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CEOs

3 Ways to Create Recurring Revenue

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What’s better—a hundred dollars automatically deposited in your bank account at the end of every month or a hundred dollars you had to work for? The answer’s obvious: even though the value is the same, we all prefer the money we can count on. That’s exactly why recurring revenue streams are so important to a business.

According to Ventana Research, over half of American businesses are considering moving over to a recurring revenue model to increase revenue and user engagement. There are a clear benefits to creating recurring revenue — it provides your business with dependable cash flow and a solid base for growth and makes budgeting and revenue projections easier. Beyond that, repeat customers are an asset in more ways than one: buyers tend to pay more for companies with proven recurring revenue models. But the best thing about recurring revenue is that it can fit into almost any business across a wide variety of industries.

Here are the top three ways to create recurring revenue.

1. Automatic Renewal Subscriptions

Adobe is the most powerful example of this method of generating recurring revenue. The software giant went from selling software for a one-time fee of usually about $1,800 to a cloud-based subscription model in 2013. As of December 2015, recurring revenue from subscribers accounted for 74 percent of Adobe’s total revenue.

These subscriptions are a great way to create recurring revenue because they’re evergreen — they go on forever, until a customer decides they’d like to cancel the service. Media companies like Netflix and Spotify are the leaders in the space, but shipping commerce companies like Five Four Club and Birchbox have revolutionized the model.

2. Hard Contracts

Contracts without outs can be a riskier method to generate recurring revenue, especially since no one actually reads contracts. But the key to being successful with hard contracts is two-fold. The first thing is to pick a length of time that’s not so long potential customers are put off by it, and the second is to make sure it isn’t so short they can’t truly get a feel for your service. Wireless telecommunications and mobile phone companies are the most successful example of this, but this model has the potential to fit into almost any business.

3. Metered Usage

Instead of having customers subscribe for their services, some companies have a pay-per-use, or metered usage, recurring revenue model. Users generally enroll for your company’s services and only pay for what they consume. Customers are attracted to this model because it seems fair, and companies can use data collected on customer usage in a variety of ways. Over time, patterns in customer behavior can be used to customize services, calculate the lifetime value of a customer, and be used in developing more effective pricing schemes. This model is typically associated with utilities like water and electricity, but it’s also increasingly popular with cloud computing companies (although not everyone’s happy about that).

Recurring revenue models aren’t perfect. They’re difficult to implement at the outset, and they can lead to stagnation in innovation as companies get used to having a large database of repeat customers. But the benefits still outweigh the risks. The lack of a recurring revenue model  is among the top reasons small businesses don’t sell. Aiming for recurring revenue is an important measure for any company to take.

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