For centuries, revenue streams have gone something like this:
- A company sells a product or service.
- A customer buys that product or service.
- Money exchanges hands.
And that's pretty much it. That's the end of the transaction. Businesses have been doing the same thing over and over again. Now, a new revenue model is taking hold in the software and tech sectors, and it's much more stable and predictable. The recurring revenue model means businesses like yours receive payment not once, not twice, but time and time again.
What is the Recurring Revenue Model?
More businesses are providing services that generate recurring revenue — reliable payments at regular intervals for an indefinite amount of time. Subscriptions are a great example of this business model. In this instance, customers subscribe to a service (Netflix, Spotify, a particular piece of software, etc.) and pay for it monthly, until they cancel the subscription.
Until that happens, revenue is continuous — it doesn't stop.
In many cases, the recurring revenue model provides businesses with a steady stream of income over the year and increases the value of their assets significantly.
Research shows that the recurring revenue model proves lucrative for businesses in various verticals. Take the software industry, for example, where recurring revenue for SaaS software generates, on average, a 6x revenue multiple for valuation. In other words, recurring revenue increases the average value of businesses that sell SaaS software six times over.
Software companies that sell perpetual licenses (these require a one-off payment), on the other hand, increase the average value of their business just three times over.
Why Should You Use the Recurring Revenue Model?
#1. It Decreases Customer Churn
Customers are less likely to "churn" when you offer the recurring revenue model. (Churn rate is the percentage of customers who leave your service after a certain amount of time.)
In the non-recurring revenue model, customers might just make a one-off purchase and then fall out of your sales pipelines. They have purchased what they need and will look elsewhere in the future. In the recurring revenue model, however, customers are more likely to stick with your company because are making regular payments and receive perpetual value from your products or service.
Research shows that customer churn rates are much lower for companies who use the recurring revenue model — anywhere between 2-16 percent. Church rates for companies who use the non-recurring revenue model, however, have churn rates of 20, 30, 40 percent or more.
#2. It's Scalable
The recurring revenue model is completely scalable, so you can adapt it to suit your needs as you grow your business. As customers will likely continue to pay for your product or service over months or years, this business model is sustainable, and you can grow your customer base or infrastructure at the same time. Other business models just won't provide you with the same value.
Look at the non-recurring revenue model again. Businesses that use this model might experience a slump in sales during certain times of the year and will need to continue to adjust their prices as a result. This leads to inconsistency.
#3. It Increases Sales
It goes without saying that the recurring revenue model can increase sales significantly over time. Although customers tend to pay more for a one-off payment in the non-recurring model, they will far exceed this amount if they continue to make regular payments for a prolonged period of time.
There's certain predictability with the recurring revenue model. This is because customers who pay you every month or quarter are likely to continue to pay you, which provides you with peace of mind. As a result, the recurring revenue model provides you with more lifetime value than other models.
As you can see, the recurring revenue model provides both you and your customers with more value over a longer period of time. Non-recurring revenue streams might suit some businesses, but they won't be able to generate regular payments from customers for an indefinite time period. Think about using a recurring revenue stream if you want to reduce customer churn, scale your business, and improve sales.