Traditionally, most business models were based on single transactions. You make a sale and the customer walks away. If you market to that customer, he or she may come back and make more purchases, but that may not happen — and if not, you're left scrambling for new buyers.
In recent years, though, media-streaming services, software providers, box subscription companies and other businesses have discovered that there's a more efficient and effective way to deliver products to consumers, one that significantly increases retention: a recurring revenue model.
"Many companies are looking to steadily grow their relationship with the customer and cater to their evolving needs," said Fergus O'Reilly, vice president of solution management at SAP Hybris, an e-commerce software company. "Often, this means that companies are looking to go beyond one-time transactional purchases and instead move to becoming an ongoing service provider."
As the name implies, recurring revenue models are good for businesses because of the steadier, more predictable income stream. But that's not the only reason companies are making the switch. Guy Nirpaz, CEO of customer success platform Totango and author of "Farm Don't Hunt" (Amazon Digital Services, 2016), said this model is gaining momentum because it clearly favors the consumer.
"It's an opportunity to try [a service] and cancel it at any time," Nirpaz said. "It sends a signal to the customer that the vendor is not just trying to score [a sale] initially, but will deliver great service and value over time."
The key advantage of an ongoing service relationship is the ability capture customer data over time, and provide personalized experiences through recommendations, O'Reilly said. Similarly, Matt Pufall, director of product for protection-plan services company Assurant Product Protection, noted that additional value-added transactions increase the utility and value of a customer's primary purchases.
"That enhanced value can drive increased loyalty with a retailer's customers, because the customer recognizes that the merchant understands how to make meaningful recommendations related to the customer's lifestyle," Pufall said.
Whether you add elements onto your existing e-commerce model or replace it entirely, here are a few basic ways to start generating recurring revenue for your business, as outlined in Robbie Kellman Baxter's "The Membership Economy" (McGraw-Hill Education, 2015).
The subscription model, in which customers pay a fixed, recurring fee for a service, is one of the most common ways of creating recurring revenue. Some organizations have a single subscription price and offering, while others offer tiered pricing, with increased benefits and access at higher levels. Kellman Baxter wrote that the latter gives customers greater flexibility, and gives you the opportunity to market "upgrading" to lower-level members.
If you sell a product or service that customers don't necessarily need on an ongoing basis, you might consider a pay-per-use or à-la-carte model. Kellman Baxter noted that customers may feel ripped off if they have to pay for an entire month or year up front when they plan to use your product or service only occasionally, so à la carte is a good alternative or addition to automatic subscription payments.
Ancillary products that enhance your primary offering can be a great way to give your revenue stream a boost. Kellman Baxter cited Skype headsets and Apple iPhoto books as examples, but you could also consider other services, like premium customer support or product-protection plans.
For a low-risk way to enter the "membership economy," Kellman Baxter recommended a partnership with an organization that offers complementary products or services that your customers are likely to want. You can share revenues or commissions with the organization for referrals or cross-marketing efforts, without taking on the risk of developing and selling their products yourself. For example, hotels often have partnerships with rental-car companies in which the hotels receive money for guests who rent cars during their stays.
Regardless of which model you choose, any kind of shift toward recurring revenue will require a thorough understanding of how to scale your offerings quickly and efficiently, O'Reilly said.
"Companies may find themselves playing in different markets with quick-moving competitors," he said. "It's important to leverage analytics such as 'what-if' pricing simulations to learn from customers and adapt pricing models to quickly capture market opportunities."
When you make a change to your business model, you're going to have to change the way you manage relationships with your customers. In his book, Nirpaz describes the difference as a "farming" mentality over a "hunting" mentality.
"If you're trying to profit from an orange grove, everything you do when the tree is young — all the nurturing — is what will determine the outcome," Nirpaz told Business News Daily. "[The hunting] model is all profit up-front. You try to invest as much as you can to convince the customer to buy. Farming focuses on the delivery of value and profit over time. It's a new way of thinking for people that are not used to recurring revenue models."
To truly embrace the "farming" mentality required for recurring revenue to work, the timing and context of customer engagement must be your top priority. O'Reilly noted that customers have to be able to engage where, when and how they want to with your brand, and their experiences need to be personalized based on the information you learn throughout your relationships with those customers.
Pufall added that your engagement efforts should feel organic and not forced for the customer. It must feel like a natural, easy fit in order for customers to buy into it.
"Make it simple, not only from an integration and offer standpoint, but from a post-purchase support standpoint as well," Pufall said. "Provide an offering that is best-in-class [and] delivers value as a long-term ... experience."