The term recurring revenue comes from the way some businesses model their income. Examples include monthly or yearly memberships, subscription services (for software or content), or even a pay-per-use service (like Netflix).
These types of business models have you as the customer choose to invest in the product or service periodically. This investment is not one time only — it continually renews itself until you decide to stop investing.
The word “revenue” has been replaced with “investment” because this type of business model produces an ongoing stream of money for the company. Most people recognize that spending $100 every month on Amazon Prime is an excellent way to spend your hard earned cash, but what most don’t realize is that Amazon Prime is actually a valuable asset to them!
By investing in Amazon Prime now, they are already receiving rich rewards later in the form of more purchases made online through their account. And since you get all of these benefits free, the cost of owning Amazon Prime is really just buying yourself a little bit of internet shopping motivation at no additional expense!
There are many other examples of products and services that use this model, so let’s take a closer look at how they work. We will also discuss which kind of business model is best for you and Your Business!
I would like to add here that while there are advantages to having a recurring billing system, there are disadvantages too.
While both are considered to be the same, there is some slight difference in how they’re defined!
Annual recurring revenue (ARR) is when you offer an item or service for a fixed yearly price. This could be through a monthly subscription, a one time purchase, or even a year-long employment contract. The cost of the product/service is divided into twelve equal payments instead of up front.
Recurring revenue (RR), however, uses the term ‘recurrent’ which refers to something that happens more frequently. For example, with a recurring payment plan for a monthly magazine subscription, your reader does not have to worry about paying each month as their access is constantly available via device every day.
This article will discuss the differences between ARR and RR and what it means for business owners.
An example of annual recurring revenue (or “army of loyal customers”) is something like an annual membership to a site or product that pays for itself through repeated use every year.
A great way to think about it is that if you were a member at this website, we would be paying you back each month for everything you use us for!
This is why most people associate memberships with sites that cost around $100 per year and give you unlimited access to their services. This is the classic model of ARR.
But there are many other types of ARMs out there as well. In fact, I would argue that the best ones are even more expensive than that!
Here's how some companies make money via ARM. ___________
1. They offer a service with a monthly fee attached- typically business related (think: Office 365, Amazon Prime, etc.)
2. Then they ask you to do one specific thing outside of the main service to create a secondary effect (like buying a book or leaving a comment on their blog).
3. Once you have done those things, then your subscription automatically renews because you made an investment in their company by doing these additional things.
4. Because they built their business off of steps 2 and 3, they get paid over and over again, not just once at the beginning.
One of the most common ways to gain recurring income is through what’s called “recurring business,” or RB. This is when you offer and sell an item over and over again. For example, someone could make money from offering and selling your average houseware storeitem like towels for monthly fees.
Another way to get RB is with a service that people pay for on a regular basis. For instance, someone may pay YOU to do their laundry every week! Or they might hire YOU to clean their home once a month!
And then there are things like online courses that students can access regularly to learn new skills.
While it is tempting to think that any business with regular revenue is already using the term recurring, this isn’t always the case. An annual contract is slightly different than what we mean by recurring revenue in our book “How To Grow Your Business Using The Power of Recruiting”.
An annual contract doesn’t have to be yearly services or products – it can be every other year (like Christmas and Thanksgiving). It also can be something such as monthly membership fees or even one-time service purchases like buying a computer for your office.
With an annual contract, the money keeps flowing in consistently, but not necessarily annually.
Even though this article focused mostly on annual contracts, there is one type of business model that can be considered recurring revenue as well! This is what most technology companies do these days- they offer a service or product for a fixed price per year.
This is usually framed as “monthly subscription” to show it as a yearly discount for buying upfront (hence the name!). For example, if you are subscribed to Netflix, you pay $8 per month now, but you will pay only $64 per year when you renew your membership.
The difference between an ARP and a monthly subscription is just how long of a term you have. An ARP comes with a 1 year commitment whereas a monthly subscription has a lower renewal period typically set at 12 months.
With both types of models, the length of time you stay engaged with their offering determines if it is successful or not. If you use their services for only a short amount of time, then chances are you won’t remain loyal to them once they increase their bill!
Just like with an ARP, with a monthly subscription you will still receive value from their products even if you are only using them for a few months. The reason is because you have already paid for the next twelve months ahead of time!
By staying connected to their site for a minimum of twelve months, you are helping them keep up with their promises by further investing in their company.
The first thing to consider when determining how to structure your business is what kind of relationship you want to have with your customers. Do you want to build long-term relationships or are you more interested in making quick money?
This will determine whether you offer monthly payments, one time payment for a yearly service, or a free trial period before paying for extended use.
It will also determine if your services are annualized (yearly) or not. For example, I would rather pay $500 every month than buy Photoshop at its normal cost of around $1000 per year!
The last option is a freemium model where some features are paid for and others are offered for free. This is typically done through an online software program that has limited features but costs no money to use.
By having this type of relationship with your customer, they will keep coming back because they get something valuable for their money. In addition, you will retain these customers as they perceive that your product does not waste their hard-earned cash.
You can also add additional products and/or services to give them more value for their money. Is there a way to test out our product before buying it? If so, then offering a free trial is appropriate.
The term recurring revenue comes from the way in which companies with this model make money. This is not the case for annual revenue models, or at least they have never been described that way! Companies using the annual revenue model typically offer users a service or product for a yearly fee. Examples include Netflix, Adobe Creative Suite, and Apple’s iWork suite of apps (Pages, Keynote, and Numbers).
By adding up how much money these products make annually, you get the total amount of revenue generated by the company. Because these fees are set every year, there is no longer need to talk about whether or not the company is able to maintain their reputation and therefore income. You can assume that they will because it has always done so before now.
This type of business model was very common back in the industrial era, when large corporations could afford big expensive equipment and technology needed to run production lines. Now that we live in an internet-connected world though, things don’t work quite the same way.
Producing goods requires expensive machinery and software, but most people only use a small portion of those products once a month if even then. Users of online services such as YouTube and Facebook know what I mean! If someone uses one app monthly for two hours, why should the company be rewarded for them spending $20 per month on software?
That is where the concept of recurring revenue comes into play.
So what is recurring revenue, really? Many entrepreneurs talk about how they will start an online business with no income (or very little income) before it gets busy. But most of them have been busying their businesses for some time now!
They have been working hard to grow their revenues up until this point. And more often than not, they run out of money at this stage.
This is when they must decide if they are going to continue offering the same services or cut down on the number of services they offer. If you’re looking to launch your own business, this can get tricky. You want to know whether it’s okay to put off investing in new equipment and resources or not. It’t easy to gauge.
But there is something that almost every entrepreneur needs to understand, and I hope you make it through all 20 questions below.
It’s important to ask yourself two key questions about your current revenue model. One question is whether its annual or monthly recurrent revenue. The second one is whether your current price is too high or too low.
If you don’t clearly answer these questions then it may be a good idea to reconsider your pricing structure or even your business model completely.
You see, most people go into entrepreneurship without thinking about the future. They don’t plan ahead and they don’t consider what they would do if they ran out of money.