If you’re looking to add a recurring revenue model to your business and want to sell it successfully, our guide can help. We cover everything you need to know about types of recurring revenue, its pros and cons, deciding if it’s right for you, and implementing it.
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 project their future income more accurately.
Recurring revenue can come from memberships, contracts, subscriptions and similar customer relationships. We’ll cover them all and in more detail in the next section.
With recurring revenue, your company can achieve:
- A loyal customer base
- Higher average lifetime value (LTV) of their 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.
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-off sales can have a higher sense of immediacy and closure compared to recurring revenue.
8 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. Recurring revenue is no longer limited to the world of software—it’s everywhere.
Let’s explore some of the most well-known ways you can add recurring revenue as your business model.
A standard subscription has an end date. A magazine subscription for six months or one year is a great example of a standard subscription.
At the end of the period you subscribed for, you can choose to cancel your subscription or opt in to a new subscription period.
The best example of hard contracts would be phone plans and contracts. When you sign up for one, you get a phone, but you’re also locked into a fixed contract for two or three years.
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 on coming in, even though the hard contract has ended).
Ongoing, auto-renewal subscriptions
These subscriptions keep on going until the customer voluntarily ends them. They’re usually on a monthly basis but are sometimes available as a yearly subscription.
Some examples of auto-renewal subscriptions:
- 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
Subscriptions on standalone products
Some brands have noticed that people tend to 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.
Sunk money consumables
When a customer makes an initial investment into a product that requires further purchases in order to function and do its job, it’s what John Warrillow calls a sunk money consumable.
Here are some examples of sunk money consumables:
- Nespresso coffee machine: in order to make coffee, you need to buy Nespresso’s coffee capsules
- Brita water filter system: if you want clean water, you must keep buying new Brita filters
Sunk money subscriptions
The example Warrillow uses for sunk money subscriptions is the Bloomberg Terminal. 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.
Service providers like freelancers and agencies can generate a guaranteed income by offering retainers. In essence, it 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
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 pros and cons of recurring revenue and one-time revenue
Want to know if you should consider a recurring revenue model? Of course, there are times when a recurring revenue or a one-time revenue model makes more sense than the other (some are mentioned above). There are also products where people offer both options, such as larger consumer purchases such as a car or item of furniture.
However, sometimes you want to choose one or the other. Here are some of the advantages and downsides of it, especially when compared with one-time revenue.
Recurring revenue benefits
A consistent revenue stream
Recurring revenue models bring certain stability around predicting your future revenue. Having a regular cash flow means you’re better able to plan for payroll and investment.
Stronger customer loyalty
As we mentioned earlier, if someone has bought from you frequently and over a longer period of time, it means 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, and the longer they’ve been using it, the harder it becomes to switch to a competitor.
According to one report, 56% of the companies focusing on customer lifetime value (LTV) aren’t effective at predicting who will be their most valuable customers. Recurring revenue can help you recognize and establish those patterns.
A foundation for growth and scalability
The first two benefits set the scene for the third one. Thanks to a more predictable cash flow and loyal customers that act as your brand ambassadors, you gain a safety net you wouldn’t otherwise have.
For example, you can experiment with a new program or service based on your recent market research. You can get a portion of your sales team to stop selling your existing products and focus on selling this new one.
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. Annual leave, sickness and many other factors can play into this, 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.
Unlike with single purchases, you’ll need to keep track of contract lengths, churn rates and similar metrics that will show you the health of your company at any point.
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 can make your customers feel quite uncomfortable.
It’s because you’re not just changing a single price—you’re changing every upcoming monthly charge.
One-time revenue benefits
Ease of setup
One-time revenue makes it easy to understand how your marketing and sales efforts will affect your revenue immediately.
It comes with a straightforward revenue formula: if [number] people buy a product at [price], our company will make [revenue]. Based on your lead generation results to date, as well as your sales team’s close rate, you can easily project the impact of every campaign.
A simpler sales pitch
Your potential customers can see the benefit of buying from you in an immediate way. Because you’re not asking for a long commitment, you can simplify your sales pitch and address any questions and concerns quickly and efficiently.
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.
So even though your customer isn’t paying for a recurring subscription, you can compound the value you bring them this way, and the revenue you bring to the company.
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.
It’s more difficult to build loyalty
This definitely depends on the industry and the main drivers your audience uses when shopping for solutions. If they’re buying largely based on price and look to reduce their expenses, you’ll struggle to create loyalty.
Remember: price wars with competitors require caution and could slash your profits in the long run.
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 model suits your business. Let’s look at some questions you should answer to find out.
Do people need your product or service on a recurring basis?
In an ideal world, 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 we 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.
But when the answer isn’t so simple, it may require some “what if” follow-up questions.
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?
Here’s another example. Let’s say you sell professional cooking equipment. You work with 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 that will help your customers keep their skills up to date?
- You ran a paid subscription that would consist 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.
The next area to focus on is whether you have the bandwidth to support the expectations of your recurring customers.
This can include:
- Number of customer-facing employees. Do you have enough people to respond to customer support queries in a timely manner?
- 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 clearer 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 we covered earlier and your answers to our 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 can you package your offering so that it benefits the customer (instead of just being a pricing change)?
- Are all of your customers 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?
- How early before the changes happen is it essential 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
Just like with any other product or service you sell, you need to set sales goals when moving into a recurring revenue model.
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 the changes will happen. Here’s a list of those changes you can start from (to expand based on your specific situation):
- Start of the rollout of your monthly or annual recurring revenue offering
- Length of the transition period (if all customers need to be moved to the new model)
- Internal processes
- Start of the customer notification process
- Rollout of changes to marketing and messaging (website, product/service descriptions, ads, etc.)
Step 5: (Over)communicate with your existing customers
Notifying and supporting your customers must happen very early in this process—probably earlier than you’ve defined in the previous step.
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 this change
- Understand if it’s (still) the right fit
- Ask questions and get answers from you
- Get support from you during this transition
Your communication should also include direction on the technical side of making payments: adding payment details (e.g. card details, PayPal, etc.), how frequently you’ll charge them, how they can download receipts and so on.
There’s no one-size-fits-all strategy around when exactly you need to start communication, or how often to do it.
A safer path is always to over-communicate rather than not communicate 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 (one-time payment) to Creative Cloud (a recurring subscription). One year after introducing the recurring plans, they’ve 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. In order to make the most of your relationship with them if they become a customer, you need to be able to schedule in their potential recurring payments.
If their recurring revenue stream is tracked in your CRM, it 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 to them, as you can revert back to their original deal when they were a lead.
You can sync up Pipedrive’s recurring revenue feature with many of our tool’s other features. With Insights, for example, you can view the growth in new or canceled recurring revenue payments, forecast future monthly or even annual recurring revenue and adjust your business strategy if necessary.
At any point, you can also change the terms of the deal, such as amount, agreement length and how regular the payments are—we know how important it is to be flexible, especially in uncertain times.
Start earning recurring revenue for your business
Setting up a recurring revenue payment system for your product 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 insights 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.