Businesses are like modern-day airplanes: they can run, they can fly, and they can even go auto-pilot. Businesses run when they are just beginning to gain traction, serve customers, and generate revenue. They fly when their revenue generation methods begin to work nicely or smoothly, and finally, they go complete auto-pilot when they are able to establish a recurring revenue model. 

Despite its many advantages, a good number of entrepreneurs are unaware of or simply unable to achieve a recurring revenue model for their business. A 2021 study proves this by saying that only “52% of companies receive at least 40% of their revenue through their recurring models.” The same study also, unfortunately, predicts that over the next 5 years, there will be a meager 3% increase in the number of these companies. So how do you ensure your business falls within this three percent? Well, keep reading to find out.  

What is A Recurring Revenue Model? 

The recurring Revenue Model (RRM) refers to a business model that creates and prioritizes sources of revenue that are reliable and sustainable and can exist for long into the future. Specifically, the RRM involves having a business create products or services for customers and charging them at intervals for repeated use of or consistent access to such products or services. 

The advantage of the recurring revenue model over other existing business models is that businesses do not have to perform revenue-generating tasks/activities/strategies (such as creating a product) repeatedly. Instead, they only have to do it once and these strategies and activities will continue to generate revenue for a considerably long period of time. 

Outside the Recurring Revenue Model, there are some other interesting business models to look at. These will be covered in a different article. For now, we will go on to look at the various types of recurring revenue models that exist. 

Types of RRM

Looking to apply a recurring revenue model in your business? Here is where you will find some quick examples that could turn your business around. 

Auto-Renewal Subscription Services

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Auto-renewal subscription services are arguably the most popular options in the Recurring Revenue Model of business. Platforms like Amazon Prime, Netflix, and AppleTV+ have successfully adopted the Recurring Revenue Model by making it possible for users to auto-renew their viewing subscriptions.  

This way, Netflix, Amazon, and many of the other popular streaming or retail platforms get customers to automate their subscription payments in order to get uninterrupted access to the movies, TV shows, meal packages, and other items to which they subscribed. 

The auto-renewal subscription service is an advanced version of the regular subscription service, allowing users to schedule a day, date, or time for automatically renewing their subscription. For businesses, having a high number of auto-renewal subscriptions means being able to determine or confirm the time or date for repeatedly receiving payments from subscribers. It is arguably the ultimate recurring revenue model. 

Long-Term Contract 

Long-term contracts are identical to the subscription recurring revenue model in the sense that customers are required to make repeat payments, but they are also binding and impose an obligation on customers. 

The difference between both recurring revenue models is, therefore, that customers using a subscription service have the right to end their agreement at any time, whereas customers in a contract agreement cannot cancel or opt out of such agreements until they expire. 

An example of long-term contracts are those set up by telecommunication companies where they provide users with a cellphone and subsequently credit them with data allowances and minutes packages - after they accept a contract agreement. These contracts could last between 12 to 36 months and they are designed to carry a heavy fee for customers who want an early termination. 

Sales of Supplementary Goods 

Sales of supplementary goods are another avenue of recurring revenue for many businesses. The idea behind this is that a startup or company develops a product that can only be used in combination with another already-developed product from the same company. Usually, the first of these products is offered as though it is a standalone product, meaning that customers can purchase this one product and use it satisfactorily. However, a second product is then developed but specified strictly for use in conjunction with the already existing product. 

A very prominent example of supplementary goods is the Apple cable charger and earpiece products. 

In this instance, Apple iPhones are standalone products (with everything from internet capabilities down to inbuilt speakers through which users can play and listen to music or voice recordings). On the other hand, the Apple cable charger and earpiece products are supplementary accessories to the iPhone product since they are designed to work specifically with the Apple smartphone and cannot connect to anything else - well, except other Apple products like the iPad. 

Anyone looking to charge their iPhones, or play videos/audio from these devices without using a wireless charging pad and a Bluetooth EarPod will have to purchase the special cable charger and physical earpiece from Apple. This automatically creates a source of revenue for the company. 

Creating a Loyal and Massive Fan Base 

Building a loyal customer or fan base is the least technical way of setting up a recurring revenue stream for your business. The reason why this option is so easy and reliable is because a loyal customer base always tends to drive huge and consistent patronage for business products or services. You can see this very clearly when you look at the Apple brand and its smartphone product, iPhone. Gitnux portrays this in a report that about “92% of iPhone users (are) planning to stick with Apple for their next phone, compared to 74.6% of Samsung users.” 

Aside from the loyalty of Apple users keeps them coming back for a purchase, having lots of customers backing your business products and decisions also helps to create a strong valuation for your company, pulling in investors and stakeholders and presenting a solid foundation for local and international partnerships. 

Pros and Cons of Recurring Revenue Model (RRM) Types 

The different recurring revenue models all have their glaring advantages and unique drawbacks. Here, we explain what these are 

1. Pros of the Auto-Renewal Subscription Model:

• One most outstanding benefits of the auto-renewal subscription model is that it gives an idea of customer loyalty. The more people subscribed to an auto-renewal service, the higher the number of customers loyal to the business behind that service. 
• For the customer, an auto-renewal subscription service offers convenience. They simply subscribe to a product or service that fits their preference, and schedule an automatic renewal of their subscription or access to those products and services. This reduces the possibility of service interruptions, improving customer experiences. 
• Auto-renewal subscriptions make it possible for a business to project and forecast its revenue expectations. 

Cons of the Auto-Renewal Subscriptions:

• Auto-renewal subscription service providers struggle with rapidly changing customer preferences influenced by public and private trends. 
• Another major issue with the recurring revenue model is that it is difficult to implement while also maintaining legal compliance. 

2. Pros of Long-term Contracts:

• Long-term contracts represent a more secure and reliable form of recurring income for businesses since it is legally binding.

Cons of Long-term Contracts:

• Due to its legal component, long-term contracts are highly complicated and take so much time to implement. 
• There is a less flexible pricing system in this model, making it difficult for businesses to adjust to fluctuations in operational costs. 

3. Pros of Selling Supplementary Goods: 

• Imagine creating one main product with multiple supplementary parts and having customers willing to buy each and every one of those products. For a small business, this could bring a huge opportunity for growth. 

Cons of Selling Supplementary Goods:

• The first drawback of selling supplementary goods is the cost involved in producing and marketing those goods. Of course, having a supplementary product means that a main product has already been manufactured or produced. Adding the cost of producing/marketing the main product with the cost of producing/marketing one or more supplementary products could, in some cases, result in a significant financial strain on a company. 
• Selling multiple supplementary goods means making recurring revenue through more than one product. Since these products all depend on each other, they have to be considered all at once and this might present a challenge by complicating customer retention or revenue forecasting. 

Best use cases - which business strategy should use which RRM? 

The auto-renewal subscription model is popular among businesses such as gyms, cable television, and warehouse storage. It is also becoming a thing with a growing brand of businesses known as subscription boxes or subcom. 

The most favorable conditions for applying the auto-renewal subscription model to a business is after identifying a need for customers to repeatedly and frequently purchase a product. Another condition would be identifying a strong tendency for their preference for a subscription-based service or a product offered within this service to remain unchanged over a long period of time. 

For the long-term contract model, you would find cell phone companies to be among the top engagers. The condition for applying this recurring revenue model is closely similar to the auto-renewal subscription model. Typically, it involves being sure that you have customers who would want to use that kind of service. 

For the sales of supplementary goods model for recurring revenue, you want to be sure that the main product is impressive and driving patronage. After achieving that, you would still have to ensure that the supplementary goods you offer clearly provide some added benefit to the customer. Remember that the customers are already purchasing the main product, so there is a tendency for them to carefully weigh the need to buy the supplementary product. 

Unlike the others, there is absolutely no condition or checklist to adhere to before trying to build a loyal fan base for your business. In fact, businesses make it a constant endeavor to attract and retain customers. 

Renowned Companies and the RRM Model They Employ

Apple:

Apple stands out exceptionally well for the quality and characteristics of its devices and the thoughtfulness of its development and recycling processes. The company’s strategies (in remaining consistent in the design of its smartphone product) combine to deliver it an impressive amount of customers with high satisfaction and a great potential for retention. This creates a huge user base which goes further to imply a guaranteed source of recurring revenue. 

Amazon: 

While this is not about companies that start with the letter A, Amazon is another company that is well worth the mention. The recurring revenue model that applies here is that of auto-renewal subscriptions. Amazon has a long history of strategizing every bit of its operations and one of its major successes has been in getting customers to come back over and over for its wide variety of products. This puts the company up as one of the largest retailers across the globe. It has also earned it a massive amount of users, significantly improving the stability of its revenue. 

Conclusion 

As a founder or entrepreneur, there’s nothing more fulfilling than having to put your business revenue into auto-drive. After, perhaps, months or years of hard work and long hours on the job, you want to be able to put in less effort while enjoying a decent and consistent level of revenue, if not even more. This article is written to help you understand the entire concept of recurring revenues and what model might best fit your business - to help you automate your business revenue. You can go on to find more articles like this one here on our blog.

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