There are many ways to earn money, but one of the best business models around is the recurring revenue model.
What is Recurring Revenue?
Recurring revenue is predictable and reliable income month after month. Instead of selling products or services one at a time, you are essentially selling ongoing, subscription-based transactions where you can expect to receive revenues on a regular basis from your existing customers.
Recurring revenue ensures you get the maximum lifetime value from your customers. You get lower acquisition cost because you are not going after the customer for that one time sell. Rather, you can expect a steady stream of revenues from the customers that you already have.
Some examples of business ideas that use recurring revenue models include:
- Auto renewal subscriptions, mostly for “evergreen” products or those products that are hard to replace and could go on forever such as document storage subscriptions
- Software as a service (SAAS) where you sell software on subscription basis.
- Businesses requiring hard contracts such as cell phone companies where they lock their subscribers for up to two years
- Affiliate subscriptions where you send referrals to subscription-based products and get commissions as long as customer is a subscriber.
- Supplemental services such as a web designer offering web hosting, like what we are doing with Ysari.com
- Finite subscriptions such as the annual magazine subscriptions
- Membership sites where you charge access to your products, services or information for a regular fee
- Service plans or retainers where customers pay for what they need each month. Examples of this include WordPress plugins where you have to pay a regular subscription fee (could be yearly, monthly or every six months) to avail of support and updates.
Why Recurring Revenue Is Good for your Small Business
The title of this Forbes.com article explains it all: “Want Venture Investors? Build A Recurring Revenue Model.” According to the author, one of the main things investors are looking for in a business to invest is the “frequency of that revenue stream, and whether or not it is recurring and easily predictable.”
Time tracking software company Hubstaff’s co-founder Dave Nevogt even goes so far to say that
Recurring revenue is crucial to building a million-dollar business. It’s a key factor in creating a business that scales.
Nevogt explains that he used to sell instructional golf DVDs and books for $47 each. If he wants the business to grow to $1 million in annual revenue, he needs to sell:
$1,000,000 / $47 per unit = 21,276 units per year
21,276 units per year / 365 days in a year = 58 units per day
To sell 58 units per day, he has to be constantly working hard to get each sale every day. To achieve his goal of earning $1 million faster, he has to either increase his price or have more products that he can upsell on. Either way, it will not be easy and will entail constantly finding customers that will buy.
So he switched business models and used the recurring revenue model for his time tracking software business Hubstaff. He currently has 2,400 paying customers paying him an average of $32 per month. Even if he just keeps that number of paying customers, he is on track to achieve $1 million in revenues in 13 months! As he explains:
That repeatable transaction is what enables you to spend your time growing the business instead of fighting for the next sale.
Are you convinced yet of using the recurring revenue model for your small business?