In part one of this series, we discussed the reasons businesses across all industries are moving to recurring revenue – to generate more income immediately… and sustain a long-term income stream by offering services of ongoing value. It’s clear that a successful recurring revenue model has many benefits, both short- and long-term, despite the challenges that may arise during the implementation. While customer engagement and up-/cross-selling might cause a headache, the benefits for a successful model far outweigh the challenges.
According to Ventana Research, recurring revenue offers businesses the opportunity to increase revenue, decrease costs, stabilize cash flow, and enhance profitability. But only companies that do it right can reap the benefits. To ensure a successful recurring revenue model, businesses must: 1) shrink time-to-market to innovate and iterate more quickly; and 2) enhance the product catalog to offer multiple options that satisfy and attract more customers.
Let’s take a look at two companies who’ve successfully run a recurring revenue model.
Three years ago, Adobe provided software for a one-time purchase of $1,800. Imagine the industry’s surprise when it announced Adobe Creative Cloud, a $50 per month subscription that offered access to the software for the paid period. Though the change impacted revenue in the short term, Adobe knew it would pay off in the end. The company took it’s existing software, which was already successful, and repackaged it to offer multiple options that made it more appealing to a larger audience. In 2014, two years after the switch, Adobe’s stock closed at $80 versus $32.92 in 2012 and its market cap sat at $35.5B versus $16B, an increase of 115%. And according to its most recent quarter, Adobe’s Annual Recurring Revenue (ARR) was 53% of total revenues compared to about 20% at the end of 2012.
Corporation Service Company
In the past, Corporation Service Company (CSC), charged a one-time annual fee for its services, which would be invoiced once a year at the end of the annual contract. However, with a 50% retention rate and customer base of SMBs with tight budgets, CSC found it tough to collect on payments 12 months later. The old billing system lacked the flexibility to change the way CSC billed its customers, resulting in the company’s desire to implement a recurring revenue strategy. When the IT team said building a new system in house would take 24-36 months, CSC turned to Aria’s cloud-based monetization software. They needed to get out into the market faster. Three months after a contract was negotiated, CSC launched its first product and started billing customers six months out, cutting the old billing cycle in half. CSC, empowered by a system that allowed them to control billing processes, increased their time-to-market and started testing billing three months out, then two months out. Today they’re nixing the free trial completely and billing customers upfront for its services. As a result, CSC is finding an entire year’s worth of accelerated income and an increase in overall customer lifetime value.
Recurring revenue models provide businesses with the flexibility to quickly deliver new offerings that satisfy customers and increase brand loyalty and lifetime value, resulting in an increasing bottom line over time. If you’re not already running a recurring revenue model or considering adopting one, now’s the time to start.