Recurring income, also referred to as residual or passive income, is earned by creating or acquiring an asset that continues to pay you income regardless of whether there is still active work being done to the asset. Every Business Owner’s dream! Even so, a lot of Business Owners haven’t managed to acquire or have thought of recurring income in a way that makes their Business more stable and sustainable. In this post we will be outlining the benefits of recurring income, the types and how you can grow recurring revenue in your business.
What are the benefits of recurring income?
Recurring income gives predictability of your revenue stream, which in turn can help with budgeting, forecasting, and planning for future growth. Having this regular stream of income can therefore make it easier to scale your business in the future, since there is a steady stream of revenue that can be reinvested back into the business.
If you can get your business to a place where it can generate revenue without incurring additional costs each time, it will inevitably increase profitability. This will not only be attractive to you but make your business attractive for shareholders / investors / lenders as it not only gives certainty of future revenues, it also means margins are improving.
- Customer Loyalty
Recurring income can also have benefits when thinking about your customers. Types of recurring income streams can build customer loyalty, which can help to retain customers, reduce churn and means you could add extra services or products not only to their goods and services but to your business in general. Customers generally like a set amount paid each month as it means they can budget with expenditure with more certainty.
- Customer Acquisition
There are benefits to be had in acquiring new customers too. Usually, acquiring new customers can be expensive, however with recurring income streams this can reduce the need to constantly acquire new customers to generate revenue therefore reducing your costs.
The Different Types of Recurring Income
There are different types of recurring revenue which offer slight differences in their benefits. It is therefore helpful to understand them and understand which ones would work best for your business, product, service or industry.
- Subscription-based Model
This is where customers pay a regular fee, such as monthly or annually, to receive access to a product or service. The subscription model is one which younger buyers understand. Examples of this model include subscription boxes, software-as-a-service such as Xero, and membership-based services such as Netflix or Chamber of Commerce.
- Retainer-based Model
This involves customers paying a regular fee to retain access to a service or product. Examples of this model include professional services such as HR for your business, where clients pay a monthly fixed fee to retain access to ongoing support as and when needed.
- Consumption-based Model
This model involves customers paying for a service or product based on usage, such as utility bills, cloud-based storage, or pay-as-you-go mobile phone plans.
- Tiered Model
The tiered model offers different pricing tiers for customers based on the level of service or access they require. Examples of this model include streaming services like Sky that offer different levels of access to content based on pricing.
- Affiliate Model
This model allows a business to earn recurring income through affiliate marketing programs, where businesses earn a commission on sales generated through affiliate links or referrals, e.g. Utility Warehouse.
What to Consider When Developing Recurring Revenue
It is important to firstly identify a need in the market that customers have, on an ongoing basis. Then develop a business model that can provide a solution to that need, that fits into one of the 6 types above. When developing this model, you will need to consider:
- Building a customer base by promoting the solution through targeted marketing efforts and offering incentives for customers to sign up for recurring services, such as discounts for long-term commitments.
- Establish pricing that provides a fair value to customers whilst also ensuring that the business can operate sustainably.
- Offering different pricing tiers or packages to cater to different customer needs.
- Making it easy for customers to buy as well as having the ability to add-on products / services, e.g., Amazon.
- Setting up systems and processes (recurring invoices, direct debits or repeating card payments).
Are There Any Risks With Recurring Revenue?
The main risk of recurring revenue is the cancellation of the product or service, especially if you rely heavily on a subscription-based model. This is a hard one to completely negate, as people have choice. However, it is something that can be managed by ensuring customers are satisfied with the solution and the level of service provided.
Not only will this help build customer loyalty, but it will decrease the likelihood of cancellation and increase the likelihood of recurring business. Furthermore, look to continuously improve the solution and the level of service provided to ensure that customers remain satisfied and willing to continue using the product or service. A way to ensure this is to provide an easy mechanism for feedback and reviews so that you are in a continuous and current feedback loop with your customers and audiences.
If customers are looking to cancel – be competitive! Consider offering incentives, such as referral agreements, discount codes and price matches. Be sure to check in with your accountant to make sure they would work for your business before offering them.
Always look to set periodic price reviews for your recurring income services. Don’t let value be eroded in setting a price and leaving it this way as the world and economy moves up and on over time. The T&Cs of your recurring income service should include a provision for those price rises.
‘What should I, as a Business Owner, do now?’
Look for your opportunities to increase recurring revenue through examining your business, talking to your team as well as your potential customers.
Start off small to test your model, ensuring you have a plan for staffing, systems, pricing, incentives and marketing. Review these regularly and do what you do best – excel as a business owner!