Is your company thinking about changing to a subscription business model? Or is your company already offering subscriptions? What does it mean to be a subscription business? How is this different from pay-per-use? Are there other recurring revenue models that I need to know?
There are lots of online articles that answer these questions. However, if you would like a quick, easy-to-understand primer on these concepts from a business perspective, I invite you to continue reading this blog post.
Introduction
Driven by market changes and customer demands, organizations across all spectrums—B2C, B2B, D2C, B2B2C, B2B2X—are considering subscriptions and other business models that provide recurring revenue streams. Besides having predictable revenues, these models require companies to focus on providing ongoing value to customers. Customer lifetime value ("CLV" or "LTV"), or the total revenue generated by a customer, is an important metric for subscription businesses. This means that maximizing revenue over the lifetime of a customer is a critical pathway for company growth.
There are four main business models used by companies to generate recurring revenues. Most companies use one or more of these models to drive specific customer behavior, meet customer preferences, and increase overall revenue per customer.
Recurring Subscriptions
Subscriptions give access to a service or product when a customer subscribes to a plan and pays an ongoing fee. The fee is typically priced on a monthly basis and can be paid annually up front or paid month-to-month. The subscription contract is for a defined period of time (e.g., month-to-month or annual) and auto-renews at the end of the contract period. In this model, the subscriber doesn't own the product or service. They're only paying for access that is removed once the subscription is canceled.
Subscriptions can drive new demand from customer segments that don't want to have the upfront investment of purchasing a product, or that just need temporary or infrequent access to a product or service.
Pay-Per-Use
Another business model is usage- or consumption-based pricing. Pricing is tied to the usage of a product or service. Pay-per-use is typically combined with subscription plans or other models. Some examples of when pay-per-use model can be beneficial are when a company needs to:
- Control costs when usage drives costs for the company
- Encourage usage during off-peak times by charging different rates based on usage times
- Drive customer stickiness by encouraging usage with lower unit cost as usage increases
Recurring Replenishment
Companies with consumable items associated with their core product or service (e.g., toner for printer, or detergent for washing machine) can offer recurring replenishment. Customers will automatically get goods or services automatically replenished based on a predefined schedule or usage threshold. This model helps increase revenue per customer and increase customer stickiness with ongoing customer contacts and increased usage.
This is a model that can be combined with others or else replenishment can be used to turn a one-time product sale into a recurring revenue stream.
Bundled Offerings
A popular way to differentiate offerings is to bundle related goods and services into a single offering. By bundling physical goods, in-person services, online services, project hours, and even subscriptions, customers get the convenience of a one-stop shop. Like replenishments, bundles are another way to increase both revenues and customer loyalty.
Some examples of bundled offerings include:
- Adding subscriptions to online how-to classes that increase product usage
- Bundling monthly maintenance hours to ensure that product is properly serviced
- Adding relevant third-party products and services
- Personalized bundles based on customer attributes and usage history
I hope you found this article helpful in understanding the four key ways businesses can transform or transition into recurring revenue business models. In addition to the impact on revenues, it's important to build customer stickiness and loyalty for a recurring revenue business. For more details on these business models, view
Six Ways to Unlock and Streamline New Business Models.
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