Understanding different recurring revenue models

Jun 26, 2014

Integrating a recurring revenue stream offers a vast range of benefits for startups and SMEs. In addition to receiving sustainable and predictable cash flow, your business can become more attractive for investors, buyers and clients due to the consistent revenue you collect.

Supporting a recurring revenue model goes beyond strategic cash flow management, however, as not all revenue streams are created equal. There are a number of different options available to create recurring revenue in your business, with each opportunity offering contrasting values and outcomes.

Understanding the various forms of recurring revenue is essential to ensure you choose the right eCommerce payment solutions for your enterprise. To help you make this choice, here are the top five recurring revenue models and the value of each.


Sunk-money consumables

If your business offers services or products that require clients to continually invest in accessories or replacement items, you have successfully implemented the sunk-money consumables model.

When a consumer purchases the platform – such as a coffee maker that requires consumable beans and filters to work – they have committed to making continued payments to your business. However, it can be difficult to hold on to these clients, particularly if competitors are offering compatible products at more affordable rates.


Sunk-money subscriptions

Once a consumer has purchased a product or service that requires updates and continued investment, offering a subscription can make the recurring revenue more sustainable.

After consumers “sink” their money into the initial platform, they are more likely to continue accessing the subscription to ensure their investment pays off. An example of this is the Bloomberg Terminal – a computer system required in order to access Bloomberg’s financial publications.


Auto-renewal subscriptions

In some cases, it is beneficial to offer clients a subscription to provide them with relevant information, ongoing maintenance and support related to the products or services they purchase from you.

For example, software that needs annual updates to stay relevant and effective can be sold with a renewable subscription to your company. By providing consumers with the upgrades, possibly along with other benefits such as newsletters and special offers, you can convince clients to sign up for paperless direct debit payments and an instant monthly renewal to their subscription.

Subscriptions offered through this recurring payment stream are designed to go on forever, until the clients take the initiative to tell it to stop. This model is effective for retaining customers through an accessible and simple subscription process, making it less likely the client will turn to a competitor as they are not required to do any work to maintain their custom with you.


Retainer services model

If a client has decided to invest in your services or products but has not yet decided how much work your business will be required to perform, you may want to consider a retainer services model.

This revenue stream allows clients to pay for certain services or a fixed number of hours, regardless of how little they actually use. The key advantage of this model for clients is the guaranteed availability of your services if they require you. Your business, however, benefits from secured revenue for a specific period of time.


Hard contracts

Convincing your clients to sign on to a long-term contract can be difficult, but is perhaps the most effective method of ensuring recurring revenue for your business.

A hard contract offers benefits for both you and your clients, through the ongoing supply of goods or services at predicable rates over a specific length of time. While offering your business a sustainable stream of recurring revenue, contracts can also help protect your enterprise and clients from legal regulations and liabilities.

Most contracts contain clauses and limitations related to cancellation of or changes to the document. This means that if a client tries to leave a contract before the specified time frame is complete, you could still access a part of the lost revenue, depending on the document’s restrictions.

When you implement a recurring revenue model in your business, it takes away the stress and time you spend re-selling to existing clients and chasing late payments. To put it another way, recurring revenue models let you focus on recurring relationships, not transactions and admin.

Category : SME

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