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  • Abhinav Sherwal

What is recurring revenue, and why has it emerged as a new asset class?

Updated: 5 days ago

These are exciting times for startups! The number of unicorns and decacorns we have today has shattered all records. But their journey is usually very challenging. To grow and scale, these startups need to burn cash and burn it fast.


According to a U.S. Bank study, 82% of failed businesses cited cash flow as the primary reason for their failure. Startups simply need money at the right time to make money.


So far, these startups have been giving away a significant portion of their equity or taking restrictive debt to secure funds.


INC media interviewed 40 founders who had lost controlling stakes in their companies and found that while raising VC money, more than half of them ended up with merely 20 percent or even less equity in their own company. And we all know what happens when the flexibility is lost with the loss of ownership. Companies are forced to take the road to unrealistic growth with loss in control.


Similarly, when startups look upto banks or financial institutions for lending, they face a lot of skepticism. And it becomes increasingly difficult to secure funds if you lack collateral, credible history, capital, and more.


Today, there is an alternative to get cash upfront from investors without equity dilution or debt. Startups can leverage their recurring revenue cash flows to raise runway money while keeping ownership of their startup in their hands. The recurring revenue model has risen as an attractive new asset class for both investors and founders..


Let’s understand what, how, and why?


What is the recurring revenue model?


Business models that have predictable revenues with low churn or where the business charges a recurring fee for a specific time, usage, user number, or product tier are Recurring Revenue Companies. Customers have access to the product beyond the stipulated time, and a regular, scheduled fee is charged after a predetermined time or usage. This model is known as a subscription-based pricing model.


As the name suggests, the recurring revenue model is the exact opposite of the fixed license based revenue model, where the payment is made only once, and the purchase is a one-time thing.


Salesforce, Zapier, HubSpot, and Grammarly are great examples of this model. Zapier charges a recurring fee based on the number of tasks you automate, and the price may vary from INR 0 to 46,360 per month.


Making a case for recurring revenue: Benefits


Steady and predictable cash flow

In a recurring revenue model, customers can purchase products month after month, given the small payments that can be made at regular intervals. It creates a stable cash flow for the business and increases the lifetime value from a customer.


Whereas, in the traditional model, businesses need to sell their products continuously, even after the first purchase.


Easier expansion of customer base

The recurring revenue model is a big hit among customers because of its flexibility. Recurring payments allow customers to pay without having to worry about the bulk amount upfront. Such flexibility helps businesses widen their customer base without worrying about price points and profit margins.

Longer customer retention

Customer retention is incredibly important for the long-term sustenance of a business. It is five times cheaper than acquiring new customers for most businesses. In a traditional business model, customer retention requires continuous product selling.


Whereas in the recurring revenue model, the flexibility of payments and continuity of product access makes customers stay longer. Such long-term engagement helps businesses build rapport with the customers and accurately predict their buying behaviors. The biggest and most successful example in the world is Netflix.


Higher revenue

Given the long-term relationships and brand loyalty created in the recurring revenue model, upselling and cross-selling are easier. The recurring revenue model helps businesses produce services according to customer wants and leverage the existing customer relationships to sell newer products.


Many businesses introduce tiered pricing models such as volume pricing, bundled pricing, or usage-based pricing to enhance up-selling and cross-selling.


Types of businesses adopting the recurring revenue model


SaaS

SaaS (Software as a Service) companies are the biggest implementers of recurring revenue models. It brings predictable revenue to the business and eliminates the continuous need to sell product updates to existing customers, every time they are launched.


For example, HubSpot, a CRM, sales and marketing SaaS company, offers tiered billing plans for its various products.


For customers, SaaS products offer multi-fold benefits as users essentially rent them instead of purchasing them. They provide good ROI compared to expensive software, which requires upfront money for the purchase, installation, maintenance, and upgrades. They are easy to use and scale too.

Tech Services

Companies sign services or retainer agreements with their customers for their technology services. These businesses have productized their services to create a recurring revenue model. Long-term projects can also be billed on the number of hours or manpower at a regular interval to implement the model.


B2B Tech Platforms

With products like JIRA, Atlassian offers transparent hybrid billing to generate recurring, predictive revenue. Its tiered plans provide flexibility to upgrade to the next level based on the number of users and usage level.


B2B Tech platforms have adopted different recurring revenue models to offer more value to customers and retain customers. For example, the team collaboration software Slack uses a per-seat pricing model, along with a tiered billing model with a feature set.


B2B sales are tedious, but this model can improve customer retention and engagement.


EdTech

There has been a sudden growth in EdTechs and their adoption of the recurring revenue model. Companies like Udemy and Coursera offer monthly subscriptions. It offers students access to a huge repository of courses for on-demand learning.


D2C

D2C companies have hopped on the recurring revenue model bandwagon and offer subscriptions for their products or services. They’ve minimized churn, built loyalty, and generated reliable revenue for themselves.


D2C brands are all about the right pricing and user experience. By offering their customers a subscription model, they can cut down on expensive marketing and customer acquisition costs and thus leverage price competitive advantage.


Win-win for both customers and businesses


The sustainable monetary aspect of the recurring revenue model has helped businesses with predictable revenues get rapid growth capital, thrive, and be their own bosses. On the other hand, it has made secure assets available to investors.


At Recur Club, this incredible business model is being monetized by businesses to get non-intrusive and non-dilutive capital. It ensures pressure-free, hassle-free access to capital.


Investors can sign up on the Recur Club platform and fund companies with promising business propositions. Investors have this unique opportunity to consider recurring revenue streams as tradable assets and invest based on their risk-return profile.


With Recur Insiders, companies can make data-based decisions about the business and get advice from industry veterans.


Sign up on Recur Club today!

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