Jon Gettinger, SVP of Marketing for Aria, believes that in 5 years, recurring revenue will impact all revenue. Is he completely nuts — or onto something? In this post, we explore 4 market trends that may well validate Jon’s audacious claim.
Trend #1: The business case for recurring revenue is getting stronger.
In today’s highly aggressive markets, companies face enormous pressure to generate higher revenues at less cost. Enter recurring revenue – it’s based on the powerful notion that it’s faster and cheaper to sell to existing customers than to new ones. But efficiency is only one reason businesses are rapidly adopting recurring revenue methods. Predictability, sustainability, and buyer preferences are other major factors.
Recurring revenue is growing fast and its effect is already widespread, encompassing not only subscriptions and consumption-based arrangements, but also other forms of repeat business.
Consider Uber. It’s free to join. It generates revenue not from subscription fees, but from the money it makes from every ride its customers take, which it shares with its drivers. So the company earns plenty of repeated revenue, just not from subscriptions. It’s the same mechanism behind the success of services like iTunes, or online retailers like Amazon. And it’s one that more and more companies are embracing.
Trend #2: Customer relationships are driving sales.
In today’s hyper-competitive, always-on world, customers wield more power than ever. In response, many companies are beginning to see that long-term profitability depends on developing long-term customer relationships, not on one-time sales.
These companies don’t want to just close sales and move on. They want a lifetime of repeated sales with existing customers. Consequently, customer lifetime value (CLV), not unit sales, is fast-becoming the success metric to watch in many circles.
Higher CLV is why name brand manufacturers like Nike, Levi Strauss, Estee Lauder, and Under Armor are expanding their efforts to augment retail sales by selling to consumers directly at a rate of 25 to 50 percent a year, according to Internet Retailer’s 2015 Top 500 Guide. For example, Gillette, taking a cue from the Dollar Shave Club, launched its own subscription razor service in June.
Manufacturers today want direct relationships that they can cultivate with their end customers. To help make that happen, they’re connecting with them through communications and self-service options that span online, mobile, and social channels. In return, customers get a direct line to the company they didn’t have before, in addition to amore personalized and responsive services that they’ll reward again and again.
Trend #3: More products are being sold as recurring services.
Software-as-a-service (SaaS) is one of the best-known recurring revenue models in IT. It succeeds because it gives customers a much more cost-effective way to buy something that was traditionally sold as a one-time purchase. For example, instead of buying a shrink-wrap version of Microsoft Office every few years, you get a renewable license to a perpetually updated Office 365.
Since its introduction, this recurring revenue trend has grown to include infrastructure-as-a-service, platform-as-a-service, storage-as-a-service, network-as-a-service, and other “as-a-service” variations. In the IT realm, it even has its own acronym—everything-as-service (XaaS). But the movement is expanding far beyond IT.
Today, everything from dump trucks to manufacturing equipment and cash registers to industrial robots can be procured “as-a-service.” The day when we’ll have the option to buy our cars, computers, TVs, gas grills, and washing machines as recurring services is just around the corner, if not here already.
Trend #4: The Internet of Things is speeding recurring revenue adoption.
The Internet of Things (IoT) is taking shape fast and connecting millions of smart objects and machines (i.e., products) through the cloud. But the real stars of IoT aren’t the products. They’re the services.
Smart refrigerators that order groceries. Mattresses that monitor sleep. Cars that find open parking spaces. Industrial machines that fix themselves. In many cases, customers will one day soon pay for services like these, and hundreds more like them, through recurring revenue mechanisms.
Moreover, companies will be able to monitor, measure, and analyze customer usage in ways never before possible. They’ll be able to use that data to better anticipate customer needs and strengthen brand loyalty. More importantly, that data will hold the key to incremental revenue, which will surpass all expectations. If you can measure it, you can monetize it. And with IoT, you’ll be able to measure virtually everything that matters.
So is Jon right? Will recurring payment options come to dominate revenue generation in five years? It’s anyone’s guess. But I wouldn’t bet against him. In the meantime, plan accordingly.