Recurring revenue: How to set up a new payment model

If you’re looking to add a recurring revenue model to your business and want to sell it successfully, you’ve come to the right place.

In this article, we cover everything you need to know about types of recurring revenue, its pros and cons, deciding if it’s right for you and how to implement it successfully.

What is recurring revenue?

Recurring revenue is a business model that relies on repeat purchases from customers. A company that uses a recurring revenue model can often predict their future income more accurately.

Recurring revenue can come from memberships, contracts, subscriptions and similar customer relationships (we’ll cover them all in more detail in the next section). It’s a model that’s often used by SaaS companies to manage subscriptions to their service.

With recurring revenue, your company can achieve:

• A loyal customer base

• Higher average lifetime value (LTV) of your customers

• Stable cash flow

• Lower risk when it comes to growth opportunities

From the customer's perspective, buying regularly and for a long time usually means there’s a long-term problem to solve. If you’re their company of choice, it means they trust you as their solution.

What is the opposite of recurring revenue?

On the opposite side of the spectrum is the one-time revenue model, which is based on single, non-recurring payments that may or may not happen again. One-time sales can have a higher sense of immediacy and closure compared to recurring revenue

With non-recurring revenue, it’s harder for businesses to forecast and plan for the future. They don’t have as much certainty as a recurring revenue model.

With a one-time purchase, you don’t know when new customers are going to make another purchase, or even if they’re likely to purchase again.

You can make educated guesses, but it’ll never be as clear cut as recurring revenue.

Why is recurring revenue important?

Let’s take a look at some of the key reasons recurring revenue can be helpful for business growth.

Better manage your cash flow

Unlike one-off sales, recurring revenue sales are predictable. They occur at regular intervals with a (relatively) high degree of certainty, which means you can get a handle on the following information:

• How much money is coming into the business

• When the money is coming in

• What your outgoings are

With this information, you can keep a better track of your cash flow. As a result, you can make informed decisions about business growth and effectively allocate resources.

Easily predict future earnings

Knowing what’s coming in and out of your business gives you a solid foundation for forecasting future earnings. You can predict your sales for the next month, the next quarter, even the next year.

You can also calculate business growth. You’ll be able to visualize:

• Your average revenue

• How and when your business can grow

• Where the best opportunities are

From here, you can pretty accurately predict how your business will grow and what milestones you’ll hit along the way.

Successfully scale your business

With a clear picture of your cash flow and future earnings, you’re in a good position to scale your business with minimal risk. A recurring revenue model helps you create a realistic and achievable plan for growth. Here’s how:

• You can predict future sales and profits. You’re not taking a stab in the dark and hoping for the best. You have recurring income coming into the business, so you can predict how your business will grow over the coming months.

• You understand what your customers are looking for. With a recurring revenue model, you build trust and loyalty with your customers. They stick around because your product or service is worth paying for, which reduces customer churn and boosts your profits.
  

• You can identify the best areas of growth. Based on insights from your recurring revenue, you’re able to pinpoint areas of growth. Let’s say the data shows 60% of your customer base pays for your mid-level service. You might want to focus on how you can make this service even better to boost customer acquisition.

10 different recurring revenue models

The potential of a recurring revenue model is vast, and many industries are adopting them. A recent survey of retail executives revealed that recurring revenue programs are “a prerequisite for doing business” for 77% of those currently offering them or considering offering them.

Let’s explore some of the most well-known ways you can add recurring revenue as your business model.

1. Standard subscriptions

A standard subscription service involves customers paying for your product or service on a weekly, monthly or yearly basis. Take a look at National Geographic as an example.

Source: National Geographic

Users pay for the magazine on a monthly basis over the year. At the end of the year, they choose whether to renew.

2. Hard contracts

Phone plans and contracts are the best example of hard contracts. When you sign up for a plan, you get a phone for free (or for a small down payment). You then pay a monthly fee to use it. These fixed contracts span from as little as six months up to two or three years.

Source: Mint Mobile

When the contract is up, you usually keep using the service under the same conditions with a rolling monthly contract (meaning the monthly recurring revenue keeps coming in, even though the hard contract has ended).

3. Ongoing, auto-renewal subscriptions

These plans keep going until the customer voluntarily ends them. They’re usually monthly subscriptions, but are sometimes available as annual subscriptions.

Some examples of auto-renewal subscriptions include:

• Software as a service (SaaS), like Xero’s accounting software or Pipedrive’s CRM

• Streaming services, like Spotify or Netflix

• Learning platforms, like Skillshare or LinkedIn Learning

• Fitness subscriptions, like ClassPass

• Subscription boxes, like Birchbox or Barkbox

4. Subscriptions on standalone products

Some brands have noticed that people buy certain products over and over, so they thought of a great way to create a more predictable revenue stream: product subscriptions.

Shampoos, socks, shaving products and much more—companies like Dollar Shave Club and MeUndies get the best of both worlds by making it possible to buy standalone products as well as recurring subscriptions.

5. Sunk money consumables

When a customer makes an initial investment into a product that requires further purchases to function properly, it’s what John Warrillow (author of Built to Sell) calls a “sunk money consumable”.

Here are some examples of sunk money consumables:

• Brita water filter system. If you want clean water, you must keep buying new Brita filters

• Nespresso coffee machine. You buy the coffee machine, but to make coffee, you need to buy Nespresso coffee capsules

Source: Nespresso

6. Sunk money subscriptions

Sunk money subscriptions follow the same principle as sunk money consumables. The difference is that instead of investing in a tangible product, consumers pay for a subscription.

Warrillow uses the Bloomberg Terminal as an example of a sunk money subscription. Wall Street traders have bought into a platform, so they keep buying the information – Bloomberg’s financial publications – to make sure their investment pays off.

7. Service retainers

Service providers like freelancers and agencies can generate a guaranteed income by offering retainers. This means that for a recurring monthly fee, the client gets a certain deliverable.

It’s usually a predefined number of:

• Hours worked

• Projects or updates completed

• Consulting calls

These are generally issued monthly, but it can vary based on the services.

8. Online memberships

A membership site is a place where you can deliver valuable content, build a community and offer coaching or consulting in a more scalable way compared to one-on-one teaching.

Here are some examples of existing online memberships:

• The Hashtag Files, a library of handpicked Instagram hashtags and an Instagram course

• Tech Ladies, a Hashtag Files group for women working in tech, with access to networking, webinars, job postings and more

9. Usage-based subscriptions

With usage-based subscriptions, users are billed for what they use.

Think about a pay-as-you-go phone contract as an example. You only pay for the calls, texts and data you use. There’s no flat rate to pay in advance, and users can pay for add-ons when they need them.

This subscription model is helpful for customers on a budget, but it does make it harder for you to track exactly how much revenue you’ll get every month.

Imagine one month your customers use your service a lot and you see a spike in profits. But who’s to say they’ll use the same amount next month? This makes it harder for you to forecast and scale your subscription business.

10. User-based subscriptions

User-based subscriptions bill users based on the number of subscribers using the product or service on one account. This model is common with SaaS businesses – take a look at Slack as an example. Their pricing is based per active user, per month (when paying annually).

Some businesses will charge an additional fee for each user, whereas others might have capped pricing options based on the number of users.

For example:

• 1-5 users = $29.99 per month

• 6-10 users = $49.99 per month

• 11+ users = $64.99 per month

The pros and cons of recurring revenue and one-time revenue

Should you consider a recurring revenue model?

There are times when either a recurring revenue or a one-time revenue model makes the most sense (some are mentioned above). There are also instances where you might offer both, such as with larger consumer purchases like a car or item of furniture.

To help you identify which is right for your business, let’s look at some of the advantages and downsides of both recurring and one-time revenue models.

Recurring revenue benefits

A consistent revenue stream

Recurring revenue models bring a certain stability around predicting your future revenue. Having regular cash flow means you’re better able to plan for payroll, investment (more on this later) and resource allocation.

All of this makes it easier for you to plan and manage company growth. You’ll be able to create realistic goals and plans for scaling the business.

Stronger customer loyalty

If someone has bought from you frequently and over a long duration, they see you as the solution to a problem that’s either complex or recurring (and sometimes both).

Your offering has taken an important place in your customer’s life. The longer they’ve been using it, the harder it becomes to switch to a competitor.

According to one report, 56% of companies focusing on customer lifetime value (LTV) aren’t effective at predicting who’ll be their most valuable customers. Recurring revenue can help you recognize and establish those patterns.

A foundation for growth and scalability

Thanks to a more predictable cash flow and loyal customers who act as your brand ambassadors, you gain a safety net you wouldn’t otherwise have.

Here’s what the safety net includes:

• Regular income. you can predict how much income you’ll have each month, which gives you a great starting point for figuring out how and when to grow your business

• Market research. you can experiment with a new program or service based on the insights you have from your loyal customers

• Identifying your top sellers. you can easily see which revenue streams are getting the most income and focus your efforts on promoting those to get the best results

Appeal to investors

Recurring revenue means stability. You can predict monthly recurring revenue (MRR) and annual recurring revenue (ARR). From here, you can see how best to allocate your resources for business growth.

This is a green flag for investors. It’s a much safer option for them to invest in a business that can predict revenue with a regular stream of income.

Not to mention, a recent study found that customers feel more loyal and spend more money with businesses they subscribe to. This boosts customer retention and keeps revenue coming through the door.

Recurring revenue disadvantages

Customers have expectations

Your customers have committed to a long-term relationship with you. This means they’ll want to get tangible value from it.

For you, it means you’ll always need the right amount of people and resources to be able to deliver that value and meet customers’ expectations. You’ll need a knowledgeable customer service team in place to support your users.

This isn’t always easy to achieve. Finding the right people, annual leave, sickness and other factors can affect consistent support, so it requires extra planning to make sure you can serve your customers well.

Revenue tracking can become complex

With recurring revenue, you may have hundreds or even thousands of customers in different parts of their subscription cycles all at once. That’s a lot of data to manage.

Unlike with single purchases, you’ll need to keep track of contract lengths, churn rates and other metrics that show you the health of your company at any point. You’ll also need this information to accurately forecast for the future

Less flexibility when changing prices

As the market evolves and trends change, you may want to update your pricing. However, recurring revenue makes that process more difficult.

When you change the price on a one-time purchase, it’s quite straightforward. If you were to do that on, say, a membership or a service retainer, it could make your customers feel quite uncomfortable.

You’re not just changing a single price, you’re changing every upcoming monthly charge.

Netflix is a good example of how to address these changes. Take a look at their pricing page:

They tell users that they’ll receive an email notification 30 days before the price changes to give them a heads up. Users can also cancel at any time, so they’re not stuck in the contract if they don’t want to pay more for the service.

One-time revenue benefits

Ease of setup

One-time revenue makes it easy to understand how your marketing and sales efforts will immediately affect your revenue.

It comes with a straightforward revenue formula:

Based on your lead generation results, as well as your sales team’s close rate, you can see the impact of every campaign in real time.

A simpler sales pitch

Your potential customers can immediately see the benefit of buying from you. Because you’re not asking for a long commitment, you can simplify your sales pitch and address any questions and concerns quickly and efficiently.

For this reason, customers may also be more willing to make the purchase. There’s no fear of being stuck in a long-term contract if they’re making a single purchase.

The opportunity to cross-sell

A one-time purchase usually solves a one-time (or a less frequently occurring) problem. This means that when a related issue comes up, your customer may need another complementary product.

Even if your customer isn’t paying for a recurring subscription, you can still cross-sell and encourage previous customers to buy again.

One-time revenue disadvantages

No predictability of returning customers

With one-time revenue as your main revenue stream, you start every month at zero. There are no guarantees. All of your revenue will come from your marketing and sales efforts.

This means that your lead generation tactics and your sales strategy need to be in their best shape at all times. You need to make sure you constantly have new (or returning) customers coming through the door.

It’s more difficult to build loyalty

The effect on loyalty depends on the industry and the main drivers your audience uses when shopping for solutions. Generally speaking, though, one-time revenue customers are looking for a one-time solution. If they’re buying largely based on price and looking to reduce their expenses, you’ll struggle to create loyalty.

Is recurring revenue right for my business?

Recurring revenue can put your company in an excellent position to grow. You know everyone can get paid for a while thanks to predictable revenue.

However, to make that possible, you first need to establish if a recurring revenue business model is right for you. Let’s look at some questions that can help you decide.

Do people need your product or service on a recurring basis?

Some products and services are only purchased once (or on a rare basis). A wedding dress for your big day, for example, or a desk, office chair and a laptop for each of your employees.

But there are many things you need on an ongoing basis, such as software for day-to-day work.

A wedding dress rental subscription would never work (or make sense), but designer clothing rental is different.It’s why Rent the Runway exists.

The answer to the question above is often straightforward. If you offer a product or a service customers buy on a regular basis, you can turn it into a subscription or a retainer.

When the answer isn’t so simple, it may require some “what if” follow-up questions before you join the ranks of successful recurring revenue businesses.

Let’s say you’re a productivity coaching company. Your main offer is a one-time, weeklong program where you go into a company and work with their leadership to implement time management processes and templates. So what if:

• You added a recurring service where you work with them once a quarter to plan the next 12 weeks?

• You added a monthly retainer where they can contact you a number of times with any time management hurdles that come up?

Instead of offering your service as a one-time-only deal, you’re offering more value over a longer period.

Here’s another example. Let’s say you sell professional cooking equipment to restaurants and bakeries. Ideally, the cookware they buy from you lasts them a long time. But what if:

• You created a monthly membership with courses and ebooks to help your customers keep their skills up to date?

• You ran a paid subscription that consists of a recurring one-hour group call where subscribers could ask you questions and you could coach them?

Run some thought experiments to explore your options.

Can you support the needs of recurring customers?

Let’s say that in your answers to the “what if” questions, you discovered great recurring revenue opportunities.

Your next point of focus is whether you have the bandwidth to support the expectations of your recurring customers.

This could include:

• Number of customer-facing employees. Do you have enough people to quickly respond to customer support queries?

• Regular new ideas. Do you know how much new content (e.g. educational videos, ebooks) you need to create every month to fulfill your promise to your customers?

• Number of available hours. If you offer hour-based retainers, how many can you offer before you run out of hours per month for non-retainer (and potentially higher-paying) clients?

Consider all the resources that would need to go into a recurring revenue model.

How to switch from a one-time revenue model to recurring revenue

By now, you have a clear idea of whether recurring revenue is the right model for you.

You might be considering switching all of your one-time offerings to a recurring revenue model or adding recurring revenue on top of your one-time products or services.

Here are the steps you can take to change your payment structure from one-time to recurring.

Step 1: Create your recurring revenue offerings

Review the types of recurring revenue (scroll back through the article to see what they are) and answer the questions in the previous section.

Use what you’ve learned to map out your recurring revenue price points, options and features, thinking about:

• Which price points will drive adoption and a solid customer lifetime value.

• How to package your offering so that it benefits the customer (instead of just being a pricing change).

• Whether all your customers are required to move to a recurring payment. If yes, how long is the period to switch or cancel? If the answer is no, what are their options?

• When to start communicating these changes. Remember that your customers may need months of notice to readjust their budgets and plan for changes.

Step 2: Set recurring revenue sales goals

As with any product or service you sell, you need to set sales goals when moving into a recurring revenue model.

These sales goals will help you develop a process and plan the exact activities for hitting those goals (activity-based selling is always a great way to plan, regardless of the revenue model you’re using).

As a result, you’ll be able to keep track of your team’s progress at all times.

Step 3: Plan for other organizational changes

It’s not just your sales approach that’s changing. It’s a cross-functional transformation for every team, including marketing, billing, customer service, product and more.

Include all departments in this process and map out key business capabilities and responsibilities that support a recurring revenue model. In this process, you may find the need for new tools and opportunities to automate parts of processes like marketing and sales.

Step 4: Map out all key dates

This is a simple but crucial step: define the exact dates when each of piece of the new model will happen. You need to be clear on the timeline so you can offer a smooth experience both internally and externally.

Here’s a list of typical changes to consider as you get started:

• The start of the rollout of your monthly or annual recurring revenue offering

• The length of the transition period (if all customers need to be moved to the new model)

• The internal processes

• The start of the customer notification process

• The rollout of changes to marketing and messaging (website, product/service descriptions, ads, etc.)

Step 5: (Over) communicate with your existing customers

You should notify and support your customers very early in this process.

This is especially the case if you’re moving fully from a one-time payment to a recurring payment model. Your customers need to have time to:

• Budget for the change

• Understand if your service is (still) the right fit

• Ask questions and get answers from you

• Get support from you during the transition

Be sure you also communicate directions on the technical side of making payments: adding payment details (e.g. card details, PayPal, etc.), how frequently you’ll charge customers, how they can download receipts and so on.

There’s no one-size-fits-all strategy around when or how often you need to communicate.

A safe path is to always over-communicate rather than risk not communicating enough. During this process, ensure you have enough people and resources to handle a potential increase in customer support inquiries.

If you want a great example of a company that successfully did this, check out the story about Adobe switching from Creative Suite (a one-time payment) to Creative Cloud (a recurring subscription). One year after introducing the recurring plans, they successfully removed the one-time payment option altogether.

How to track your recurring revenue so you get paid on time

Tracking your recurring revenue payments effectively enables you to:

• Accurately forecast monthly and annual recurring revenue and plan accordingly

• Spot any missed payments in real time

• Have data at your fingertips to better maintain customer relationships

• Know who your best customers are and leverage those relationships to bring in more revenue

This process starts when you have a new lead for one of your subscription or rolling contract products. To make the most of your relationship with them, you need to be able to schedule their potential recurring payments.

Tracking their recurring revenue stream in your CRM provides you with a solid foundation of data if they become a customer. It’s also especially useful if you see an opportunity to cross-sell or upsell, as you can review their purchase history and their customer journey from day one..

With Pipedrive, you can sync the revenue management features with many of our tool’s other features. For example, you can create proposals and quotes with Smart Docs with recurring products. You can also forecast future monthly revenue and even annual revenue and adjust your business strategy if necessary.

We know how important it is to be flexible, especially in uncertain times. That’s why at any point, you can also change the terms of the deal, such as cost, agreement length and payment regularity in the platform as you adjust your strategy.

Start earning recurring revenue for your business

Setting up a recurring revenue payment system is often an excellent way to create deeper customer relationships and scale your company.

Start with what you already have. Collaborate with your sales, marketing, product, finance and other teams to uncover ways you can introduce and/or scale recurring revenue in your company. Use these important metrics to create your recurring revenue offerings and set your sales goals.

From here, you’ll be able to map out the key dates on your timeline and start talking to your customers as early as possible, as you’ll have strong processes and efficient teams to support your plan.

Before you know it, you’ll be reaping the benefits of recurring revenue and hitting your new sales goals. And if you’re using an intuitive and flexible CRM like Pipedrive, the process becomes easy to track and manage.

Try Pipedrive for free to get started.