Adapting to a Recurring Revenue Model

Consider the metaverse. If tech leaders are right, people will soon interact in virtual worlds (with each other, companies, and places). They’ll be represented by digital avatars of themselves, ideally bearing a close likeness. The enterprise possibilities are just coming into focus.

What’s the possible business play for a fashion brand, for example, whose products exist firmly in the physical world? Imagine paying $10 per month to dress your metaverse avatar in your favorite branded clothes. Suddenly, a company used to selling its products at retail has a new revenue stream and customer relationship.

Call it another recurring revenue model for the business books.

Companies have taken advantage of digital transformation to generate recurring revenue from software as a service (SaaS) to streaming media to subscription razor blades. Such a business model offers many benefits, from predictable income to seamless billing to greater potential for cross- or up-selling. But rolling out a recurring revenue model can be easier said than done, particularly in the tech channel, where many companies are still emerging from a time of hardware sales and software licenses.

Recurring Revenue Entails Risk

Some digital-savvy companies are borne into a recurring revenue model. Others evolve into it. And still others add versions of the model (subscription, freemium, buy-now-pay-later) to their existing product offerings.

On the one hand, adapting your company to a recurring revenue model is a no-brainer. Provided you take the right steps, knowing you’re starting each fiscal year with a certain amount of revenue on the books puts you on sound footing. And if you ever seek to cash out, potential buyers consider recurring revenue a strong measure of company value.

On the other hand—and perhaps ironically—a recurring revenue model can be riskier than some traditional sales models, especially if you don’t approach it strategically. You don’t get that big payment upfront in many recurring revenue models. Yet, you still invest in your offerings and spend to acquire and maintain customers.

The companies that adapt successfully to the recurring revenue model follow these and other best practices.

Really Know Your Customers—and Your Market

It’s critical to understand customers’ unmet needs. It’s not enough to take a product and turn its use into a monthly service. A recurring revenue model requires a value proposition based on need to be sustainable. Is it as simple as ongoing service and support? Do customers like your product but not above a certain price? Do they need help getting the most out of what you sell, which could be addressed through consulting services or original content? What are their pain points generally speaking (how can your product help them) and hyper-specifically (where in the process do they tend to bail on your product)?

Companies need to do a lot of ongoing research for a recurring revenue model to work. That can be customer surveys or focus groups, big data analyses, and more. Equally important, companies need to understand what their competition is doing. And not just their direct competition but other companies that might be angling for customers’ subscription dollars.

Understand What You’re Selling

What you’re selling isn’t just a product or service. Even companies that upended the razor blade market by selling them as a subscription weren’t just selling razor blades. They were selling convenience, value, and a relationship with their brand.

It may not always be obvious what an existing company might turn into a recurring revenue model. That’s why it’s important to research what customers (and channel partners) value about your business. Eventually, most companies with strong recurring revenue models hire customer experience managers who are laser-focused on building relationships that ensure customers remain willing to pay every month.

Understand How to Sell It

As many in the channel know, because they’ve evolved from dealing tech products to offering services, selling the latter is different from selling the former. And there are many ways to build that recurring revenue stream. One I’ve seen a lot is the freemium model, in which the customer gets something gratis but then is encouraged to pay for additional services or features.

People talk about the “stickiness” of recurring revenue services. You want to make sure that once a customer is a customer, it’s hard for them to stop, whether that’s because you’ve listened and offered new features, your solution has become critical to the way they operate, or it’s just a great service. In business-to-business (B2B), recurring revenue services lend themselves well to land-and-expand strategies, where the vendor offers the service free or deeply discounted to one part of an enterprise, which becomes an in-house advocate to other parts.

Partner, Partner, Partner

A key part of recurring revenue success is your ability to consistently show value over time. One way to do that is to partner, like when a telco bundles the offerings of a streaming media company. In the metaverse example, opportunities to partner with in-real-life (IRL) brands will likely prove successful.

In the tech channel, partnerships are especially important because of how recurring revenue and subscription models affect the flow of services. For example, even though software has gone from physical media sold by resellers to cloud-based subscriptions hosted by vendors, no one is claiming the role of reseller has gone away. So, what role can channel partners play in a recurring revenue model? It could be as a function of customer experience management or land-and-expand cross/upselling. Whatever the case, channel relationships should evolve.

Consider How the Model Affects Operations

Finally, a recurring revenue model will likely alter a company’s go-to-market strategy, which means its operations will need attention. Sales, marketing, compensation, accounts payable, HR, legal, and other teams will work differently in a recurring revenue model. How do people get paid for selling subscriptions? What kind of person makes the best customer experience manager? What skills should you recruit for in a recurring revenue model? Who has the expertise to execute the user agreements that will govern the model?

Finally, if your company is going to offer its services in a recurring model, shouldn’t it buy in a recurring model? As you reimagine your relationship with customers, it makes sense to ask how your company can enjoy better efficiencies and business experiences through the model you seek to embrace. At the end of the day, a recurring revenue model is all about value.

Greg is the Founder and CEO of YoY Growth Advisors, assisting companies with commercial strategy and sales and marketing efforts for process-driven, sustained long-term success. The business leverages Greg’s international experience in mobile payments/fintech, digital media, digital health, e-commerce, and natural language processing (NLP). Most recently, he led the digital merchant/media business as senior vice president at NTT’s Docomo Digital, a leader in digital payments acquired by Bango. Greg received his BA from the University of Pennsylvania and his MBA from the Kellogg School at Northwestern University.