With the emergence of the subscription economy is a major trend that is reshaping the way businesses operate. In this new era, customers increasingly prefer to pay for access to products and services rather than owning them outright.
This shift has led many industries to move away from the traditional one-time sales model in favor of subscription-based business models. This is because subscription models offer several advantages for both businesses and customers.
What is a recurring revenue business model ?
The recurring revenue business model is a commercial model where the supplier grants access to a product or service in exchange for recurring payments, billed at regular intervals (monthly, quarterly or annually).
Since customers regularly purchase the product or service, this guarantees recurring and predictable cash flows for the supplier.
Unlike the traditional one-time sale model, where the relationship between the supplier and the customer ends after a single sale, the recurring revenue business model allows for a deeper relationship with customers to be established. This relationship results in high customer loyalty and an extension of the profit generated by a customer throughout the duration of their business relationship (the Customer Lifetime Value).
These 2 benefits — regular cash flow and customer retention — are key factors in the success of any business.
Some advantages of the recurring revenue business model:
- Predictable revenue: Recurring revenue provides businesses with a predictable stream of income, which can help with budgeting and planning.
- Increased customer loyalty: Customers who subscribe to a recurring service are more likely to stay with the business for the long term.
- Improved cash flow: Recurring revenue can help businesses improve their cash flow by providing a steady stream of income.
- Increased customer lifetime value: Recurring revenue businesses can increase their customer lifetime value by providing customers with a valuable service that they keep using.
The main types of recurring revenue business models are:
Hard contracts: A service is provided to customers for a fixed price over a predefined period. This model secures the company’s future revenue. This is the typical example of mobile phone subscriptions. The customer is committed for a period of time. If they wish to cancel their contract early, they usually have to pay cancellation fees. At the end of the contract, the customer can often continue to use the service at the same or similar rates.
Sunk money consumables: Customers first purchase a product and then make recurring purchases that allow for the continued use of the product. This is the typical case of Nespresso, where customers can buy a coffee maker at a low price and also pay for consumables (coffee pods). In this way, customers make the product a habit: they follow the routine of buying consumables, using them, and buying new ones.
Automatic renewal subscriptions: The company automatically collects revenue until the customer voluntarily cancels their subscription. This is the case for streaming services like Netflix and Disney+, or box businesses like Le Petit Ballon or My Little Box.
Usage-based subscriptions: Customers are billed at regular intervals based on their usage of the product. This is the case, for example, with Amazon Web Services, a cloud service provider.
Tiered billing: The company offers different levels of pricing. Once a customer exceeds the quantity allowed for their current level, they can upgrade to the next level. SaaS software publishers are common examples of this type of billing.
User-based billing: The customer is billed based on the number of users who have access to the product or platform. This is a common model in the software industry (CRM, messaging, etc.).
Freemium: Customers have free access to a product or service. But to get additional or advanced features, they need to upgrade to a paid plan. This is the typical example of Spotify or YouTube, where you can listen to music for free. But if you don’t want to listen to ads and want to get premium features, you need to subscribe to a paid plan.
Note that there are also hybrid models, where several revenue models are combined (recurring revenue and one-time revenue).
The Future of the Subscription Economy
The subscription economy is still in its early stages, but it is growing rapidly. As more and more businesses adopt subscription models, we can expect to see even more innovation and disruption in the way we consume products and services.
How to Improve Your Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue (MRR) measures the level of monthly recurring revenue of a company, a product, or a service.
The 2 main risks that weigh on MRR growth are:
- Churn: This is when customers cancel their subscriptions.
- Subscription fatigue: This is when customers become overwhelmed by the number of subscriptions they have and cancel some of them.
These risks lead to churn, and therefore, loss of revenue.
To minimize churn, it is essential to offer customers only what they need. With the explosion of subscription services, customers are starting to get tired of them and are more likely to cancel their subscriptions.
To do this, we recommend that you compare your customers’ actual consumption with the offers they have subscribed to. This is an excellent way to:
- Identify revenue losses: This can happen when customers require a higher level of service but are not subscribed to the right plan.
- Limit revenue leakage: This can happen when customers do not take full advantage of the products and services they purchase.
You can make this comparison if you have a tool that can effectively process the data volumes from your sales. Opencell provides an agile platform that meets the challenges of companies adopting usage-based billing and relying on recurring revenue. Our billing solution allows you to configure the dashboards you need to measure your MRR and identify the levers you need to pull to improve it.
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