These days, technology-driven businesses want a recurring revenue stream because of its predictable cashflow and its cumulative effect on growth. But the recurring revenue stream lasts as long as customers benefit from an ongoing relationship with a vendor. Simply stated: Deliver value on a recurring basis and your customer will likely pay on a recurring basis too.
Even now, a substantial number of software companies continue to demand (and get) large up-front payments and a modest recurring payment for Maintenance and Support (M&S) in return for software that the customer can install on their premises. Decoupling software product payments from the M&S payment stream, as this does, is not a good idea for a couple of reasons.
First, the traditional software model provides an ongoing stream of benefits even though customers pay once upfront, and then again only if they want to participate in a software vendor’s upgrade cycle. The amount paid is often unrelated to the economic benefit being delivered.
Second, too often updates or upgrades appear infrequently – the “M” in M&S. This results in customer complaints about the value they get for the money they pay. (One marketing executive confessed their company provided releases annually – but their calendar “year” ranged from 12 to 18 months.)
Since the software benefits are ongoing and the M&S benefits are periodic if not sporadic, it makes sense to bundle these benefits together. Doing so focuses the customer’s attention on the software value, which far exceeds the M&S value. But what about price?
Determining the price charged when bundling the two together is a matter of adding a part of the upfront software price to the M&S fee. In effect, the annual M&S fee goes up by an amount equal to the upfront payment amortized over the same timeframe as the M&S stream. For example, an upfront payment of $100, when amortized over five years and added to the $20 (20%) M&S charge, means a 5-year stream at $40 yearly.
As an arithmetic exercise, the upfront plus M&S payment stream can be easily converted into a recurring revenue stream. What customers pay depends on the amortization timeframe, but is much less than the “typical” upfront payment.
Making the recurring revenue stream equal to the upfront plus M&S is the easy part. The hard part is making sure the actual price is correct, dealing with new types of customers, cashflow, sales compensation, and existing customers.
No one said getting into a business with recurring revenue would be easy. But that doesn’t mean you shouldn’t do it, because the rewards in both customer loyalty and more predictable revenue cycles provide a winning model for everyone involved. That’s why you need to “Just Do It”.
– Jim Geisman
To find out more about how adding a recurring revenue option to your business can generate new income streams and improve customer lifetime value, consider downloading the recently released ePaper The Right Recurring Revenue Model for Success.