Subscription Management
What is a Recurring Revenue Model?
Today, the role played by recurring revenue models like subscription services and membership programs is very important in business strategies. In such models customers pay at regular intervals, be it monthly or annually to have continued usage of products or services. This not only provides funds continuously but also cultivates strong lifelong customer relationships. Found in the software, media and telecommunication industries among others, recurring revenue models are highly regarded because they are predictable and encourage customer retention, as well as lower product prices. They assist in maintaining stable cash flows that ensure the stability and growth of the enterprise.
Read More: Power up your revenue strategy with Chargebee's insights!
What is the recurring revenue business model?
The recurring revenue business model is a business strategy where customers pay for access to a product or service repeatedly at regular intervals, such as monthly, quarterly, or annually. This model is popular in various industries, including software, media, and telecommunications, as it provides predictable income, enhances customer retention, and makes products and services more affordable for customers.
What are the different types of recurring revenue models?
1. Subscription model
The Subscription Model is a type of recurring revenue model in which customers pay a fixed fee to access a product or service at regular intervals, such as monthly (monthly recurring revenue(mrr)) or annually (annual recurring revenue(arr)). Slack is an example of a subscription-based business model.
Pros:
Provides a predictable and consistent income stream for the business
Encourages customer loyalty through continuous access to the product or service
Allows businesses to offer different subscription levels and pricing tiers to cater to different customer needs and budgets
Cons:
May require significant investment in marketing and sales to acquire new customers
If the product or service does not meet customer needs, customers may cancel their subscription, leading to a loss of revenue
Who it works for:
The Subscription Model works well for businesses that provide ongoing access to digital content or services, such as:
Software companies offering software applications
Streaming services providing on-demand movies and TV shows
Music services offering music streaming
Fitness and wellness services providing access to classes or programs
This model is particularly suitable for businesses that can provide regular updates and improvements to their offering to maintain customer satisfaction and prevent churn
2. Usage-based billing
Customers are billed for their usage on a regular schedule. A good example of this kind of recurring revenue model is Zapier.
Pros: Saves the customer money when there’s irregular usage. It’s good value for low to mid-volume users.
Cons: Unpredictable revenue for the business because of customer usage fluctuations, as well as unpredictable and surprising costs for customers. It may not provide good value for the higher volume customers.
Who it works for: Usage based models work best for businesses that can easily track usage whether it’s the number of emails/messages/invoices sent, APIs used, or triggers activated.
3. User-based billing:
Teams or organizations pay for the number of people using the product every month or year. A good example here is Atlassian, that charges $7 a month per user for teams with more than 10 people. Oftentimes with this structure, the same capabilites are provided to all users regardless of usage or volume.
Pros: More predictable revenue and scales well for large/enterprise teams. There’s no need to track usage.
Cons: This system may serve as a barrier for economical teams who will limit number of seats to control costs. Also, it doesn’t always align with product value, in which case you’ll be leaving money on the table. For instance, a customer may end up paying for users who aren’t active. Slack addresses this issue by adding prorated credits for users who have become inactive in a billing cycle, and only charging for active use.
Who it works for: User-based billing works optimally for team collaboration or customer service tools.
4. Tiered billing:
This pricing structure is built in ‘tiers’. Each tier is constructed for a specific buyer persona and is capped off in price. Once a user hits a functionality ceiling on a particular tier, they are upgraded to the next tier offering more functionality and usage. A popular example is Hubspot with its Basic, Pro & Enterprise tiers.
Pros: It allows you to appeal to a wide range of users and their specific needs, so there’s something for everyone. It also helps businesses understand where customers see the most value.
Cons: ‘Something for everyone’ is not always a good bet, because it has the potential to become sprawling and complicated very quickly. There is also the possibility of the tiers not including a certain user-type’s needs.
Who it works for: It’s most commonly used by businesses offering sales or marketing products.
5. Hybrid Billing:
This model takes a mixed approach, choosing aspects of two or more revenue business models. Eg: Both Zapier and Atlassian have hybrid pricing, where hitting specific usage levels or number of users will require you to upgrade to the next tiered plan.
Pros: It’s a flexible way to structure pricing and it allows businesses to overcome the disadvantages of a single model by bringing more nuanced pricing that’s better aligned with value. It also allows for more customizable plans and features.
Cons: It may bring in more complexity, so businesses need to take additional effort to keep their hybrid models simple enough for everyone to grasp. When users can’t understant the process or if it is overly complicated, it discourages use.
Who it works for: SaaS businesses where the value customers get from the product/service doesn’t clearly fit into any one model.
6. Freemium:
Freemium offers a lifetime free plan with a premium upgrade to convert free customers into paying customers. Evernote, Dropbox, Buffer all offer a freemium model.
Pros: Low barrier to entry. It’s relatively easier and quicker to acquire a sizeable customer base. It is a great way to spread brand awareness and get users acquainted with the product.
Cons: If businesses don’t think it through, they could easily run at a loss servicing new customers and find themselves unable to give paying customers the time and attention they need. It could also attract the wrong kind of customers who see the most value in the ‘free’ part of your freemium model and don’t feel the need to upgrade.
Who it works for: It works well for businesses where the cost of servicing new customers on a free plan is low and the potential to convert them into paying customers within a certain period of time is reasonably high. This of course requires a sound business model but can be great way to quickly grow.
7. License Model
The License Model is a type of recurring revenue model where customers pay a recurring fee to use a product or service. This model is commonly used by software companies, where customers pay an annual fee to use the software, often with updates and support included. Microsoft, Adob, Spotify & Netflix offer license model
Pros:
Provides a predictable income stream for the business
Fosters long-term relationships with customers
Encourages customer loyalty as they feel they are getting good value for their money
Cons:
Customers may feel locked into the agreement and may not be able to easily switch to a different product or service
The business must continually update and improve the product to maintain customer satisfaction and prevent churn
Who it works for:
The License Model works well for software companies and other businesses that provide ongoing access to a product or service. It is particularly suitable for businesses that can provide regular updates and improvements to their offering to maintain customer experience and prevent customer churn.
8. Retainer Model
The Retainer Model is a type of recurring revenue model where a client pays a fixed fee to an agency or consultant for ongoing services over a set period. This model provides a predictable income stream for the service provider and encourages long-term relationships with clients. Law firms like Baker McKenzie, DLA Piper, and Clifford Chance use the retainer model to provide ongoing legal services to clients
Pros:
Predictable income stream: The retainer model provides a consistent and predictable income stream for the service provider.
Long-term relationships: The model fosters long-term relationships with clients, as they are committed to working together over a set period.
Cons:
Transparency can be an issue: It can be difficult to track where time and money are being spent, and clients may not have full control over how their resources are utilized.
Who it works for:
The Retainer Model is suitable for businesses that provide ongoing advisory services, such as consultants, attorneys, and coaches, who can benefit from the stability and predictability of the model
What are the benefits of recurring revenue model?
1. Makes budgeting and planning easier
The biggest benefit of having recurring revenue is that it's more steady and predictable than one-time revenue generating models. This makes it easier to plan your business around it.
Additionally, the recurring revenue model reduces the risk of fluctuations in sales and helps businesses focus on providing ongoing value to their customers, rather than constantly acquiring new ones. This makes monthly and quarterly planning easier, accurate, and more effective
2. Improves Customer Retention
Recurring revenue model helps businesses improve customer retention by creating a long-term commitment for customers and providing ongoing value.
With a recurring payment, customers are less likely to cancel their subscriptions because they don't want to lose access to their favorite products or services.
The consistent and reliable service provided through the recurring revenue model builds trust, leading to increased customer satisfaction and reduced churn.
3. Helps You Offset High Customer Acquisition Cost
The recurring revenue model can also help offset high customer acquisition costs by reducing the need for constant acquisition and instead focusing on retaining existing customers.
With a predictable stream of revenue, businesses can focus on providing ongoing value to their customers, building stronger relationships, and increasing customer loyalty.
What are the Challenges With Recurring Revenue Model ?
Difficult To Implement With A Bespoke Product Or Service
The recurring revenue model is difficult to implement with a bespoke product or service. You need to standardize your offering to be able to create a monthly or usage-based pricing structure.
Your customers will become accustomed to paying for the same thing month after month, so you mustn't deviate from that price point.
The most common way to do this is through subscriptions. When creating your subscription model, it's important to make sure that you're getting the most value out of each customer and that there are no hidden costs involved with the recurring revenue model.
For example, if you're selling software as a service (SaaS), make sure that every customer has access to all features and functionality at no additional cost. If you're selling products or services as part of an ongoing contract, make sure that there is an upfront cost associated with each purchase (that doesn't change over time).
Makes It Tricky To Expand To A New Offering
The primary challenge with a recurring revenue model is that once you standardize it, it becomes tricky to expand to a new offering since it may or may not fit into your existing wheelhouse.
Adding a new product or service to the existing offering could mean adding new pricing tiers, or increasing the price on the existing plans. Both these strategies can tend to impact the overall conversion rate on your offering.
Providing Value Consistently Is A Must
You need to make sure that your customers are happy and continue to use your products or services. To do this, you need to be able to provide them with value at every step of their journey, from the initial contact with your company until they have completed a transaction.
Another challenge is that if you don't keep up with demand, your customers will not renew their subscriptions. This can result in losing a lot of money and also losing the trust of your current customers who may decide to leave for another company if they don't see any improvement in service quality or customer support.
To avoid this situation, you must offer great customer support so that your customers feel comfortable when making purchases from you again in the future.
Building a Recurring Revenue Model Based on Value
The end game of finding the right recurring revenue model is to figure out how to facilitate a fair exchange of value between a business and its customers.
Many businesses unknowingly charge lower than they can and end up hurting profits. The other side of the spectrum is charging too much for something, which will lead to obvious results. Customers will use the product for a few months and when the price and value don’t match, they churn and find other solutions in the competitive SaaS market.
The best path to knowing if a fair exchange is happening, is to identify and align your recurring revenue model with a value metric. It will enable you to price your offerings optimally for you and your customers, resulting in a win-win for both in terms of growth.
Harnessing the Strategic Power of Recurring Revenue Models with Chargebee
When you incorporate a steady income model into your business, it not only helps stabilize the business but also creates long-lasting relationships with customers through continuous value offerings using subscriptions or memberships. This method increases the reliability of your financials and instils loyalty by continuously fulfilling customers’ expectations.
However, implementing this strategy is not always easy. To be successful, one must understand pricing strategies, maintain customers, and constantly provide benefits. Achieving success also requires listening to others' opinions, keeping an open mind, and ensuring that everything is customer-oriented.
How Chargebee Can Help
To bring about a huge change in the management of recurring revenue models, you can consider adopting Chargebee into your processes. Here is how Chargebee’s expertise can enhance your company:
Additional Reads
There’s no school that teaches businesses how and what to price their products and why. But as the trend of approaching revenue models more strategically grows, so does the volume of quality information on the subject. Browse through some of these resources and articles to learn more:
Here is an exhaustive teardown of how three well-known SaaS players test, learn, repeat, and ace their pricing games. How to Experiment with SaaS Pricing Strategies – Teardowns of Shopify, Zendesk, and StatusPage
Pricing is the center of your business, and here’s a list of things that you need to make sure you’ve checked off before you launch a pricing change. A 6-Point Checklist to Foolproof your SaaS Pricing Experiments
Dear SaaS Peers, Scale Value, Not Usage. (It’s Not as Simple as You Think)
