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 five to 10 times more than selling to a current customer, and current customers spend 67 percent more on average than those new to your business, according to BIA Advisory.
That’s why companies focus on excellent customer service. A great customer experience keeps a business’s current customers happy and satisfied. However, while great customer service is crucial, there’s another way to retain customer loyalty: the recurring revenue 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.
Adobe found that 7 in 10 shoppers consider themselves brand loyal after at least three purchases from the same brand. What’s more, existing customers are also 50 percent more likely to try your new product, according to Invespcro.
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.
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.
- 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.
- 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. Non-using members finance marketing to more customers, and non-use 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.
Like recurring revenue models, repeat business – when a customer shops with your company regularly – fosters customer loyalty, brand trust and increased sales.
How to earn recurring revenue in 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 implement this model. Here are a few examples in various industries:
- Membership rewards: In a membership rewards scenario, a business provides value and engenders loyalty and repeat business. For example, a gas station offers gas rewards or discounts to any customer who signs up for a $5 to $10 monthly membership. In this scenario, loyalty will generate significant money for the business. A non-member will go to any station, but a gas club member will ensure they fill up at your gas station. Grocery stores, partnering with gas stations, are implementing this model nationwide.
- Legal information packages: Small businesses often need advice and help from a business lawyer. However, paying an expensive lawyer’s retainer fee may not be appealing or cost-effective. As a solution, a law firm could offer four 30-minute sessions with a junior attorney for $150. Customers can use the arrangement to get their questions answered. Moreover, they’ll be more likely to turn to that law firm when bigger issues arise. The law firm enjoys steady income and loyal clients.
- Retail frequent buyers’ programs: Retail stores can offer memberships or 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.
- SaaS models: SaaS stands for “software as a service.” Software companies use cloud computing to implement a SaaS recurring revenue sales model for software usage. For example, businesses and individuals use Microsoft 365 and QuickBooks online via a SaaS model.
- Streaming entertainment: Entertainment companies like Spotify and Netflix use a recurring revenue model to allow customers to access streaming content.
- Online courses: Education and training businesses use a recurring revenue model to give customers access to online courses for a monthly fee.
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.
Jennifer Dublino is a prolific researcher, writer, and editor, specializing in topical, engaging, and informative content. She has written numerous e-books, slideshows, websites, landing pages, sales pages, email campaigns, blog posts, press releases and thought leadership articles. Topics include consumer financial services, home buying and finance, general business topics, health and wellness, neuroscience and neuromarketing, and B2B industrial products.