We Live in a Customer-centric, Software and Services-driven World
Customers are now driving decision-making, and they increasingly expect immediate access and value-based pay-as-you-go options for goods and services. These options create a unique opportunity for a win-win, giving the customers what they want while laying the foundation for a business model that brings in reliable revenue on a recurring basis.
Adapting customer-driven and usage-based revenue models can be advantageous for your company and your customers. There is a strong trend toward using subscription-, usage-, and consumption-based recurring revenue models, which better reflect how customers think about price and value today.
Recurring revenue models enable you to deliver strong value to more customers while earning greater market differentiation with longer and more predictable revenue streams. And if you’re thinking about moving to recurring revenue business models for your products and services, you’re not alone.
IDC recently forecast that 60 percent of manufacturers of connected devices will generate recurring revenue via a software-based offering or service, and in the near future, more than 50 percent of all industries will price and package their offerings as services with flexible subscription- or consumption-based pricing models.
The Three Components to Driving Recurring Revenue
As you begin to set the stage for shifting to recurring revenue, there are three primary components you need to evaluate. Alone, they are each relatively straightforward, but when considered together, what is best for one element is often a poor choice for another component.
Understanding what the typical options are for each component and considering your entire revenue model as a whole will help you create a sustainable recurring revenue model that will drive additional income for your company.
Component #1 - Customer Acquisition
With a traditional perpetual licensing model, customer acquisition tends to be the main priority. In this model, retention and maintenance are relatively important, but the likelihood of churn to a competitor is much lower since switching costs—i.e. the up-front cost of new perpetual licenses—are so high.
Component #2 - Customer Retention
In recurring revenue models, acquisition is important, but retention is arguably more important because customers pay-as-they-go and can opt out any time if perceived value drops. This is not the case with perpetual licensing models.
Component #3 - Monetization
This component is driven by the price you can charge and how well you can upsell and cross-sell value and features to your customers over time to increase customer lifetime value.
The Recurring Revenue Trade-Off
Individually, each of these components may seem relatively easy to improve as you switch to a recurring revenue model. However, a closer look at achieving all three of these goals at once reveals clear trade-offs that must be balanced to achieve a successful recurring revenue model.
Acquisition vs. Monetization
A low-price strategy can fuel acquisition efforts, but once you have established a pricing anchor, it is very difficult to increase annual contracts more than 4-5 percent per year.
Acquisition vs. Retention
Increasing acquisition could take the form of lower commitment terms, which could increase churn.
Retention vs. Monetization
You may be tempted to maintain prices to try and retain customers, but that approach ignores the value you provide through continual product investment and improvement
As the figure above illustrates, the recurring revenue trade-off is a multi-dimensional balancing act, which is why transitioning to this model is especially challenging.
Each of these trade-offs can be addressed through specific product elements: packaging, price model, or price level.
Want to learn more about the pros and cons related to each side of the recurring revenue trade-off?
Checkout part two of our newest whitepaper, Higher Revenue, Happier Customers, to get the full scoop on how you can boost recurring revenue models by managing the three components to recurring revenue.