It’s common business knowledge that it’s cheaper to retain a current customer than it is to attract a new one.
Acquiring new customers costs 5 to 10 times more than selling to a current customer — and current customers spend 67% more on average than those who are new to your business (Inc). (Tweet this stat!)
That’s why companies focus on great customer service – to keep their current customers happy and satisfied. While great customer service is mandatory, there’s also another way to retain customer loyalty: the recurring revenue model.
Related: Keep track of your sales with the help of an accounting software provider
What is Recurring Revenue?
Recurring revenue is what occurs when companies find a way to turn a one-time sale into a recurring one. Say you have a dog grooming business. You could offer a one-time dog grooming session for $50 – or you could ask the customer to join a monthly club that offers unlimited dog grooming for $130 a month.
- You might think you could lose money on that – what if the customer comes in every day? Realistically, that won’t happen; they will probably only come in a few times a month. But, if you don’t offer that deal, they will have no loyalty to you and could just find the dog groomer offering the best discount the next time the pooch needs a trim.
The Benefits of Recurring Revenue
You might think that giving customers a deal on more frequent use of a product or service will only benefit their pocketbooks. Instead, you business will actually thrive because of the benefits of implementing this model.
- Stabilization: You won’t have to guess how much business you can drive in the door each month. As long as you do a good job of keeping your recurring customers, you can count on that revenue, plus any new business that might drop in.
- Customer Service: Since you’ll frequently interact with the same people, your relationships will slowly build. This will lead to better customer service. If a customer tries your service once and leaves, you will have fewer opportunities to increase his loyalty.
- Marketing: Once you know the percentage of customers that will take the recurring option, how many of those stick, and how much profit you’ll gain through them, you’ll be able to outspend your competitors in advertising. For example, you have a product you sell for $10 upfront or $20 monthly. At least 30 percent of your customers take the recurring offer, and the average lifespan of membership is four months. Your average lifetime value per customer is $34. However, you competitor offers the same product without a recurring model, making only $10 per sale. You know you can outspend him in advertising by 3.4 percent per customer, which is enough to dominate any market.
Applying Recurring Revenue to Your Business
Don’t think your company has a product conducive to the recurring revenue model? You might be surprised. With a little creativity, any company can do this.
- A gas station can offer a few pennies of gas to any customer who signs up for a $5 to $10 monthly membership. The big money will come because of loyalty. A non-member will go to any station, but a gas club member will make sure to fill up at your gas station. Grocery stores, partnering with gas stations, are doing this all over the country.
- Most small businesses don’t want to pay the expensive fees of a lawyer’s retainer, but they have constant questions that come up. The law firm could offer four 30-minute sessions with a junior attorney for $150. Customers get their questions answered and are more likely to use that firm for the big things, and the firms have steady income.
People are inundated with choices and worn out with being faced with too many options. A recurring revenue model makes the customer’s life easier by simplifying and limiting choice. Oh, yeah, and you’ll make a little money, too.