How to Add a Recurring Revenue Stream to Your BusinessNov 18, 2020
There are two challenges that many small to medium businesses face: growth and stability. It’s why business owners know the pressure to keep adding new revenue so well. This is especially true for businesses based on a non-recurring business model. There’s an urgency to find and attract new transactions on a constant basis to sustain business. If you own a business like this, you may want to consider adding a recurring revenue stream to your business model.
Recurring revenue streams not only provide stability and predictability to your revenue, they also offer a unique path to growth in today’s economy. With the rapid shift towards subscription-based offers, many B2B owners wonder if there’s space for their businesses to leverage the power of recurring revenue. Good news. There is.
A Disclaimer - We’re Not Talking About Unreasonable Changes
Before we dive in, I do want to mention one thing - as we talk about transitions to recurring revenue, we aren’t talking about flipping your business on its head (unless you’re up for that kind of thing!) and trying to make it entirely subscription-based. For most B2B businesses, that model just won’t work. However…
There’s a wide variety of ways you can implement recurring elements into your existing business model where they make sense. I’ll pull a quick example looking at HP from a recent article we put out, and then we can dive in.
It wouldn’t make much sense for HP to try to sell printers on a subscription basis--how many new printers do you need yearly? But ink is another story. HP capitalized on the frustrating reality that we all experience at some point--running out of ink and not having any more cartridges (or even worse, having ones that don’t work with your specific printer).
So they started selling their ink cartridges (something they were already selling) on a subscription basis. Yes, it helps their frustrated customers out...and it just so happens to augment their printer sales too. They’ve translated something they already do into a small recurring offer that can secure additional revenue--and it’s not even their primary sale item.
So again, we’re not talking about flipping your entire business model into a 100% recurring revenue model. Instead, we’ll be talking about how to translate any of your current offers (or low-hanging-fruit potential ones) into a successful recurring revenue stream.
Why Do Recurring Revenue Models Work?
If so many business owners see this trend of recurring revenue models, why aren’t more businesses implementing it? After all, among business owners who saw the value of recurring revenue streams, only 24% of businesses are actively using recurring revenue despite 70% saying they plan on creating one. From this same study, only 7% called their recurring streams a “significant” source of revenue. Is there a gap between value perceived and revenue achieved?
I would suggest that where there is a gap, the issue is education. Another study found that nearly a quarter of businesses surveyed were at least trying membership revenue models, but they didn’t know how to grow them. Another 22% of that group saw the value for their business but didn’t know how to put a recurring model into action.
For you to take a strong first step into the recurring revenue world, you need to start with your customers’ needs, not necessarily your business model. (We’ll get to that later.)
Now, customers have many needs that aren’t recurring - how often do you purchase a new refrigerator? But those same customers have other needs that are more consistent, and I would argue that most of their individual purchases fall into that category.
We’ve seen companies like Apple transition from requiring users to purchase individual songs to their current $10/month plan with unlimited listening. It’s also why there’s more money in gym memberships than selling gym equipment. Gyms prefer to incur the cost of ownership and sell access to the equipment, whether or not their members use it. (New Year's resolutions anyone?)
The same trend has happened in the B2B world as well. We’ve seen quite a few creative transitions from traditionally non-recurring offers and business models. How many cloud-based apps do you rely on without owning? Quickbooks? Your CRM? Just how many bills do you see pop up every month on your credit card statement?
It’s a Win-Win: Customers AND Businesses
There are a number of reasons the subscription model has boomed, and chief among them is that consumers love it. It secures a need or want in a single decision. It helps them manage cash flow by spreading out the costs normally associated with ownership. The need or want is already recurring - you’re just offering a simplified way to meet it.
It’s also true that business owners that successfully implement recurring revenue models tend to love them every bit as much as their customers. While they do offer basic (but substantial) benefits like increased predictability and financial stability, they also give brands opportunities to build their customer base in unique ways.
By leveraging subscription offers, businesses can remove future opportunities for their customers to be faced with a new decision between them and their competitors. Free from the strain of having to re-win the sale each time, you can focus more attention and resources on delivering value which naturally retains your recurring customers.
So what have all these businesses found that both they and their customers love? Let’s pull back the curtain, see what makes the model work so well, and get an idea of if your business is poised for a new recurring revenue stream.
Step 1: Identify Your Ideal Customer’s Recurring Needs or Wants
All the brainstorming in the world won’t get you very far unless you start with your customers and what they are looking for.
(I also like to throw in “ideal customer” because as you’re developing your business, it’s in your best interest to put your time and effort into building a business model that caters to your ideal customer.)
What do they need or want repetitively?
Let’s start with what already exists. Right now, within your business model, what products or services do customers purchase on a regular basis? This can include purchases from you or from your competitors - right now we are just focused on the need.
Another facet of this is looking for consistent risks your customers face. They might not need to actually use what you offer, but they prefer to know they have access in case of emergency. This kind of offer requires a confident grip on your financial operations and a little bit of risk tolerance, but there are strong profits to be made in selling insurance against your customers’ concerns.
We’ve seen this especially with some of our manufacturing clients that provide high-cost, low-frequency products. Due to the longevity and high price of their offers, it’s not designed to be a recurring purchase. They often do however require smaller maintenance jobs or occasional “wear-and-tear” replacement parts. These clients have found significant profit margins in these smaller recurring agreements, securing business for future transactions in a single decision.
So let’s revisit the question at the top of this section. Take a moment and ask yourself:
- What products or services do my customers purchase on a regular basis?
- What consistent risks do your customers face that you can supply a solution for?
Step 2: Identify the Specific Value Prop of Your Recurring Model
The rise of subscription-based offers may be prevalent, but it hasn’t happened by accident. There wasn’t a point where customers decided they preferred to pay for things on a recurring basis - there was a new value proposition added with each transition.
People are willing to commit to recurring offers for a number of reasons. The key is to identify what specific value your recurring model offers so that you can structure and present your offer in a way that aligns with your customers’ wants and needs. Here are the main value prop categories recurring revenue models often provide. Which one are you selling?
Recurring Model #1: The Reliance Value Prop
This option focuses on the customer that will consistently use what you are selling. It’s not an “if they use it” model - it’s “when” and “how often”. It’s also the kind of offer they can easily get in non-subscription form (unlike a gym membership where subscription is the standard). This kind of customer is generally looking for a few benefits:
- Pricing: They’re either looking to lock in prices that might go up, or they’re looking for a slight discount since they’re committing to your business.
- Non-financial Perks: Subscriptions don’t need to mean less money. They can also offer unique perks not available to one-time purchasers. This can mean things like priority product support, built-in upgrades, and anything else that adds value without lowering the price.
- Future Needs: If you can help a customer cross off a future item on their list of responsibilities, there’s a surprising amount of value there. You’re providing freedom to “close a mental tab”.
You need to have a clear definition of why your subscription-based offer provides more value than the standard solo purchase, incentivizing your customer to stick with you.
Recurring Model #2: The Access Value Prop
To me, this may be one of the more comical (but still effective) forms of recurring revenue. This model offers access to a product or service, regardless of the frequency it’s actually used. The customer may not need it regularly, but they like the thought of it being available.
I mentioned this example a moment ago, but it’s too good not to revisit again: gym memberships. There’s always a sense of promise and anticipation when you sign up for a gym. You’re starting something new, you're putting your money where your mouth is. But “results may vary”. Greatly.
Within the world of gym memberships, there are actually some gyms that have built their business model around targeting people who are likely to sign up, not use their membership, then forget they’re paying for it. Others try to spur their members towards consistent usage, which can be an uphill battle but you can see why. Both make money.
Let’s come back to your business. If you offer a product, you will want to focus on the value delivered to your customer in not needing to own everything you’re offering access to. People are willing to pay for something they wish they could have but can’t afford. This may be focused on either the quantity (variety) or quality (features, experience, etc.) of the product(s) you’re offering.
If you have a service-based offer, you can focus on the availability itself. For example, a friend of mine has an exterminator that he likes to use to protect his home from bugs. For an annually recurring fee, their company does quarterly treatments to keep up the protection.
Their key selling point lies elsewhere though - not only does this membership provide 4 treatments a year, it also provides on-call emergency coverage. My friend will tell you that the entire reason they did the membership was so that they would never have to worry about calling for help. It’s been 2 years, and they’ve only needed it once. Despite the low actual usage, it provides a high level of value to them.
Recurring Model #3: The Risk Value Prop
While people are willing to pay for things they’ll use regularly, they’re also willing for things they can’t do without. Now you might be thinking of insurance-type models, and that might immediately turn you off of this idea. I would encourage you to think of it more like a care plan for whatever it is that you sell.
To see if this works for your business, let’s start with a question. Consider the range of goods or services you provide. Are any of them connected to a vital function for your customers? How much would your customers be willing to pay to ensure that they always have what they need to accomplish their goals? I’ll give you an example of this.
If you go purchase a new Macbook from the Apple Store, they’ll immediately offer you Apple Care to protect your purchase. Now, most computers require little to no maintenance for the first few years, but Apple still collects annual fees. If the majority of customers don’t end up needing AppleCare, why do they purchase it?
It’s because people think like individuals while businesses think about customer bases. When a single customer experiences the sticker shock of buying a several thousand dollar laptop, they’re far more likely to be willing to shell out a few hundred extra to ensure they don’t have to spend that much money again any time soon. The single consumer thinks of their own fear while the business can focus on the larger pool of data showing actual usage.
Assessing Your Business for Recurring Revenue Opportunities
Any transition (big or small) to recurring revenue requires a great deal of thoroughness from research to preparation to execution. If you need help identifying existing and potential recurring opportunities, we’re here to guide you through every step on your path to growth.
We’ll help you get the tools and guidance you need to expand the volume and velocity your business converts opportunities into profitable revenue streams. So reach out today, and let’s start the conversation.
Feel free to download our infographic on the 3 main recurring value props!