One of the most challenging things about starting your own business can be the inconsistency in profit. One month, sales are through the roof, and you’re feeling great. Then, the next month, your sales drop unexpectedly, and you’re back in the office crunching numbers. This ebb and flow of revenue is an inevitable part of owning a business.
That being said, some business structures are much more predictable than others. As a result, entrepreneurs who prefer to maintain some semblance of predictability are often attracted to recurring revenue models of business.
If you think the recurring revenue business model may be for you, keep reading. We’re going to look into what recurring revenue is as well as examine different types, examples, advantages, and disadvantages.
Recurring revenue is a predictable and stable portion of a company’s revenue that can be reasonably expected to materialize at specific intervals. The critical part here is that you can expect this income with some degree of certainty. Generally speaking, this revenue won’t be coming from one-time purchases but rather from different revenue streams like long-term contracts or subscription services.
Recurring revenue can not only help you predict future income, but it can also help increase the value of your business. By predicting how the company will perform in the future, your business becomes more attractive to potential investors or buyers down the line.
In order to maintain reasonably predictable recurring revenue, you must create a business that follows a specific business model. A recurring revenue business is one that sells a service or product that requires a recurring payment at planned intervals, such as monthly or yearly.
The idea behind this business model is to help establish stronger ties between the business and its customers and encourage customer retention. This can be accomplished through obvious means such as automatically renewed subscriptions or, more subtly, through sunk money consumables. There are quite a few recurring revenue business models, and while they all have one thing in common – recurring revenue – they vary considerably from there.
Every business out there is subject to recurring charges each month for various vendors and suppliers, and there’s a booming industry out there trying to reduce those costs for other companies. Cost Reduction Consults will monitor contracts, invoices, and agreements in search of ways to save their clients’ money.
Cost reduction consultancy companies typically make money by sharing in the savings that they earn for their clients. This benefits all involved since clients only pay once they’ve saved on their monthly expenses, and consultants are continuously encouraged to keep cutting their client’s expenses. Since these businesses are facing recurring charges for business services, the consultants can continue to monitor invoices to supply savings to their clients and revenue for themselves every single month.
P3 Cost Analysts is a cost reduction consultancy business that has saved its clients hundreds of thousands of dollars since 1991. They go to bat for their clients by uncovering hidden errors and overcharges and finding more cost-effective solutions for the future. P3 also has franchising available, meaning entrepreneurs can get a head start on opening their own cost reduction firm and start helping other businesses save money, all while creating their own stream of recurring revenue.
Software as a Service, also known as SaaS, has taken over the world in the past decade. Companies deliver their software applications via the internet rather than through complicated hardware and software installations and manage security and performance from their own servers. These products cover many uses, from complex IT tools to simple entertainment apps.
Most SaaS businesses charge their customers a monthly or annual subscription fee to use their services. This is beneficial to all parties involved. Tech companies can focus on maintaining and improving their product while customers have no large upfront costs and can choose from different options that suit their needs best. In addition, with your customers paying a monthly fee, which is typically set up with an automatically renewing subscription, you can better predict your long-term revenue trends.
While it may seem like all the brilliant ideas have already been done, there are always ways to improve existing concepts or find holes in the market. You can often find these potential software ideas in a niche market you’re already involved in. For example, the team members at Fuse Autotech were previously car dealers who realized there was no streamlined process of buying, selling, and financing a car that focused on the customer experience. So, they created software to help dealerships do just that. It was founded in 2020 but is already showing promise only a couple of years later.
Subscriptions are the heart of many recurring revenue businesses, but it’s not just monthly subscription boxes. There are many other ways your business can use the subscription model. One way is monthly subscriptions for a service. This business model works great for services that are typically needed on a regular basis, such as tutors, personal trainers, cleaners, or doggy daycare. It also works well for B2B firms or freelancers, such as graphic designers, marketing managers, or web designers.
By charging a monthly subscription for these services rather than a pay-per-use model, you will guarantee a monthly income from your clients. This model can be encouraged by offering your clients something in return. For example, if you run a doggy daycare company, you may charge $30 per day. However, you offer a subscription package that gives them 20 days of daycare for $500 per month. As a result, your clients save money, and you create recurring revenue.
Turnify offers monthly packages for the owners of Airbnb properties, including managing cleaners, auto-scheduling bookings, damage reporting, and other services. By handling daily tasks that property owners don’t want to do themselves, they can charge a per-month subscription fee that covers all of their needs.
Just as you can create a business that uses subscriptions for services, you can also have subscriptions for products. This model works best for essential products that people regularly consume on a day-to-day basis or niche product boxes where customers receive a new surprise product or products each month.
There are a ton of different business ideas that would thrive with monthly product subscriptions. Surprise box subscriptions have thrived in the makeup, beverage, and wellness industries, as well as many others. Monthly subscription fees are generally automated, meaning businesses will continue to make recurring revenue as long as they maintain customer retention and produce a quality product.
Clothing is expensive, and many fashionistas won’t be caught dead in the same piece twice. Fashion Pass tackled a few problems with one solution, leading to its success in a competitive market. They offer unlimited rentals for a flat price per month. This monthly subscription helps its customers find products picked especially for them, wear multiple different pieces per month, and prevent useless waste from fast fashion.
Memberships are similar to contracts but are much more attractive to consumers because they’re free to cancel anytime. The membership model can be used for online products and physical locations such as gyms. As a business owner utilizing a membership program, you must keep material up to date and fresh for online membership sites or manage the overhead at brick and mortar locations.
Members are charged a flat monthly fee for full access to whatever it is that you’re offering, whether that’s the use of woodworking tools or vegan dessert recipes. As long as your customers still need access to specialized tools or training, they’ll keep up with their membership. The best way to keep this recurring revenue coming is by focusing on customer relations and listening to your clients’ needs.
Offering monthly memberships helps Massage Envy maintain recurring revenue by providing their members monthly massages for a flat rate that saves them money in the long run. They also increase further sales by offering discounts on other services for members only. By offering flexibility in timing and location, they keep their members happy and encourage referrals with rewards.
Real estate investments are a booming industry, but many investors don’t want to do the day-to-day tasks required to manage tenants smoothly. Owners of single-family and multi-family properties can benefit by hiring a real estate management company to take care of these administrative tasks. These companies will handle tenant communications, collecting rent, repairs, maintenance, and landscaping.
Tenants pay their landlord a monthly fee for the right to live in the rental property. Owners who don’t want to deal directly with their tenants look for a property manager. Typically, a property manager will make a percentage of the rent. Even when the unit is vacant, you can charge a flat fee for monitoring the empty unit. As long as you have landlords using your service, you will consistently make recurring revenue.
Greystar is one of the largest property management companies, with relationships with owners worldwide. They offer end-to-end services from property operations to marketing. This is an example of a large-scale property management company that typically works with big multi-family properties. However, small-scale owners may look for property management with a more personal touch.
With so many companies turning to recurring revenue business models, there clearly must be benefits in doing so. Some significant benefits include:
While there are many benefits of a recurring revenue business, there are also some challenges business owners face when modeling their business like this. Some issues that business owners may face include:
P3’s business model uses other recurring revenue businesses to create recurring revenue for franchisees. Each month, companies face recurring charges from various vendors such as telecom, waste management, and merchant processing providers. The problem is that many of these invoices come with errors and overcharges, costing businesses a ton of their hard-earned money.
That’s where P3 comes in. We do the dirty work by digging through bills, invoices, and contracts for our clients to find savings they never knew they had. While the service is free, we share in any savings you find for them. So by opening a P3 franchise, you’re creating a residual income stream for yourself while saving other businesses money.
Recurring revenue business models solve one of the main problems that prevent new business owners from taking the leap – uncertainty. While there is no way to fully predict what will happen in the future, specific business models that are set up to provide recurring revenue can help businesses plan better for the future.
If you’re looking for a good recurring revenue business model and also enjoy helping other businesses improve their bottom line, chat with one of P3’s franchise experts today to see if it’s a good fit.