How to switch to a recurring revenue model (and why you need to)
If your business is like most, its revenue is “lumpy”.
That means the amount of money that hits your business bank account varies every month, sometimes by quite a bit.
And sure, revenue hits a number you might be happy with over the course of the whole year.
But if you lose a few key clients – or things go really sideways – you don’t have a safety net of guaranteed monthly income to fall back on.
Fortunately, there’s an alternative: A recurring or subscription revenue model.
Recurring revenue not only makes your business easier to manage... it also helps to more accurately predict future revenue streams. And makes your business more valuable in the eyes investors should you choose to sell.
Don’t think your business could work on a subscription model?
Read on to learn why recurring revenue is so important and how to transition at least part of your business into a recurring revenue stream.
Why you need to switch to a recurring revenue model
There are six reasons you need to switch to a recurring revenue model if you want to build a valuable business you can sell at a premium:
One of the biggest challenges you face as a business owner is estimating demand.
Overestimate how much demand there is for your product or service and you’ll end up strapped for cash, with a warehouse full of inventory gathering dust or an office full of staff left twiddling their thumbs (and probably eying the door).
Underestimate demand and you’ll run out of stock, struggle to meet client deadlines, and overwork your team – not to mention leave money on the table.
A predictable recurring revenue income, on the other hand, will mean you can forecast demand well in advance and plan accordingly.
Which will take the guesswork out of estimating supply and demand for your product or service.
2. Say goodbye to chasing invoices
Switch to a subscription service and customer payments become automated.
Which means no more sending invoices and crossing your fingers that they’re going to be paid within 30 days.
Think of the time and money you’ll save not having to chase deadbeats for $100 invoices!
3. Free market research
Ever wonder why Netflix has such a good track record of producing incredible shows?
It’s because they have the ultimate market research – access to the watching habits of all 200,000 of its worldwide subscribers.
So instead of commissioning a phone survey or a batch of focus groups to discover what your customers want, launch a subscription offering and get paid while you do market research.
4. Make your customers sticky
Before I became a smol subscriber, I would buy whichever dishwasher detergent was on offer in the supermarket.
I wasn’t loyal to any particular brand.
Since I started getting smol’s capsules posted through my door each month I haven’t even considered switching allegiances to one of its competitors.
They’ve made me a “sticky” customer by getting me hooked on their subscription model.
5. Subscribers buy more
Ever wondered why Amazon is so keen to get you to buy subscriptions to things like Prime or Subscribe & Save?
It’s because the data shows that when someone is subscribed to a service, they’re much more likely to buy other things from the same company.
For example, for every $10 a H.Bloom customer spends on their subscription, they spend another $3 on one-shot special occasion orders.
6. Increase what your business is worth
Last but not least, a business with a recurring revenue model is a lot more appealing to potential buyers.
If they take over a business built on a subscription service, an investor can predict what the return on their investment is going to be much more confidently.
This makes your business a much less risky investment opportunity – and therefore dramatically increases what it's worth.
So, if you’re looking to sell your business, it’s well worth transitioning to a subscription model.
“A subscription model would never work in my business”
Some businesses undoubtedly lend themselves to a recurring revenue model more easily than others.
But here’s the thing:
I’ve never come across a business where at least some aspect couldn’t be turned into a subscription offer.
If you want to sell your business for the highest possible profit – and have it be easier to run and more profitable in the meantime – you shouldn’t be asking yourself if you could transition to a subscription model.
You should be asking yourself how you’re going to reinvent your business to ensure you’ve got a solid stream of recurring revenue in place.
A closer look at some successful subscription businesses
Subscription models come in all shapes and sizes.
Here are just a few examples of successful subscription businesses to help inspire you:
- Your business probably relies on several subscription services. QuickBooks for finance, HubSpot for marketing, Zoom for meetings – the list goes on.
- A decade ago, you would pay upfront for the latest version of Photoshop or Premiere Pro. Today, you need a subscription to the Adobe Creative Cloud to use Adobe’s apps.
- Tri-State Elevator maintains elevators for billionaires in Manhattan, and a monthly subscription revenue of $70k helped them through the 2008 recession.
- ContractorSelling.com charges $89 a month for tips on how to run a successful contracting company for plumbers and electricians.
- Dollar Shave Club and Harry’s have disrupted the shaving space, upsetting Gillette and Wilkinson Sword’s market dominance through their subscription models.
- Coffee, wine, and beer aficionados can now explore flavours that have been hand-picked based on their tastes and sent straight to their door by companies like Pact, Savage Vines, and Beer52.
- You can even get a car on a subscription through services like Volvo’s car subscription.
Nine recurring business models you can use to transform your business
You don’t have to reinvent the wheel when it comes to transitioning your business to a recurring business model.
Chances are that you can easily transition at least part of your business to the four subscription models for your business:
And if none of those models fit, here’s a look at five more subscription models for your business:
How to shift to a subscription model...
So, you’re sold on the idea that switching to a recurring revenue model will turn your business into a valuable asset.
And you’ve identified a subscription model that’s going to work for you.
Here’s exactly how to make the transition from lumpy revenue to a steady stream of subscription income:
Reinvent your processes
When your subscription service is up and running, it’s going to be the easiest part of your business to run.
But before you can remove yourself from the day-to-day running of your business, you need to set up a whole new raft of processes so that your team can manage the new arm of your operations themselves.
Before you launch your new service, carefully plan out the new processes involved. Chances are these aren’t going to be too complex, as by definition a subscription service largely runs itself.
Once you’ve done this groundwork, be sure to brief your staff, build a team to manage the transition, and then get the new systems in place.
Then you’re ready to take your new offer to market.
Refine your positioning
Different types of subscription services offer different benefits to customers.
For example, in the viral advert that put it on the map, Dollar Shave Club told viewers:
“Stop paying for shave tech you don’t need, and stop forgetting to buy new blades every month”.
That’s the brand's position in a sentence – a cheaper, more convenient alternative to the needlessly complex and expensive incumbents that dominated the market.
What does your subscription offer promise customers?
Convenience? Affordability? Security? Novelty and surprise? Curated expertise?
This should define your brand’s position, which in turn will inform your sales and marketing efforts.
Which is why it’s so important to get the positioning of your subscription service right before you take it to market.
Keep your existing customers
Another key part of the puzzle when you’re transitioning to a subscription model is keeping your existing customers during the shift.
It’s therefore well worth spending some time planning on how you’re going to communicate the change to them.
If you have a few key clients, then it’s definitely worth picking up the phone and explaining your thinking behind the transition to them.
And a carefully crafted email should suffice for the rest of your customers.
Offering all your existing customers a discount on their first few months subscription is bound to help win them over to your new way of working as well.
Make sure you do everything you can to reward your existing customers for their loyalty and keep them on your side, as they’re liable to stick around for the long-haul if you do get them hooked on your subscription offer.
Invest in customer support
Last but not least, you should invest heavily in customer support after your switch to subscriptions.
Your new business model is going to rely on nurturing long-term relationships with your clientele, and a big part of that is going to be first-class customer support.
If you’re used to the focus of your business development efforts being on bringing in one-off customers, this is going to be a sea change in your approach to customer communications – and one you should make sure to make it a priority to get right.
A recurring revenue model not only makes your business easier to run and more predictable.
It also makes it much more valuable in the eyes of potential buyers.
Switching to a subscription model was one of the nine changes that increased the value of my business the most.
I wrote this short guide to help you understand the value it could have for you – as well as what your options are when it comes to making the transition and exactly how to do it.
Follow these simple (but not always easy) steps to dramatically increase the value of your business – which there’s never been a better time to do.
For more guidance on how to build a business that gives you the freedom you deserve, subscribe to The Freedom Experience podcast (and find out how you can work with me).
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