rate? Here are 5 easy ways.
The Recurring Revenue Model Applies to Any Business
Now, you might be thinking that a recurring revenue model may not apply to your business, especially if you sell physical or digital (downloadable) products.
But that’s just not true.
You can apply this model to any business.
3 Models for Recurring Revenue
This model is used for fixed payments for a service for a specific period of time.
An example of this model would be a membership based business where users pay a monthly or yearly fee for access to members only content and materials.
This model is used to charge per use or per unit.
An example of this model would be a stock image site that allows you to purchase a single image at a time.
Subscription and Usage
This combines the fixed subscription and typically involves a “service level” with upgrades or overages charged as “extras”.
This method can also be applied to both the membership and stock image examples above. You could have a subscription to access the membership content or a certain number of stock images, and then pay one time fees for access to additional content or image downloads.
Is Recurring Revenue the Best Model for your Business?
It’s up to you to decide if any of the above options fit into your current business, but chances are the answer is yes.
Want to know more? Here’s another great article that goes a bit deeper into the benefits of recurring revenue models.