Why do gyms like you to sign up? How is Netflix able to produce programmes as costly as “The Crown?” Why is Amazon Prime such a successful offering?
The answer in all these cases is subscriptions. Getting customers to sign up for regular payments for the goods or services they receive is a well-proven way to build value in your business.
However, many business owners mix up re-occurring and recurring revenue, but one is much more valuable than the other.
Re-occurring revenue comes from customers that have a re-occurring need for whatever you sell and buy. They do so on an unpredictable, yet regular basis.
Imagine a health food store. Customers come in to replenish their supply of vitamins whenever they run out. The owner is never quite sure when a customer will be back, but they‘re pretty sure they will return when they run low on a critical supplement.
Recurring revenue comes from sales to customers that buy from you on a predictable, automatic basis, for example, a subscription or service contract.
Let’s take the same health food store owner. They recognise their customer comes in every month or so to buy Vitamin C. The breakthrough comes when they decide to offer a subscription for Vitamin C capsules, whereby they ship a new bottle to their subscribers each month, automatically. The customer doesn‘t need to make a dedicated trip to the store, and the owner automatically gets repeat sales.
Compared to one-off transaction revenue, both re-occurring and recurring revenue contribute positively to your company‘s value, but one is much more valuable than the other. The benefits of recurring revenue are clear to see. You have certainty and peace of mind, knowing that money is coming in on a regular basis. You have more stability, allowing you to hire new talent, and re-invest. You are a more desirable proposition to investors. You‘re in a strong position should you want to exit.
If your income comes from re-occurring sources, you have less stability, certainty, and will be far less investable.
How to convert re-occurring revenue into recurring revenue.
You can begin by segmenting your customers into those who buy on a re-occurring basis.
The next step is to look for customers whose purchase cycle is fairly predictable. You don‘t want customers who only buy from you once in a blue moon. You need those who like your product and service enough to buy it on a regular basis.
You then need to design an offer for your regular, re-occurring customers that makes it more convenient for them to buy on a subscription or service contract, rather than on a transactional business model.
Aim to give re-occurring customers three compelling reasons to subscribe.
For example, in the case of the vitamin store owner, they could make the case that subscribing to a regular shipment of vitamins is:
- more convenient for the customer because there is no need to drive to the store;
- more reliable because subscribers would be given priority on available stock; and
- safer, because vitamin subscribers would be given a newsletter describing new clinical trial results of emerging vitamin therapies.
The customer needs to feel that the subscription model is better than the ad-hoc purchasing approach. It should make their life easier. It should feel like a no-brainer.
Re-occurring and recurring revenue may sound similar, but when it comes to your company‘s value, recurring revenue is far better. By converting your re-occurring customers into subscribers, you‘ll build a more predictable and valuable business. And in these uncertain times, every business could do with a bit more certainty.