Recurring revenue management is a crucial component of every subscription-based business. Analysis of recurring income offers a wealth of significant hints and insights about business activities. Investors consider it to be one of the key determinants of a subscription-based company’s valuation. It enables managers of the company to determine if the company is growing or decreasing.
Finally, thorough research into recurring revenue business models enables analysts to spot essential patterns in consumer behavior. Based on such analysis, the business can design or modify its plan to enhance the client experience. It can also take action to bring in fresh clients, investors, and income streams.
We will go into more detail about the requirements of subscription-based businesses in this post.
What is Recurring Revenue Business Model?
Most subscription-based businesses operate under the recurring revenue business model. These companies regularly rely on consumers’ subscriptions or agreements to pay for goods or services. Payment frequency varies depending on the services provided. They may come in weekly, monthly, or yearly installments. The well-known Netflix, Internet service providers, and fitness facilities are all examples of subscription-based businesses.
Let’s imagine that your company relies on subscriptions. The worth of all of your subscriber connections, computed for a certain length of time, is your recurring income (month, year). Customer lifetime value, expected future revenues, and average selling prices are determined by monthly recurring revenue.
Analysis of two sets of criteria is necessary for effective recurring revenue management.
- variables connected to billing (business aspect)
- variables associated with processing (technical aspect)
An ideal approach is based on an analysis of each set of elements.
Let’s examine both sets in more detail.
Recurring Revenue Management: Business Aspect
Experts claim that typical recurring revenue business models used today consist of four essential elements that are directly connected to billing. These elements are listed below.
- New monthly recurring revenue. This part of the equation includes revenue from recently acquired subscriber revenue.
- Expansion of monthly recurring revenue. Upgraded subscriptions and payment structures are included in this section's value. Customers may upgrade from a free to a paid tier, add additional members, etc.
- Reactivation of monthly recurring revenue. The value of reactivated and unfrozen payment plans, as well as returning customers, is included in this component.
- Churn monthly recurring revenue. The only unfavorable element out of the four is this one. The value of clients who downgrade or terminate their subscription plans is reflected in it.
- Additionally, churn revenue analysis aids businesses with recurring revenue in comprehending the primary causes of client attrition. Therefore, this element may be the most crucial one in terms of analysis and feedback.
A company should thoroughly examine each element and change within it throughout the reporting period. The quantity and causes of subscription cancellations and freezes should be easily visible to managers. A consumer may be given an alternate product if they terminate their membership with the business (and, potentially, turn churn into expansion). Upgrading the service to a major offering may be advantageous for those who are currently utilizing ordinary subscription levels.
Billing-related variables enable a corporation to assess the nature of changes and modify its tactics as necessary. The firm also becomes more responsive and effective when resolving the relevant consumer concerns as a result of the analysis.
Recurring Revenue Management: Technical Aspect
Issues arising from processing-related or technological causes include when payments don’t go through. A company must be prepared to handle these problems.
The company should have declined recycling methods in place for when transactions are rejected.
The business should have options for subsequent reattempts of the first payment with a “link to deny recycling” to solve circumstances of “insufficient money.” At the same time, account updater logic may be used to deal with problems like expired cards and changed account numbers.
For instance, changes to the cardholder’s name, expiration date, or spelling of their name might all result in rejects. They must be manageable for the company.
While a decline is a one-time occurrence for a retail company, it may become a huge concern for a recurring revenue business model. Depending on the cause of the decrease, the decline may return again. And if specific declining factors predominate, it seems reasonable to investigate whether there is a problem.
A transaction’s formatting may need to be changed in specific cases. As an example, suppose the “recurring” flag is not correctly included in the transaction description.
Decline Analysis Outcomes
The examination of declines yields a wealth of insightful data, just like the analyses of churn and downgrades. The management can respond to various critical inquiries when it has a clear broad picture of the transactions that declined throughout a certain reporting period. Here are some examples of these queries.
- What kind of declines are prevalent?
- Which rejected transactions require reprocessing (retrying)?
- When must the business notify or contact cardholders to confirm their profile information?
- What common scenarios call for the employment of an account updater engine?
The main objective of this analysis is to reduce the decline rate and increase income from consumers who are interested in subscribing.
Transaction Pricing
Examining transaction processing expenses is another critical component of recurring revenue management. Small companies often collaborate with significant suppliers (Stripe, PayPal), giving them set fees (say, 2.9%).
Therefore, unless their transaction volumes increase, smaller companies will have very few choices for negotiating improved processing terms. Businesses that use a “cost plus” pricing model (and pay service fees in addition to interchange) should carefully consider the type and amount of interchange fees they are billed. For instance, you could discover that many of your members use reward credit cards. These cards require pricey maintenance. Therefore, encouraging these clients to move from expensive reward credit cards to ACH or debit cards may make sense.