The Types of Recurring Revenue Models

How to Create Recurring Revenues for Your Business

Recurring Revenue

In my course on how to grow your business faster I cover the benefits of having a recurring monthly revenue model. This basically means that your customers are regular repeat customers. If you have ever run a business you are no doubt aware that keeping an existing customer happy is far easier than finding a new one. Generally the toughest businesses to run are those which make a single sale and then kiss the customer good-bye forever.

Having repeat customers greatly increases the value of your company whether you are trying to raise more capital or sell it.

So let’s take a look at five recurring revenue models that should be part of your business model. You are unlikely to be able to cram them all in, but do try to at least integrate two or three.

We will start with the weakest and move towards the strongest:

Consumables Model:  The best examples are your local gas station and grocery store. Everyone needs to refill regularly on both food and fuel.  The weakness here is that customers are not required to buy from any particular business and are free to go to the competition at any time.

Monthly Sampling Models: In recent years we have seen a veritable explosion of startups in this space. The first example I can recall was a website that had single men sign up for a service that would send them a fresh assortment of underwear every month. Since then scores of other offerings have been added. Are you a chocoholic? Sign up for a box of gourmet chocolates to be delivered to your door each month. High end steaks are another example. Snacks. Skin and hair care products. Vitamins. Supplements. The possibilities run in the thousands.

Sunk Cost Model:  With this model the company first sells an expensive item which then either consumes or wears out another item which can be resupplied on a subscription basis. There are a number of coffee maker companies that will sell you an expensive coffee maker, sometimes as a loss leader, provided that you subscribe to a program that automatically sends you a pound or two of coffee each month. The company then makes its profit from the refills. This is commonly called the “Gillette Model.”

Ongoing Service Model: This is anything where the consumer is billed regularly for a service. Think of renting storage space somewhere. This can be both online or offline. Home monitoring systems are another.  Netflix is another example. Most SaaS companies were created for no other reason than to capitalize on the RMR model.

Contract Model: This is the strongest of the RMR models because the consumer is locked in for a period contractually. Think mobile telephone plans these days. Have you noticed how they have gotten very tough to get out of? For example, a few years ago to get a new phone for free you had to renew your contract for two years but you could switch plans with the same carriers for free. Now if you need to switch plans because you need more or fewer minutes, you are forced to reset the clock for another two years.

Smart money loves this revenue model. So whether you are looking for a lender, an investor, or a buyer for your company, be sure to add as much RMR as possible.