Recurring Revenue Still Flying High

parachuteInnovative companies who provide their products and services on a recurring basis have continued to generate new sales and drive greater profits since Aria Systems published its Big Book of Recurring Revenue Innovators e-book in Spring of this year. From established names such as Microsoft, ESPN, Toyota, and United Airlines to start-ups like JustFab, recurring revenue-based companies continue to show the potential for tremendous growth.

JustFab, which sells women’s shoes, handbags, jewelry, denim, and athletic gear by subscription, joined the Billion-Dollar Club of companies in August with a venture capital valuation of $1 billion or more. JustFab, and its brands ShoeDazzle, FabKids, and Fabletics, expect to do $400 million in revenue in 2014 and more than $500 million in 2015, with 90% from subscribers, according to co-founder Adam Goldenberg.

The August 2013 JustFab-ShoeDazzle merger made it into The Big Book of Recurring Revenue Innovators this year as the pair joined forces to build the world’s largest fashion subscription eCommerce company. Through $40 monthly subscriptions, the company aims to grab 15% market share among 18-35-year-old women who buy clothes online.

A Sept. 8, 2014, study from IdeaWorks found that United Airlines generated $5.7 billion in ancillary (non-airfare) income in 2013, five times more than United’s 2013 profit of $1.084 billion. Ancillary income includes United’s subscription revenue for checked bags, more legroom, and access to its in-airport red-carpet lounges providing 4.9% of United’s $38.2 billion in overall revenues, or $40.97 per passenger. The report ranks United’s ancillary revenue as No. 1 among global airlines.

Microsoft has pushed its online Office 365 software applications into the market for Apple’s iPads by offering a variety of subscriptions. Since Sept. 2, Microsoft has allowed Office for iPad subscribers to pay monthly, rather thanannually-only. Although Office 365 is free to iPad owners for viewing documents, a monthly subscription of $7-10 allows users to create new documents or reformat existing ones. Office 365 subscriptions for Android tablets are expected from Microsoft before the end of 2014.

The Big Book of Recurring Revenue Innovators recognized Microsoft for achieving $1 billion per year in annual sales through three separate subscription-revenue streams: Office 365, the Azure cloud computing Platform as a Service (PaaS), and Lync, Microsoft’s enterprise-oriented communications suite.

Meanwhile, sports media giant ESPN is considering selling online access to live Major League Soccer games to consumers who don’t have pay TV subscriptions. This effort to expand ESPN’s direct-to-consumer revenue with a subscription model would add to their existing repertoire of subscription services, which includes ESPN Insider and ESPN Magazine.

ESPN appeared in The Big Book of Recurring Revenue Innovators for using a subscription model to stem the flow of its audience from TV to online broadcasts. This is strategically important for ESPN as they seek to add more web-based subscribers without cannibalizing existing pay TV revenue.

Toyota made The Big Book of Recurring Revenue Innovators for Toyota Europe’s trial program of quarterly GPS map updates by subscription, but that’s not all they are doing with recurring revenue. In Japan this summer, Toyota beefed up its subscription, in-vehicle telematics system by adding automated voice activation. The new T-Connect service, available only in Japan, builds on Toyota’s G-Book system, which integrates a driver’s mobile phone with the car’s console. Meanwhile, Toyota-owned brand Lexus upgraded its telematics system to make high-speed internet standard. The service is free for three years with the purchase of new Lexus vehicles.

As Fortune reported last month, subscription-based sales are on the rise as the G200 as well as young start-ups understand the amazing gains that can be had with recurring revenue models.

About the Author

Tim Clark
Tim Clark is a partner and senior analyst with The FactPoint Group, a Silicon Valley-based market research and consulting firm that conducts proprietary research for customers and creates strategic content for clients. Its methodology relies on in-depth interviews with early adopters in target markets. Clark’s recent research has spanned Freemium, payments, Big Data, storage and Software as a Service. Prior to FactPoint, Clark was a senior analyst at Internet research firm Jupiter Media Metrix. Before becoming an analyst, Clark was a reporter and editor for 24 years, working as enterprise software reporter and e-commerce columnist for CNET's News.com, Inter@ctive Week and Advertising Age.

The Forrester Wave: Subscription Billing Platforms, Q4 2015

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