Returning Customers Spend 67 Percent More Than New Customers — Keep Your Customers Coming Back With a Recurring Revenue Sales Model

What is recurring revenue?

Recurring revenue occurs when companies find a way to turn a one-time sale into recurring purchases. For example, let’s say you have a dog grooming business. You could offer a one-time dog grooming session for $50. But you could also ask the customer to join a club that offers unlimited dog grooming for $130 a month.

You might initially think that offer could lose you money. What if the customer comes in every day? Realistically, that won’t happen. Customers will likely come in only a few times per month. Your initial offer doesn’t foster customer loyalty; the next time the customer’s pooch needs a trim, they’ll likely seek out the dog groomer currently offering the best discount. But your unlimited offer keeps the customer tied to your business with an incentive to keep working with you.

“Recurring revenue is the foundation of predictable, sustainable growth,” explained Berns Lim, chief automation officer at WunderWaffen. “Instead of relying on one-time sales, businesses can build long-term stability by creating revenue streams that renew automatically.”

Types of recurring revenue models

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 implement this model. 

Here are the main recurring revenue models across various industries:

• Subscription: In a subscription model, customers pay a recurring fee to gain access to a product or service. The fee is typically fixed and charged on a regular basis, such as monthly or annually. Examples include Netflix for streaming content and Adobe Creative Cloud for software tools.
• Usage-based: In usage-based or pay-as-you-go models, businesses charge customers based on how much they use a product or service. This can be beneficial for customers who don’t use the service heavily. An example would be cloud computing services like Amazon Web Services (AWS), where customers are billed based on the computing resources they consume.
• Freemium: The freemium model involves offering a product or service for free while charging for premium features or enhancements. The idea is to acquire a large user base with the free product and then convert a portion of those users to paying customers. An example is Spotify, which offers free ad-supported music streaming but charges for an ad-free and feature-rich premium service.
• Membership: Similar to the subscription model, the membership model involves customers paying a recurring fee for access to exclusive benefits, services or products. It’s often used where there’s an exclusive community aspect.
• Frequent buyers’ program: Retail stores can offer customer loyalty programs that give customers discounts on specific products or services. Customers are incentivized to save money and gain rewards, while the store enjoys customer loyalty and the potential for repeat business. For example, Petco has a program that offers discounts on grooming and monthly cash-back incentives for in-store use. Additionally, Costco uses a straight membership model that allows customers to shop at its discount warehouse exclusively.

People are inundated with choices and exhausted by the numerous options available in today’s product and service landscape. A recurring revenue model makes the customer’s life easier by simplifying and limiting choices and providing unique value. Businesses gain loyal customers and increase revenue. A recurring revenue model, when implemented correctly, is a win-win.

The benefits of recurring revenue

You might think giving customers a deal on more frequent product or service use will only benefit their pocketbooks. Instead, your business will thrive because of the benefits of implementing this model.

“Recurring revenue is the holy grail for investors or buyers of companies,” said Kimberly DeCarrera, fractional general counsel and chief financial officer at Springboard Legal. “So, if you are looking to get more money in the door from an investor or a buyer, look for ways to incorporate recurring revenue into your business model. It doesn’t even have to be all of your revenue — just a significant portion. If you can make it 25 percent of the revenue, it gives them something to build off, as well as cash flow confidence. This raises the enterprise value of your business, leaving you with more money.”

Consider the following upsides to implementing a recurring revenue model:

• A recurring revenue model brings reliable income. With recurring revenue, 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 — in addition to any new business that might drop in. “For many businesses, the biggest benefit is being able to forecast revenue out for many months ahead,” DeCarrera said. “Once you have a predictable amount of recurring revenue, this gives you the confidence to continue to grow your company — hire new employees, new marketing campaigns, new locations, new investments in technology or other resources.”
• A recurring revenue model helps build customer relationships. In a recurring revenue model, you’ll frequently interact with the same people. This communication level will help you build and grow customer relationships while gaining the knowledge and tools to provide excellent customer service.
• A recurring revenue model boosts customer retention. If a customer tries your service once and leaves, you have little chance of fostering customer loyalty. In contrast, a recurring revenue model can increase customer retention — as long as you continue to provide value.
• A recurring revenue model can boost cash flow. Operating in a recurring revenue model can help solve cash flow problems. Membership payments are typically set up automatically. You’ll receive that revenue whether or not the customer takes advantage of the services offered. “One of the unappreciated benefits of recurring revenue is that it lowers your budget for customer acquisition,” said DeCarrera. “You don’t need as many customers for your business if you have a few dedicated customers that are consistently buying from you.”
• A recurring revenue model can increase profits. A recurring revenue setup requires no additional expense outlays. You receive money in a timely fashion whether or not customers avail themselves of your services.
• A recurring revenue model can increase marketing effectiveness. Once you know the percentage of customers in your recurring revenue model, how many will continue in the program and how much profit you’ll gain through them, you can outspend your competitors in advertising. For example, say you have a product or service you sell for $10 upfront or $20 monthly. At least 30 percent of your customers take the recurring offer and the average membership lifespan is four months. Your average customer lifetime value is $34. However, your competitor offers the same product without a recurring model, making only $10 per sale. You know you can outspend the competition in advertising by 3.4 percent per customer — enough to dominate any market. 
• A recurring revenue model is easy to scale. Scaling is easy with a recurring revenue model. Nonusing members finance marketing to more customers and nonuse by some allows use by more. For example, a gym may have 500 members but only a fraction of them use the equipment at any one time.

“The benefits of recurring revenue are undeniable,” said Lim. “Predictable cash flow. Higher customer lifetime value. Easier scalability. Stronger relationships. Instead of chasing new sales every month, businesses can focus on refinement, innovation and long-term growth. The right recurring model transforms a business from a constant hustle to a well-oiled machine, running efficiently, scaling intelligently and growing sustainably.”

Key metrics for recurring revenue

To successfully manage a recurring revenue business, it’s essential to track specific metrics that provide insight into performance and growth potential.

• Monthly recurring revenue (MRR) is the total monthly revenue generated from all active subscribers. This metric provides a clear view of your business’s monthly performance and helps predict future revenue.
• Annual recurring revenue (ARR) is the yearly version of MRR, calculated by multiplying MRR by 12. ARR is particularly important for longer-term contracts and strategic planning.
• Churn rate is the percentage of customers who cancel their subscriptions over a specific period. Lower churn rates indicate better customer satisfaction and retention.
• Customer lifetime value (CLV) is the total revenue you can expect from a customer throughout their relationship with your business. This metric helps determine how much you can spend on customer acquisition while remaining profitable.

Choosing the right recurring revenue model

The best recurring revenue model depends on your business type, customer needs and industry characteristics. Here are some common industries to consider:

• For software and technology companies: SaaS subscription models work best, offering tiered pricing with different feature sets. Usage-based models suit businesses with variable customer consumption patterns.
• For content and media businesses: Freemium models allow you to build a large user base before converting to paid subscribers. Traditional subscription models work well for premium content.
• For service-based businesses: Membership models create exclusive communities and ongoing relationships. Retainer models provide predictable income for professional services.
• For retail and physical products: Membership programs with benefits and discounts encourage repeat purchases. Subscription boxes work well for consumable products.

Implementation best practices

Building a steady stream of recurring revenue can transform your business, providing financial stability and long-term growth. Instead of relying on one-time sales, a well-designed recurring revenue model keeps customers engaged and consistently investing in your product or service.

“To earn recurring revenue, businesses must start with a service or product that delivers continuous value,” said Lim. “Customers need a reason to stay engaged. A strong pricing model helps — tiered plans, annual commitments or usage-based fees can all work. But the real key is customer experience. If renewals feel like a hassle, customers will leave.”

Lim told business.com the steps companies should take to expand their revenue sources include:

1. Create valuable offerings. Create a service or product that justifies recurring payments to give customers a reason to keep coming back. This can include artificial intelligence (AI) automation, software licenses and consulting retainers.
2. Design flexible pricing. Develop pricing models offering tiered pricing, usage-based fees or annual subscriptions. This helps retain customers by making them want a premium version, turning them into loyal buyers.
3. Build customer relationships. Create a customer success framework by performing regular check-ins, onboarding and engagement. You need to keep customers invested and you can’t do this by not interacting with them.
4. Reduce friction. Show customers why it’s easier to stay subscribed than to leave by offering no-brainer value propositions. If they try to unsubscribe, have a pop-up to convince them to stay.

“The biggest part of having recurring revenue is that you have to continue providing great value to the customer,” said DeCarrera. “No matter what your service or product is, you must bring the value. As soon as the customer feels that the value of your offering has dropped below what they are paying, they will cancel or downgrade your offering.”

Utilize AI to your advantage

On top of setting your business up for recurring revenue with the above steps, Lim suggested companies use AI to assist with additional tasks. This way they’ll have additional help to retain customers and maintain a sense of appreciation.

“Getting customers to buy again and again isn’t just about automation,” he said. “It’s about trust. Deliver value, communicate consistently and anticipate their needs before they do. AI and analytics help predict churn, identify upsell opportunities and personalize incentives. A frictionless experience ensures loyalty. When customers feel like they can’t afford to leave, you’ve done it right.”

Comparison table

Here’s a comparison of some of the most popular recurring revenue models.

Amanda Hoffman contributed to this article. Source interviews were conducted for a previous version of this article.