What Recurring Revenue model is best for my business?

1 Answer

  • 1 month ago

    What your product is and what your revenue goals, long term and short term, are matters.

    An established business can have consistent and predictable revenue by using a multi-year subscription model.  That means you have contracts which run for multiple years which the customer is locked into.  Think cell phone plans up until just a few years ago or ISP/cable companies.  You have to sign up for 2-3 years and owe big penalties if you cancel early.  For you, this means a consistent revenue on that client for a known amount of time.  You collect payments either monthly or annually depending on your business.  Also include an auto-renew clause in your contracts so that if they don't cancel after the initial 3 years term the contract renews for another year.  That reduces the chances of cancellations which reduces re-sale efforts (thus your expense).

    If you need more up front cash/revenue, then you can do an up front one-time fee with smaller monthly fees going forward. Public companies have to structure it to make sure the fees are associated with setup, install, etc to properly recognize the revenue, but it wouldn't matter for a private company.  The advantage here is you get money up front.  The disadvantage is your on-going revenue stream is lower meaning you have to have more sales' efforts to keep your revenue consistent.

    In the software/SAS industry, Salesforce runs on the first model where it charges a large per user license fee which is due every year, but it has no up front costs to purchase.  Oracle traditionally has been on the second model as you would have to purchase their software for high dollar and pay a small fee going forward for users and upgrades.

    There are other models out there as well you can look up, but again it depends on your product and revenue goals.

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