What is a Recurring Revenue Model?
A recurring revenue model is a type of business model in which a vendor does not sell the product at the purchase price but instead offers access to a product as a service in exchange for regular scheduled payments.
By giving access to the product, the vendor retains the ownership of the product and generates payments on a recurring basis.
The most common recurring-revenue models
1. Flat-rate pricing model
Also commonly known as fixed pricing. In the flat-rate pricing model, a single price is set for the product that unlocks all features. The customer pays a fixed price every month or for the subscription duration.
When to use - the flat-rate pricing model is perfect for products that have limited features, limited differentiating factors and a singer buyer persona.
Pros - Flat-rate pricing model is simple to use, understand, communicate and sell, has easy billing processes, and has more predictive monthly revenue.
2. Tiered pricing model
In the tiered pricing models, subscription products are available in various combinations and at different price points.
When to use - tier-based pricing model is used when there is diversity in consumer needs, budget and usage. The tiers must have enough recognisable differentiation points between them.
Pros - Flexible and sclable. Address multiple customer segments and persons. Increases the Customer Lifetime Value (CLV) as customers have the possibility to upgrade and downgrade subscription products.
Types of tiers
- Tiers based on subscription duration - the subscription prices decrease as the subscription duration increases. It is commonly used as a pricing model for product subscription companies to push customers towards more extended subscription periods. The incentive for the customer to subscribe for a longer period is a lower subscription price.
- Tiers based on number of users - the subscription price increases as the number of users increases. It is commonly used as a pricing model for SaaS subscriptions.
3. Usage-based pricing
In the usage-based pricing model, also commonly referred to as a consumption model and pay-as-you-go, the subscription price to be paid is directly linked to its usage or consumption by the customer. The pricing in such a model is much more variable as it usually includes a fixed base rate that remains constant and then a consumption rate that is variable. This type of model is common in mobility subscriptions, especially cars, and is often combined with other pricing models such as the tiered-pricing model.
When to use - when subscription companies have the means and capacity to monitor the usage of the product
Pros - considered to be the most flexible model for customers. Low, upfront costs help attracts more customers.
Cons - tends to be more complicated for the business.
4. Pre-added pricing module
In the pre-added pricing model, the product price is based on the functionality offered or selected by the customer. There is typically a base product and the possibility to add modules to enhance functionality. Usually, adding more functions also increases the subscription price, but sometimes the customisation options are offered to the customer so that the customer can only pick parts they need.
When to use - when function modules can be easily added to the base product and the customer finds value in these additional functions.
Pros - higher upgrade potential. Product scales with the customer.