The Magic of Recurring or Subscription Revenues
What’s one of the worst things about owning and running a business? It’s the fact that on the first of every single month your revenue resets to zero and you have to restart the process of building sales, reaching break-even, and hopefully realizing some profit by the end of it.
Up until just a few years ago the Recurring Monthly Revenue (aka RMR) model or subscription revenue model, if you prefer, was something associated with large companies and utilities. Think about how your old land telephone company had you locked into sending them a payment on the same day every month. Think about utilities such as the electric company. Then there’s your cable-TV company and your ISP. They all had you paying them on the same date every month.
Today we are witnessing a virtual explosion of recurring revenue models as small startups race to create enticing offers which customers will
subscribe to. There are now companies offering to ship you monthly or weekly shaving razors, underwear, chocolate sampler packs, and a host of other goods. (I will use subscription plan and recurring revenue plan interchangeably.)
So why is everyone trying to jump aboard the subscription revenue model? Two main reasons.
- First, a company with this revenue model doesn’t see its revenues reset to zero every month. Instead it enters every new month with guaranteed sales.
- Second, it costs a lot more to win a new customer than it does to simply keep existing ones satisfied enough to remain. So a business model where you only have to win each customer once and then concentrate on keeping them happy is going to be a lot easier to run than one where you are starting with a blank customer list every thirty days.
Let’s take a look at six of the most common varieties of this type of revenue.
1. Restocking Model: This is for selling consumables which must be replenished on a regular basis. The companies which ship a month’s worth of shaving razors and cream to men are a good example as are the ones which ship them a new set of underwear every sixty days. The possibilities are endless ranging from coffee beans to steaks to beef jerky to fresh flowers. Subscribers are paying for the convenience of not having to worry about running out of these types of goods.
2. The Gillette Model If you ever studied business you know all about the famous Gillette business model. You first sell someone the expensive hardware, a razor in this case, and then rake in the profits over an extended period by shipping them new blades monthly. Another more modern example consists of a printer and its proprietary toner cartridges. Some years ago a few players in the coffee industry adapted this model by selling coffee makers which could only use their own coffee cartridges. Thereby the customer was locked into buying all his or her coffee from the same company. In the financial services industry Bloomberg terminals are a high example of this model. The terminals represent a major upfront investment for the subscriber who then also agrees to pay monthly for the financial information produced by the company.
3. Subscription Plan Classic examples include all those magazine and newspaper subscriptions your parents used to pay for when you were a kid. Time, Life, Outside, Wall Street Journal. Although print media has waned it’s been replaced in part by digital media hidden behind a pay wall. If you want access to all of the WSJ, Economist, New York Times, etc., you still have to be a paying subscriber.
4. Service Model Today the possibilities are almost endless when it comes to services which can be sold through a recurring revenue model. Think of the thousands of SaaS services, mobile phone plans, Internet access services, home alarm monitoring, and a host of others which sell this way. The services don’t have to be high tech either. Think of landscaping companies which require a service contract to come by weekly to mow the lawn and trim the hedges at your business or home. Almost any manual service can be sold as a subscription: window cleaning, oil changes, pet grooming, car washing, elevator and HVAC maintenance, etc.
5. Sampler Plan With this model you find customers who are fanatical about a category of goods and promise to ship them sampler packs of the same. One popular example of this model is selling high end chocolate to chocolate lovers. Various companies doing this cut deals with as many chocolate makers as possible to ensure that something new is delivered every month to their subscribers. Other companies offer pet treats, cheeses, beef jerky, pies, and steaks. Still others offer skin and hair care products.
6. Membership Plans Sign up with Netflix and for a monthly fee you get access to as many movies as you can watch and return in a given month. There are now companies trying to become the Netflix of books. Back in June 2000 Phil Kaplan launched a notorious website where insiders could anonymously post both facts and scuttlebutt about which pre-IPO dotcoms were the most likely to implode shortly. After a few months he decided to package and sell a newsletter containing this info to subscribers in the venture capital and investment banking industries for a monthly fee of $99. Not too long afterward the great dotcom massacre happened. In a nutshell, anyone with valuable knowledge or information can use this model.
Now lets look at payment plans. The more someone is locked into paying monthly the better it is as far as the company, its investors and lenders, and potential buyers are all concerned. Consider gas stations and grocery stores which lie at the weak end of the spectrum. While they technically can be said to have recurring revenues from mostly the same customers month after month, there is nothing that forces customers to buy everything at the same store or station. Next are plans where the customer signs up for a subscription but can cancel at anytime. Think of ISPs and all the companies selling sampler packs. The next level up is the mobile plan where in order to get the latest smartphone you had to commit to two or three years of service and would pay a sizable cancellation fee if you quit early. Finally, in B2B situations you will find suppliers of key inputs locking customers into bullet-proof multi-year purchasing contracts.
If you don’t have any recurring or subscription plan revenue coming in you should set aside time to consider ways in which it can be added. Everyone loves the increased certainty of sales that such revenue models provide.