Implementing a recurring revenue business model guarantees stable, predictable income and a high customer lifetime value (CLV). It’s no surprise, then, that nearly half of U.S. businesses have either adopted or are planning to adopt recurring revenue models.
Recurring revenue is a disruptive trend that empowers companies to grow revenue, gain the competitive advantage, and increase market share across all industries, from healthcare to entertainment to retail. Some estimates place the total market value of the opportunity for recurring revenue business at $500 billion or more.
According to Ventana Research, “the increasing importance of the recurring revenue model reflects a shift in buying preferences for both businesses and consumers.” Businesses must consider this model if they want to mimic the success of forward-thinking companies like Salesforce, Adobe, and Netflix who have already reaped the benefits with new consumption and distribution models built on recurring revenue.
Here are 5 reasons Fortune 500 companies are making the move. Recurring revenue models:
Establish a regular, predictable income stream
It’s in the name of the model: recurring revenue. Ventana Research determined that increasing the top line was the most commonly cited business driver for adopting a recurring revenue model. Recurring revenue creates streams that continue to flow through existing customers, versus the traditional one-time sales model that relies heavily on customer acquisition. There are three basic monetization models that create recurring revenue:
- 1) Subscription – customers pay in advance for goods or services delivered over a set period of time (ex: magazine subscription)
- 2) Usage – customers are charged based on the amount or frequency of usage (ex: utility bills)
- 3) Subscription + Usage – customers are charged a base subscription rate plus some form of usage (ex: cell phone minutes)
Provide an agile business model
According to MGI Research’s Andrew Dailey, “accelerating time to revenue has become the new business mantra… business demands agility.” In this ever-increasing digital world, the faster your enterprise grows by adapting to market changes and customer preferences, the more heavily rewarded you are with premium valuations and competitive advantage. A successful recurring revenue model provides the capability to respond to new market conditions and competitive pressures with new product or pricing offers and flexible business systems that don’t constrain your ability to change.
Recurring revenue systems support scalability and allow enterprises to meet customer needs and demands with multiple package options. Your customers want what they want, how they want it, when they want it. Packaging or re-packaging products and services satisfy your current customer base and looks attractive to potential customers seeking a long-term solution to work with.
Enhance customer engagement
The same Ventana Research study found that long-term customer engagement is the most common challenge for businesses looking to increase customer retention, which is key to a recurring revenue strategy. Companies find success when they’ve mastered customer “revenue moments” – or touch points in the customer’s lifetime that encourage engagement and foster a two-way relationship – with capable systems in place that manage all the multiple revenue moments necessary for long-term customer success, from billing to upgrades to add-ons.
Maximize customer lifetime value (CLV)
Recurring revenue models rely on maximizing customer lifetime value (CLV), a metric of a customer’s net present value of all cash flows. The higher the CLV, the higher satisfaction and retention rates, resulting in loyal customers who are more likely to continue investing their dollars into a business over time. Recurring revenue models allow enterprises to maximize CLV through an established lifetime of customer interaction points that provide an opportunity to win or lose revenue and loyalty.
It’s important to note that adopting a recurring revenue model isn’t a quick swap-out of your current system. Businesses must have the proper systems, processes, and technology in place to support a recurring revenue model. Implementation requires a lot of thought, planning, and work, but, when done right, it can ultimately increase the bottom line, maximize CLV, promote efficiency, and decrease costs. Take the time to research the best solution for your recurring revenue strategy, whether on-premise, SaaS, or a custom build. Remember, high-growth companies are rewarded nicely so don’t miss your opportunity to get ahead and stay on top.