Selling is a never-ending battle that your business must fight to reach your goals. As any experienced salesperson will tell you, growing a business from 90 to 100 customers a month doesn’t mean selling to 10 new customers – it means selling to 90 customers all over again plus ten more. If that sounds exhausting, then you might want to consider recurring revenues to build more sustainable and efficient growth.
What are the different types of revenue?
The money your business earns can be divided into three categories:
Transactional revenues: These are sales that are made of products or services that your customers pay for once.
Project-based revenues: This is when a customer buys a product or service that they receive over a longer period of time and pay for in installments. For example, You hire a contractor who does their work over several months and you pay them over time.
Recurring revenues: Recurring revenues are when the customer continues paying your company to use your product or service. A good example of this is a streaming service, such as Spotify or Netflix.
What types of recurring revenue models are there?
Recurring revenues come in many shapes and sizes. While the “subscription model” is the most well-known, it represents just one of many options for building recurring revenue.
Resupply: Replenishment is the classic model of recurring revenues in the product world. Customers buy a product, and then through the design of the product, they need to buy related supplies to replenish the original product. An example of this is the Swiffer mop. Customers need to buy new specialized mop pads and soap from Swiffer for every usage, creating a recurring revenue stream.
Leasing: Leasing is often viewed as a type of financing, but it is also another valid means of generating recurring revenues. Automakers realized that many people are looking for a simple means of owning a vehicle – one in which they don’t have to put much money down, that includes maintenance and enables them to roll over into a new vehicle after a few years.
The auto lease greatly benefits automakers because it allows them to get ongoing cash flow from a customer (with profits built into it), a long-term customer (because the customer comes back to them for a new car lease), and a mildly used vehicle to resell at the end of the lease.
Subscriptions: Subscriptions are when customers receive a regular refill of products or continued access to a service in exchange for a monthly fee. Subscriptions take on a multitude of forms including access to software, music, and video streaming services, and regularly shipped gift boxes.
What are the advantages of recurring revenue?
The main advantage of recurring revenues is that it provides stable growth. When you use this type of business development strategy, you’ll enjoy more consistent cash flow through the regular payments coming from customers, and an easier sales effort.
Unlike transactional revenues, growing from 90 to 100 customers a month in a recurring revenue model means signing just 10 more customers and accounting for any canceled subscriptions (referred to as the “churn rate”). This means that your business can grow faster with a smaller staff than you would need to achieve the same growth rate using transactional revenues.
What to consider when building recurring revenues
Most transactional business models can be converted into recurring revenue models. The first step is to ask yourself, “is it ethical to turn this into recurring revenue?” Transactional revenue means that the customer owns the product or the right to use the service once; creating an ongoing demand for that product or service might not be the right thing to do.
For example, if a medical product or service can be delivered to customers once and solve some type of problem, then it may be unethical to instead offer them a product or service that they must continually purchase to preserve their way of life. After testing the concept’s ethics, ask yourself these questions to reveal potential recurring revenue sources:
Can the product or service become “consumable?”
If the offerings that you sell to customers have a lifetime utility, can you create ways to motivate customers to come back to you for resupply? For example, mops are a very old tool that generally have a very long useful life; Swiffer modified them to make their cleaning heads replaceable in boxes with a specialized cleaning fluid that customers buy for years after buying the mop.
After buying products from you, what do customers ask for the most?
Feedback from existing customers can offer insights into recurring revenues that can be built on top of your existing offerings.
For example, if customers are asking about maintenance and support, this might be an opportunity to sell support packages. If they’re asking for attachments or upgrades to your product or service, this might be a way to integrate a freemium model – where the core product is offered for free and then upgrades are charged at incremental monthly fees that customers can build up.
Recurring revenues can add stability to your business
Recurring revenues are a way to build a more stable cash flow base for your business. As part of an entire revenue strategy for your business, including many products sold on a “transactional” basis, this can be the key to building up the reserves you need for further expansion of your business in the future. A stable cash flow base is the foundation of a successful business. Recurring revenues can help establish this so you can focus on the next stage of growing your business. If you need support reaching this next stage, talk to Pursuit.