Recurring Revenue Business Model

Recurring revenue management is critical in any subscription-based business. Many crucial hints and insights into a company’s operations can be gained through recurring revenue analysis. It is one of the deciding criteria that presents the value of a subscription-based firm for investors to consider. It enables managers to determine if the firm is either expanding or decreasing. Finally, detailed examinations of recurring revenue business models allows analysts to identify crucial consumer behavior trends. Based on this information, the organization may enact or modify its plan to improve the customer experience. It can also bolster the recruitment of new consumers and investors while also creating new income streams.

In this post, we will discuss the requirements of subscription-based businesses in further depth.

What is the Recurring Revenue Business Model?

A recurring revenue business model is the prevalent mode of operation for subscription-based businesses. Subscriptions, or obligations to pay for items or services on a regular basis, are the foundation of such enterprises. Payment frequency is determined by the service. They can be either weekly, monthly, or annual. Fitness facilities, Internet service providers, and the well-known video streaming service , Netflix, are all instances of subscription-based businesses.

Let’s assume you run a subscription-based firm. The value of all your subscriptions over a set period of time is referred to as recurring revenue (month, year). Monthly recurring revenue is used to determine client lifetime value, projected future revenues, and average selling prices.

Two factors must be considered when managing recurring revenue.

  1. Factors related to billing (business aspect)
  2. Factors related to processing (technical aspects)

An optimal strategy can be developed by analyzing each set of factors.

Let us take a closer look at both sets.

Recurring Revenue Management: Business Aspect

There are four critical components to modern recurring revenue business models, all of which are directly associated with billing. These components are listed below.

▪ New monthly recurring revenue. This component includes the subscription revenue from newly acquired customers.

▪ Expansion of monthly recurring revenue. This component includes the upgraded subscriptions and payment plans. For example, customers switching from basic to premium service packages or adding more users.

▪ Reactivation of monthly recurring revenue. This component consists of the returning subscribers that reactivated their payment plans and unfrozen payment plans.

▪ Churn monthly recurring revenue. This is the sole negative component out of the four. It reflects the value from clients that cancel or decrease their subscription agreements. Churn revenue analysis assists firms with recurring revenue in understanding the primary causes of client loss. As a result, this component may be the most essential when it comes to analysis and feedback.

A company should thoroughly examine each component and its developments during the reporting period. Managers should be able to examine the number of subscription cancellations and freezes as well as the reasons behind them. If a consumer cancels their membership, the company may offer an alternate product (and potentially turn churn into expansion). Some subscribers on regular subscription levels may benefit from upgrading to a better offer.

As we can see, billing-related variables enable a company to assess the nature of changes and alter its tactics accordingly. Furthermore, the companies become more responsive and efficient when dealing with consumer difficulties.

Recurring Revenue Management: Technical Aspect

Processing-related or technical considerations include problems that arise when payments are not received. A company should be prepared to deal with these difficulties.

When a transaction is rejected, the company should decline the recycling processes in place.

To solve “insufficient money” situations, the company should plan for subsequent reattempts of the original payment link. Additionally, account updater logic may be used to resolve issues such as expired cards and account number changes.

For example, the cardholder’s card number, expiration date, or name spelling might all change, resulting in a decline. The company must be able to deal with these possible situations.

While a loss is a one-time occurrence for a retail company, it can become a huge concern for the recurring revenue business model. Depending on the cause of the decrease, the decline may return again. And if specific predominant declining factors exist, it makes sense to investigate whether there is an underlying problem.

A transaction’s formatting may need to be changed in certain cases. As an example, the “recurring” flag may not be correctly included in the transaction description.

Decline Analysis Outcomes

Analysis of decreases, like attrition and downgrades, gives a plethora of useful information. A clearer picture of refused transactions within a certain reporting period enables management to resolve numerous crucial issues. 

Here are some example questions useful for analysis.

  1. What type of declines are prevalent?
  2. Are there any declined transactions that need to be repeated (reattempted) in processing?
  3. When does the company need to contact cardholders to verify their profile details?
  4. What are the typical cases when account updater engines are appropriate?

The overall aim is to reduce the decline rate while increasing income from clients willing to pay for subscriptions.

Transaction Pricing

Analysis of transaction processing costs is another critical component of recurring revenue management. Smaller businesses often work with major providers (such as Stripe and PayPal) that provide them with set pricing (e.g., 2.9%). As a result, small companies have few alternatives for negotiating better processing terms until their transaction volumes increase. Simultaneously, firms with a “cost plus” pricing system (and those that pay interchange plus service fees) should carefully examine the kind and magnitude of the interchange fees they are being paid. You may find that a substantial number of your subscribers use reward credit cards. The cost of maintaining these cards is relatively high. As a result, it makes sense to encourage these clients to convert from expensive reward credit cards to ACH or debit cards.