Recurring Revenue Models to Help Scale Your Business
Recurring revenue models, also known as subscription-based or usage-based business models, have surged over the past several years, thanks in part to advances in cloud computing, artificial intelligence and the internet of things (IoT). One-time software purchases have turned into software-as-a-service subscriptions. Brands like Amazon Prime, Netflix and Spotify have not only founded their businesses on subscription models, but have created demand for it. More and more consumers are willing to pay for access and convenience, even within industries not traditionally associated with a recurring revenue model — such as health and beauty retailers and national chain restaurants.
In 2020, Panera Bread made headlines when it offered coffee subscriptions. For $8.99 a month, subscribers could get unlimited coffee. The national chain has secured roughly half a million subscribers and the business benefits are paying off. Metrics roughly six months into the program revealed that 35% of subscribers were new customers and roughly 35% of the coffee orders included food.1
The Panera Bread example is a case study for why so many businesses are incorporating subscription-based business models into their operations. More than offering predictable cash flow, a recurring revenue model can help your business scale up — expanding your customer base, elevating profits and decreasing costs associated with sales. For companies that have already proven their success as a repeatable, profitable business model, such as those on a franchise platform or national retail chain, it’s a natural next step to consider how a recurring revenue model can help your business meet its growth goals.
What Is the Recurring Revenue Business Model?
A recurring revenue business model is based on customers who pay a recurring monthly, quarterly or annual fee for a company’s products or services. It is an alternative to the more traditional one-off sales model, in which the customer pays a one-time purchase price for permanent ownership of a product or service.
Types of Recurring Revenue Business Models
Different types of recurring revenue business models have been designed to suit different industries and deliverables. For the purpose of this article, we’ve expanded on those most appropriate for franchisors, franchisees and owner-operators of national, branded retail chains.
| Hard Contracts | You provide a service to a customer for a specified period at a specified periodic cost. With a hard contract, you lock in the customer until the end of that period. If they want to cancel early, they generally have to pay a cancellation fee. Mobile phone contracts are an example of this model. |
| Sunk Money Consumables | You sell a product or service to the customer in a one-off sale, then continue the relationship by making regular periodic sales of items they need in order to use the product or service. Sell a customer a razor once and sell them blades every month. Sell a customer a coffee machine that uses pods and then sell them the pods. |
| Auto-renewal Subscriptions | Streaming services and phone apps often use this type of subscription. It enables you to collect revenue automatically until the subscription is specifically canceled by the customer. |
| Usage-based Subscriptions | With a usage-based subscription, you charge customers at scheduled intervals based on their usage. They pay for what they consume. Cloud computing providers like Amazon Web Services use this model. |
| Tiered Billing | Tiered billing is a form of usage-based subscription in which there are multiple specified levels of use and functionality from which customers can choose and according to which they are billed. SaaS products often offer multiple tiers of pricing. |
| User-based Billing | You bill customers according to how many users access the product during a specific time period. This is a common model for business software products used by company teams. |
| Hybrid Billing | You can combine revenue models to maximize your income. Many companies using subscription-based models, such as beauty box companies, use a hybrid model to set up a recurring income stream and also allow for additional one-off product sales. |
| Freemium | With the freemium model, you offer customers limited access to a product or service for free but require them to upgrade to a paid plan to get more access or features. Spotify, Bumble and YouTube all offer freemium models. |
Businesses Suited for the Recurring Revenue Model
Businesses from a variety of industries are trying out recurring revenue models and, as mentioned in the beginning of this article, its uses are expanding across a surprising array of industries and business types. In fact, you can convert virtually any service or product desired by consumers on a regular basis into a subscription business. Here are a few ways you might consider applying it to your business.
Convenience and “Surprise” Products
Subscription boxes are growing in offerings and popularity. They currently are the most common example of using a recurring revenue model for product sales. Convenience boxes contain practical products that must be bought frequently, such as pet food or razors, while “surprise product” boxes contain curated assortments of discretionary items such as makeup or home decor items.
Growing Your Business with a Recurring Revenue Business Model
A survey of senior financial executives by CFO Research and Salesforce showed that more than half (roughly 55%) estimated that, within five years, over 40% of their company’s revenue would be from a recurring revenue model.2 It’s worth noting, though, that most companies aren’t transitioning from traditional transaction-based business models to subscription-based business models full stop but, rather, are leveraging both models to expand into new markets.
For some companies, transitioning to recurring revenue is a natural change as the nation shifts to a service economy. For others, the competitive landscape may drive the need to evolve their business model. Whatever the reason, the benefits of a recurring revenue model are layered and reach multiple stakeholders and divisions, including:
- Predictable and growing revenue: With steady revenue paid at expected times, cash flow is predictable, which can help you budget expenses, stock inventory and invest in growth with more confidence. In addition, subscription-based customers often spend in addition to their membership costs.
- Growing and retaining customers: Subscription-based models often make services and products more affordable and/or appeal to a new market base. The low recurring costs also make it easy to retain customers, creating loyalty and long-term value.
- Decreasing sales costs: The recurring revenue model is a known formula for driving down costs associated with selling. With a captured audience, it’s easier to present them with additional services or products they might be interested in.
- Investor satisfaction: The primary appeal of recurring revenue models to investors is the value of predictable revenue and the potential for growth. After all, stock valuations are forward-looking predictions and subscription-based models are forward-looking revenue models.
Texas Capital Bank offers deep experience and specialized financial expertise to national branded retail chains, franchisors and franchisees to help them succeed and grow. From franchise loans to maximizing cash flow and accelerating receivables, we work closely with clients to ensure they have the working capital they need to acquire new units, refurbish existing units, purchase equipment and more.
1https://www.restaurantbusinessonline.com/operations/paneras-unlimited-coffee-program-has-nearly-500k-paid-subscribers