A common trend that we’re seeing recently is the re-emergence of the subscription sales model. What was once only exclusive to cable and print publications has now become a familiar face in the market. The success of streaming services demonstrates this sales model such as; Netflix, Hulu and Spotify, mainstream products from cosmetics and dietary supplements (Ritual and Care/Of). Other companies are also adapting this approach.
Food delivery services are also entering into this foray (Blue Apron, Hello Fresh). This model is even making its way into the markets of hot sauce and stationery. In addition, it has been increasingly popular in the mainstream. This sales model has seemingly become the standard for startups and tech firms. So why does this matter? And if it does matter, how can businesses use it to scale their companies?
How Subscription Models Work
The subscription model is based on the premise that a business sells a product or service in order to receive a recurring subscription revenue. This happens within a certain time frame which can be either monthly or yearly. Companies focus on customer retention as opposed to customer acquisition. The difference is that the company doesn’t have to spend thousands and hundreds of dollars on targeting a new market. Essentially, the subscription business model focuses on restructuring revenue. This focus is implemented so that one customer alone puts down multiple payments for extended access to a service. Essentially, the subscription business model focuses on restructuring revenue.
With technology innovating fast and the popularity of software-as-a-service (SaaS) products, a lot of companies are shifting from a business revenue model. The revenue is then generated through a customer’s one-time purchase, to a subscription model. This revenue can also be defined by recurring payments exchanged for prolonged access to certain goods or services.
Costco’s Business Model
Inc. Magazine says that recurring revenue is a testament that businesses can increase in value over a prolonged period of time. Gaining revenue through this model can be executed through long-term contracts, subscription services or memberships. This is also the reason why Costco’s business model is effective. The prices of products at retail are significantly cheaper than those of other wholesalers and retailers just like it. Why is that? Because they’re already making margin off the membership prices. The estimation is that between the years 2014 to 2018, Costco had approximately 94.3 members worldwide. The rest is just icing on the cake.
Where It All Began
Recurring revenue or what we know more commonly as the subscription model has become one of the most popular business models retailers, most notably startups in today’s multi-industry landscape. It is a stable source of consistent income, as opposed to one-time purchases in license or traditional transactional models. The recurring revenue model has descended upon companies who strive in attempts to cultivate their operations, as well as disrupt large industries that are almost as old as time.
Many associate recurring revenue models with modern-day companies, as well as those who have the capacity to take advantage of innovative technology in an increasingly interconnected world. But before subscription models recurring revenue has been disrupting the American business industry for nearly a thousand years.
Perhaps the most well-known subscription model is in the print industry. The birth of the printing press in 1440 gave way for newspapers, periodicals and magazines to be profitable. Individuals and small publishing firms could produce written content on national scale that would be disseminated within a well-oiled system. This would eventually increase the volume of production without having to hike up the costs of operations, which led to the capacity to sell products on a more regular basis, eventually leading to a consistent subscriber base. It is this system that applies to the subscription model that lets readers enjoy publications on a daily, weekly or monthly basis.
The invention of the telephone in 1876 played a central role in pushing the recurring revenue model forward. In 1885 a company was created to serve the purpose of connecting local Bell companies, establishing a monopoly in the communications market. This company was AT&T. Under their business model, AT&T could charge customers with monthly subscription fees to receive continuous access to an on-demand service.
Once this whole thing with technology picked up, other recurring revenue streams started gaining traction. Another key player entered the market with the proliferation of security systems replacing traditional locks and keys, which was once exclusive to companies with high-security facilities and now households were able to afford. The new digital security systems provided consumers with the option to live with a more reliable sense of security and comfort. This assurance was exchanged for monthly fees in order to maintain the system.
Increase Small Business Value with the Recurring Revenue Model
Based on the examples mentioned above, it is a fact that the Recurring Revenue Model increases value to businesses and makes it more appealing to consumers. The market displays more interest in small businesses that can perform well through its the dependability of its revenue streams. Inc. Magazine says that it’s not merely about minor improvements. In other instances, recurring revenues can significantly increase the market value of a business.
In the software industry, companies that perform well have recurring revenue for “software as a service” (SaaS) averages “6 times revenue multiple for valuation, compared to a 3x revenue multiple for software companies that sell perpetual licenses.” Basically, if you have a recurring stream of revenue, your company is worth more than if you rely on a one-time transactional model.
Consumer Spending Motivation
Despite the fact that the impact of recurring revenue depends on the industry and the type of business model, there are multiple reasons as to why consumers are willing to spend more for products with established recurring revenue system:
- Revenue and Cash Flow – Consumers can rely on recurring systems of revenue immediately can count on recurring revenue right out of the gate. With guaranteed cash flow in their corner, they sleep a little easier knowing that they can repay loans and meet other financial obligations.
- Predictability and Stability – Forecasting businesses with recurring revenue models is easier. Business owners can project revenue and sales, months ahead and proceed accordingly by structuring budgets with a higher chance of certainty.
- Reduced Risk and Growth Potential – The recurring revenue model also serves as padding for income volatility. Businesses that adapt the model have less risk and more opportunities for growth.