Blog Billing & Monetization

Understanding the Distinct Advantages of the Three Basic Recurring Revenue Models

Aria Systems

10 January 2012

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:

The advantages of a subscription model for buyers include:

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:

The advantages of a usage model for buyers include:

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:

The advantages of a usage model for buyers include:

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.

Aria Systems