Navigating the Pitfalls of Recurring Revenue Models
“Recurring revenue is the secret sauce behind the explosive growth of powerhouses like Netflix and Uber.” – Jeff Bussgang
Recurring Revenue Models give businesses a new way to engage with customers and build lasting relationships, Previously, we mentioned that transitioning to a customer-centric model is complicated, so why should you do it? What are the business advantages? Where should you start?
Is a Recurring Revenue worth it to your business?
Over 226 million adults spend ~$850 a month in online subscriptions including utilities. Researchers expect this amount to only grow.
Entering into the Recurring Revenue space opens up new streams of revenue for businesses that are predictable, stable, and (my favorite) perpetual. It gives businesses the ability to fine-tune their revenue models on the fly and the freedom to scale revenue relative to costs. With “automatic customers” and the revenue that accompanies them, companies can operate with more precision. They don’t have to rely on unpredictable project-based revenue any longer.
By increasing the number of interactions a business has with a customer over their lifetime (what we call the Customer Lifetime Experience or CLX), businesses also increase the number of opportunities they have to make a sale. More interactions equal more customer feedback and insight, which equates to better products and services down the line.
It also fosters organic conversations to develop between businesses and consumers. This shift equates to a lower cost of sales overall and higher lifetime customer value. In fact, due to increased touchpoints and more opportunities for upgrades, promotions, cross-sells, and upsells, retaining a customer can earn you 46% more over that customer’s lifetime.
The switch also gives businesses the ability to experiment in the marketplace. Want to try out a new service or pricing model? Do it. It’s much easier to quickly integrate new products and make changes to existing services under a Recurring Revenue model. So why wait?
Avoiding common pitfalls of transitioning
Recurring Revenue Models can be considerably more complicated than legacy billing systems. While it may make sense for some businesses to bring in outside expertise to help navigate the pitfalls in transitioning models, there’s no one-size-fits-all. Having strategic alignment and organizational agility will take you a long way in ensuring your own success. Below we will dig into what we consider the biggest pitfalls businesses face when transitioning.
The Mona Lisa wasn’t created in a day—your Recurring Revenue Strategy shouldn’t be either
Shifting to a Recurring Revenue model puts the customer at the forefront. This transition of focus requires companies to become customer-centric and solution-driven. Businesses who focus only on selling products no longer cut it.
Today’s customers want a seamless customer experience. This means businesses need to knock down the traditional silos that separate products, services, and departments that currently keeps them from ever knowing their customers. In order to be successful, the entire business has to start focusing on the customer’s needs at a holistic level together and driving solutions. This transition requires C-suite buy-in and alignment throughout your organization.
Such a massive undertaking means that you can’t reach perfection right away. The best strategy is to start small and scale fast. Just like the Mona Lisa began as a sketch before da Vinci ever picked up a paintbrush, your Recurring Revenue model should also start simple and then evolve.
Instead of trying to shift your entire business all at once, identify a smaller area (e.g. a product or portfolio) to tackle first. Starting small allows you to quickly understand the scope of your undertaking, identify any weak areas that might exist, and de-risks any further efforts. Only after that should you focus on expanding into other areas of your business.
Waiting to transition could cost you in more ways than one
Though it’s critical to pace yourself as you transition, there is a risk in waiting too long to start. The longer businesses don’t make the leap to a Recurring Revenue Model, the more cumulative the cost can be. ChainLink Research estimates that a $200M company will lose ~$1M every month it delays in missed profit and revenue opportunities.
It’s also considerably more expensive to acquire new customers rather than retain them (in fact, it can cost up to 6-7x more!). With a Recurring Revenue Model that focuses on long-term customer relationships instead of one-offs, businesses avoid the substantial cost of acquiring customers over and over again.
Waiting also costs you in growth. The longer companies use outdated billing systems, the longer they ask their employees to focus on the complications of basic billing and invoicing instead of focusing on activities that are value-driven. Simply put, time spent billing is time missed innovating.
Streamlining your business’s billing system allows your employees to focus on what matters most: how customers experience your product. Don’t leave the door wide open for your competitors to disrupt the marketplace with new ideas before you do. Certainly, don’t let them gain the loyalty of your customers before you get around to focusing on them.
Don’t let technology lead your transition
The biggest mistake businesses make when switching to a Recurring Revenue model is letting technology dictate, or even limit, their choices. Many businesses decide what they want based on what a piece of software is capable of doing. Don’t fall into this trap. Don’t settle when it comes to deciding how your business operates.
Instead, focus on what makes your business unique, and then tailor the software to your business needs. A Recurring Revenue Model should enhance your core business, not change it because a developer tells you that feature isn’t available yet. Benchmark your business needs against what each vendor’s software can do and don’t settle if it means losing what sets you apart.
Employing Recurring Revenue is a shift to a solution-driven economy where revenue is predictable, stable, and perpetual due to a hyper-focus on customer relationships via the customer lifetime experience (CLX). Making this shift successful requires your entire business strategically align its focus on the customer experience. It also requires your business to be agile enough to both navigate the common pitfalls of transitioning and also reap their rewards. With usage-based services estimated to total more than $8.9 trillion in sales by 2020, a Recurring Revenue model that taps into this is worth your attention.