Returning Customers Spend 67 Percent More Than New Customers — Keep Your Customers Coming Back With a Recurring Revenue Sales Model

What is recurring revenue?

Recurring revenue occurs when companies find a way to turn a one-time sale into recurring purchases. For example, let’s say you have a dog grooming business. You could offer a one-time dog grooming session for $50. But you could also ask the customer to join a club that offers unlimited dog grooming for $130 a month.

You might initially think that offer could lose you money. What if the customer comes in every day? Realistically, that won’t happen. Customers will likely come in only a few times per month. Your initial offer doesn’t foster customer loyalty; the next time the customer’s pooch needs a trim, they’ll likely seek out the dog groomer currently offering the best discount. But your unlimited offer keeps the customer tied to your business with an incentive to keep working with you.

“Recurring revenue is the foundation of predictable, sustainable growth,” explained Berns Lim, chief automation officer at WunderWaffen. “Instead of relying on one-time sales, businesses can build long-term stability by creating revenue streams that renew automatically.”

The benefits of recurring revenue

You might think giving customers a deal on more frequent product or service use will only benefit their pocketbooks. Instead, your business will thrive because of the benefits of implementing this model.

“Recurring revenue is the holy grail for investors or buyers of companies,” said Kimberly DeCarrera, fractional general counsel and chief financial officer at Springboard Legal. “So, if you are looking to get more money in the door from an investor or a buyer, look for ways to incorporate recurring revenue into your business model. It doesn’t even have to be all of your revenue — just a significant portion. If you can make it 25 percent of the revenue, it gives them something to build off, as well as cash flow confidence. This raises the enterprise value of your business, leaving you with more money.”

Consider the following upsides to implementing a recurring revenue model:

• A recurring revenue model brings reliable income: With recurring revenue, you won’t have to guess how much business you can drive in the door each month. As long as you do a good job of keeping your recurring customers, you can count on that revenue — in addition to any new business that might drop in. “For many businesses, the biggest benefit is being able to forecast revenue out for many months ahead,” DeCarrera said. “Once you have a predictable amount of recurring revenue, this gives you the confidence to continue to grow your company — hire new employees, new marketing campaigns, new locations, new investments in technology or other resources.”
• A recurring revenue model helps build customer relationships: In a recurring revenue model, you’ll frequently interact with the same people. This communication level will help you build and grow customer relationships while gaining the knowledge and tools to provide excellent customer service.
• A recurring revenue model boosts customer retention: If a customer tries your service once and leaves, you have little chance of fostering customer loyalty. In contrast, a recurring revenue model can increase customer retention — as long as you continue to provide value.
• A recurring revenue model can boost cash flow: Operating in a recurring revenue model can help solve cash flow problems. Membership payments are typically set up automatically. You’ll receive that revenue whether or not the customer takes advantage of the services offered. “One of the unappreciated benefits of recurring revenue is that it lowers your budget for customer acquisition,” said DeCarrera. “You don’t need as many customers for your business if you have a few dedicated customers that are consistently buying from you.”
• A recurring revenue model can increase profits: A recurring revenue setup requires no additional expense outlays. You receive money in a timely fashion whether or not customers avail themselves of your services.
• A recurring revenue model can increase marketing effectiveness: Once you know the percentage of customers in your recurring revenue model, how many will continue in the program and how much profit you’ll gain through them, you can outspend your competitors in advertising. For example, say you have a product or service you sell for $10 upfront or $20 monthly. At least 30 percent of your customers take the recurring offer and the average membership lifespan is four months. Your average customer lifetime value is $34. However, your competitor offers the same product without a recurring model, making only $10 per sale. You know you can outspend the competition in advertising by 3.4 percent per customer — enough to dominate any market. 
• A recurring revenue model is easy to scale: Scaling is easy with a recurring revenue model. Nonusing members finance marketing to more customers and nonuse by some allows use by more. For example, a gym may have 500 members but only a fraction of them use the equipment at any one time.

“The benefits of recurring revenue are undeniable,” said Lim. “Predictable cash flow. Higher customer lifetime value. Easier scalability. Stronger relationships. Instead of chasing new sales every month, businesses can focus on refinement, innovation and long-term growth. The right recurring model transforms a business from a constant hustle to a well-oiled machine, running efficiently, scaling intelligently and growing sustainably.”

How to earn recurring revenue in your business

Building a steady stream of recurring revenue can transform your business, providing financial stability and long-term growth. Instead of relying on one-time sales, a well-designed recurring revenue model keeps customers engaged and consistently investing in your product or service.

“To earn recurring revenue, businesses must start with a service or product that delivers continuous value,” said Lim. “Customers need a reason to stay engaged. A strong pricing model helps — tiered plans, annual commitments or usage-based fees can all work. But the real key is customer experience. If renewals feel like a hassle, customers will leave.”

Lim told business.com the steps companies should take to expand their revenue sources include:

1. Create a service or product that justifies recurring payments to give customers a reason to keep coming back. This can include artificial intelligence (AI) automation, software licenses and consulting retainers.
2. Develop pricing models offering tiered pricing, usage-based fees or annual subscriptions. This helps retain customers by making them want a premium version, turning them into loyal buyers.
3. Create a customer success framework by performing regular check-ins, onboarding and engagement. You need to keep customers invested and you can’t do this by not interacting with them.
4. Show customers why it’s easier to stay subscribed than to leave by offering no-brainer value propositions. If they try to unsubscribe, have a pop-up to convince them to stay.

“The biggest part of having recurring revenue is that you have to continue providing great value to the customer,” said DeCarrera. “No matter what your service or product is, you must bring the value. As soon as the customer feels that the value of your offering has dropped below what they are paying, they will cancel or downgrade your offering.”

Utilize AI to your advantage

On top of setting your business up for recurring revenue with the above steps, Lim suggested companies use AI to assist with additional tasks. This way they’ll have additional help to retain customers and maintain a sense of appreciation.

“Getting customers to buy again and again isn’t just about automation,” he said. “It’s about trust. Deliver value, communicate consistently and anticipate their needs before they do. AI and analytics help predict churn, identify upsell opportunities and personalize incentives. A frictionless experience ensures loyalty. When customers feel like they can’t afford to leave, you’ve done it right.”

Types of recurring revenue for your business

Don’t think your company has a product conducive to the recurring revenue model? You might be surprised. With a little creativity, any company can implement this model. 

Here are a few examples in various industries:

• Membership rewards: In a membership rewards scenario, a business provides value and engenders loyalty and repeat business. For example, a gas station offers gas rewards or discounts to any customer who signs up for a $5 to $10 monthly membership. In this scenario, loyalty will generate significant money for the business. A nonmember will go to any station, but a gas club member will ensure they fill up at your gas station. Grocery stores, partnering with gas stations, are implementing this model nationwide.
• Legal information packages: Small businesses often need advice and help from a business lawyer. However, paying an expensive lawyer’s retainer fee may not be appealing or cost-effective. As a solution, a law firm could offer four 30-minute sessions with a junior attorney for $150. Customers can use the arrangement to get their questions answered. Moreover, they’ll be more likely to turn to that law firm when bigger issues arise. The law firm enjoys steady income and loyal clients.
• Retail frequent buyers’ programs: Retail stores can offer memberships or customer loyalty programs that give customers discounts on specific products or services. Customers are incentivized to save money and gain rewards, while the store enjoys customer loyalty and the potential for repeat business. For example, Petco has a program that offers discounts on grooming and monthly cash-back incentives for in-store use. Additionally, Costco uses a straight membership model that allows customers to shop at its discount warehouse exclusively.
• Software-as-a-service (SaaS) models: Software companies use cloud computing to implement a SaaS recurring revenue sales model for software usage. For example, businesses and individuals use Microsoft 365 and QuickBooks online via a SaaS model.
• Streaming entertainment: Entertainment companies like Spotify and Netflix use a recurring revenue model to allow customers to access streaming content.
• Online courses: Education and training businesses use a recurring revenue model to give customers access to online courses for a monthly fee.

“There are lots of business models for recurring revenue,” said DeCarrera. “… common ways include a subscription service, like for software or streaming. Or it could be a membership service with annual or monthly renewals. Even loyalty programs (buy 10 slices of pizza, get the 11th free) and coupons (10 percent off your next visit) are ways to drive repeat business and recurring revenue.”

People are inundated with choices and exhausted by the numerous options available in today’s product and service landscape. A recurring revenue model makes the customer’s life easier by simplifying and limiting choices and providing unique value. Businesses gain loyal customers and increase revenue. A recurring revenue model, when implemented correctly, is a win-win.

Amanda Hoffman contributed to this article.