Understanding the distinct advantages of the three basic recurring revenue models.

By Mike Morini

It hardly comes as news that Wall Street analysts look favorably at publicly traded companies that generate recurring revenues compared to companies that rely on one-time sales. Why? If your business has a $10 milllion run rate and 90 percent of it is in recurring revenue you can count on $9 million in repeat revenue at the start of the year. The same business with a nonrecurring revenue model starts the year at zero.

The first step toward transforming your business to a recurring revenue model involves how to charge for your products and services. There are three primary models: subscription, usage and subscription plus usage. Let’s look at the attributes of each model to better understand the advantages of each, both for sellers and buyers.

Subscription Revenue Model

A subscription revenue model or flat rate is based on a fixed payment for a specific period of time. Think of a magazine subscription, in which the subscriber pays to receive each issue for a year.

The advantages of a subscription model for sellers include:

  • Predictable revenue over the subscription term
  • Customer retention because subscribers must actively opt out to change providers
  • The gathering of customer data beyond payment information for cross-selling or data-base marketing
  • With automatic renewals more revenue can be generated from subscribers who forget about renewing

The advantages of a subscription model for buyers include:

  • Predictable cost over the term of the plan
  • The ability to spread cost of the subscription over time
  • Flexibility to change or cancel service when needed, if allowed. Sometimes penalties can be levied by the provider for breaking a contract.
  • Low cost of entry compared to outright purchase, such as leasing a car versus buying one
  • Taking advantage of technology with lower upfront purchase or personnel costs
  • A tiered or seat-based subscription can keep costs down

Usage Revenue Model

A usage revenue model – also known as metered usage, pay-per-use, pay-per-view and bandwidth billing – charges per unit of service. Municipal water service is a good example of this model. The more water used by a household, the higher the cost.

The advantages of a usage model for sellers include:

  • Scaling revenue to the cost of delivering the service
  • Increasing revenue per subscriber
  • Reducing barriers to adoption with low- or no-cost to start
  • Provides an initial step, or a foot-in-the-door to selling to larger corporate customers

The advantages of a usage model for buyers include:

  • Scaling costs to revenue generation or service delivery
  • Pay only for the service used
  • Enables a try-before-you-buy approach

Subscription Plus Usage Revenue Model

Combination plans such as subscription plus usage models charge a subscription fee with any overage billed as extra charges. A combination plan can be a combination of recurring charged services with a usage service. For instance, think of a telephone bill which has a base service subscription, a variety of usage-based services like texts, data, and minutes of calls included as free, plus overage charges beyond levels included in the plan.

The advantages of a subscription plus usage model for sellers include:

  • Earning extra revenues from heavy users
  • Recouping higher expenses from costly subscribers
  • Monetizing added features instead of bundling in services

The advantages of a usage model for buyers include:

  • Allows extra usage without moving to a higher-priced plan
  • Seamlessly access extra capacity on demand

For a complete overview of how to pick the right revenue model for your company download a complimentary copy of “Subscription Billing for Dummies,” a special edition e-book about navigating the many aspects of rethinking your business and billing strategy.

No doubt there are many variations on these three basic recurring revenue models. Let me know how your company is monetizing the delivery of its products and services.





About the Author

Mike Morini
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The Forrester Wave: Subscription Billing Platforms, Q4 2015

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