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Heather Serdoz
June 16th, 2022

What Is Recurring Revenue and Why Does It Matter?

We’re sharing everything you need to know about recurring revenue, and how you can cash in on it — literally.

Table Of Contents

Getting new customers through the virtual door is always going to be a top priority when you’re running an eCommerce business, but it’s only half the battle. With acquisition costs on the rise businesses are looking for smart, scalable ways to increase sales every month.

As of late, we’ve seen a huge rise in advertising costs, thank you iOS 15, but maybe that was the push we all needed to begin looking at retention as a key player in our marketing strategies.

Recurring revenue business models aren’t new, but more and more DTC brands are realizing the stability that can come with more predictable revenue. For this reason, it’s important to have an understanding of what recurring revenue is, the benefits that come with a recurring revenue model, and why you might want to consider adding a recurring revenue channel to your business.

What is recurring revenue?

So what is recurring revenue? Great question, we’d love to tell you. In its simplest form, recurring revenue is the portion of a company’s revenue that is expected to continue month after month. Unlike one-time sales, recurring revenue is predictable, stable, and can be counted on to occur at regular intervals with a relatively high degree of certainty.

Examples of recurring revenue can be found across all kinds of industries. We see it pop up in things like membership programs, product subscriptions, service agreements, etc. When the pandemic hit we saw a huge shift to online shopping, and businesses across industries began transforming themselves to fit into the recurring revenue model; however, there are several types of businesses that are best suited for this.

  • Content-based: Content-based businesses that provide access to content, digitally or physically, have been very successful with a recurring revenue model. We see it with magazine subscriptions, audiobooks, digital books, news outlets, photo libraries, and streaming services.
  • Service-based: Instead of a one-time transaction to purchase a service, service-based businesses will offer access to their platform on a recurring basis. We’re starting to see this pop up all over in the form of educational courses and language learning apps.
  • Product-based: Probably the most well-known out of the three, product-based recurring revenue models are popping up everywhere. From clothing to cleaning supplies, customers can subscribe to a wide variety of products and have them delivered to their doors on a regular basis.

What does recurring revenue mean in eCommerce?

Stability. Stability. Stability.

Recurring revenue streams allow an eCommerce business to establish an expected monthly revenue that makes planning for future growth possible. Many brands have structured their recurring revenue streams through subscriptions and there are several ways they can really benefit from implementing this model.

Predictability

The first and probably biggest benefit is predictability. We know that subscriptions offer a reliable, recurring revenue stream, but they can also help predict inventory needs. Because of the nature of a subscription business, merchants are able to manage their inventory more effectively, enabling them to meet consumer demand while limiting the risk of overstocking.

Predictability can also look very attractive in the eyes of potential investors and stakeholders. Brands that generate recurring revenue are a more stable investment.

Cash flow

The second benefit is cash flow or the amount of money that moves in and out of the business on a regular basis. Cash flows in when consumers make purchases or when investors add funds to the pot. Cash flows out when the brand spends money on resources like employees, marketing, infrastructure, etc.

A subscription model can help brands maintain a positive cash flow because they are recurring in nature. There is a kind of freedom that comes with predictable revenue that allows brands to reinvest in themselves through product development, marketing, and testing. In addition, the positive cash flow lets brands settle debts and return money to their shareholders.

Acquisition costs

As mentioned above, lowering acquisition costs is a top priority for most marketers in today’s economy. But it’s not just the economy brands should worry about. Acquiring a new customer is 5x more expensive than retaining an existing one. That alone should drive marketers to put their retention strategy first. When brands focus on their existing customer base, they increase their customer lifetime value or CLTV which will improve their return on customer acquisition costs.

Insights

The final benefit is all of the insights you have to gain from knowing your customers. Never underestimate the power of having a direct conversation with them. Specifically, with subscriptions, brands have a unique opportunity to better understand what their customers want and how to deliver with that intel.

Why you might want to add a recurring revenue channel to your business

Research done by Frederick Reichheld of Bain & Company states that increasing customer retention rates by 5% increases profits by 25% to 95%. Subscriptions are a great way to boost your retention and cash in on those profit increases, literally.

Thanks to today’s easy tech solutions adding a subscription channel to boost your recurring revenue is a much lighter lift than you might think. You no longer need deep pockets and an in-house web development team to get up and running with subscriptions. That means you can start focusing on increasing those customer retention rates today.

Take Yotpo Subscriptions for example; the easy-to-use app allows merchants to get up and running in just 8 minutes. With a native Shopify integration, you can rest assured that your customers’ experience will be seamless and interruption-free.

Outside of making money, subscriptions are a great inroad to building a strong relationship with your customer base, but it really boils down to the experience. As a brand, we can’t create engagement; our customers are going to choose when, where, and how to interact with us, but we can concentrate on the experience that then leads to engagement.

A recurring revenue channel like subscriptions allows you to create a unique, one-of-a-kind experience for your customers. When brands can optimize the subscription experience for their customers, that’s when both the brand and the customer win.

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