Money November 29, 2019

How important is recurring revenue?

Louis Nicholls @louisswiss

Seems like a lot of questions on IH revolve around "how can I start charging a monthly fee for my product?"

And - IMO at least - the answer is pretty simple: If you want to charge a recurring fee, you need to provide recurring value.

But that leaves an important question unanswered...

What do you do if your product doesn't provide recurring value?

After all, there are plenty of great products like that... books, courses, software people only need to use once (or very irregularly)...

In our IH quest for 'the holy grail' of SaaS-style recurring revenue, I think we've forgotten that it's possible to build very successful businesses with no recurring element at all.

You can make up for the lack of a recurring fee by introducing upsells and follow-on products to sell to your existing audience and customer base. And - most importantly - you need to make sure your customers refer new customers.

Are you selling a product with non-recurring pricing? What worked for you?

  1. 10

    You can of course, but with recurring revenue you'll have stability and predictability. What happens if suddenly you can't sell new books, ex. you get hit by a Google algorithm change like many companies did in the past? You'll end up losing traffic and tons of sales, you won't know how the next 6 months will be.

    Predictability is the best thing that recurring revenue can offer.

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      You're absolutely right about the stability recurring revenue affords.

      That's why - if you have a product or service that can't fit into a recurring business model - you need to have a distribution channel that is as predictable as possible.

      In other words, strong referrals and word of mouth sales.

      For a lot of successful founders, that strong, organic marketing engine provides just as much stability and predictability as recurring revenue would. We don't seem to talk about that enough on IH though.

  2. 5

    All of my revenue is recurring, and there's a lot to like about it. As other commenters have mentioned, it's predictable, I make money while I sleep, etc.

    But there are always two sides to everything. Recurring revenue means that your customers reliably pay you, but it also means that you have to reliably provide your product/service which can be a real burden over the years. My co-founder handles devOpsor us and he basically can't take a vacation anywhere with shaky internet. If our site were to go down and he happened to be camping for the next week, we'd probably lose most of our customers before he got back. 10 years of hard work work down the drain.

    So yeah, I love recurring revenue, but I'm also pretty jealous of people who can publish an online course, make months or years worth of revenue during the first few weeks after launch, and then basically just move on to the next thing. There's something very comforting about the idea of a transactional sale where your responsibilities end as soon as you've delivered the product.

  3. 3

    My product used to be a single purchase that was not renewing. My repeat purchase rate was 20%. I expanded my feature set to include more valuable year round value instead of only being useful on just one day and also added renewing annual subscriptions. My annual churn rate went from 80% to 30% overnight.

    It is crucial from a business perspective to have recurring revenue. Just work to find a way to deliver consistent value to make it worthwhile.

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      Awesome to hear!

      For the benefits of others here who might be in the same position, how did you work out what would get your customers to be willing to sign up to recurring subscriptions?

      Or was it as simple as making it 'default renew' instead of 'default churn'?

      1. 4

        At that point, when I had a couple thousand customers, I had a lot of customer feedback and used my own sense of what to build. It's a fantasy football website, and the tools that I had for one-time purchase helped people prepare for their fantasy football draft. So most customers would use it a few days before their draft and then on draft day. I didn't have any features that could be useful in-season.

        When I added the recurring subscription a few years ago, I did switch it so that there was no option for one-off purchases. When I did that, I added new features that could be useful during the NFL season (who to start & sit). I did get some pushback at the time, and if any users requested that auto renew be turned off, or get a refund, we always processed those requests and were very customer friendly with that. I have a 30-day money back guarantee and people do use it and we honor it if they ask.

        The first year, my in-season tools weren't great, but I have slowly improved them over time. Things don't have to be perfect as long as they're constantly being improved.

        I think the biggest thing for me early on as a solo entrepreneur was the change in mindset. For years, I had thought "my website does X" where X was draft tools for fantasy football. But my customers also wanted Y and Z, and I just never thought that I could do Y and Z, but they were paying for those things. Once I got over that hump of expanding my horizons, then it helped me understand that my job was to just deliver as much value to my customers as possible, even if it wasn't part of my initial, narrow niche. A niche is great to start, but if it's too small then you need to think bigger and let your customers show you what problems they have and solve those problems too.

        One thing that I wish I had done sooner is what I did this past year. In a survey I sent to my email list (paying and non-paying customers), I simply asked two questions: "What fantasy football products and services are you paying for today?" and "What do you like the most of those services?" They were both open textfield responses. I manually reviewed and catalogued all of the responses and found two pretty obvious things that my audience was paying for that I didn't have yet. In my case, people liked having their fantasy leagues synced automatically to the website that gives them advice, and they liked premium written fantasy advice content. I didn't have either of those a year ago. So I added both of those this past year and also increased my prices by about 3X. As a result, I had my best year ever because of those changes.

        So in summary, my advice is to:

        1. Ask your customers what they're currently paying for related to your product.
        2. Expand your mind and be open to growing to those new areas
        3. Build whatever is needed to fill that need and add recurring payments and/or raise prices accordingly.
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          This is very helpful! My product is likely going to go down the same path as yours, starting out with a pay-per-use model until I figure out what end users are willing to pay for on a recurring basis. Thanks for all of the details!

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            Great! Glad to help.

    2. 1

      Adding the questions that @louisswiss posed:

      How did you track repeat purchases? Did your clients have to create an account before making a purchase, or did you track repeat purchases based on certain demographic information provided when utilizing the product?

      1. 1

        Users had to create an account, so I had their email address every time they made a purchase. It's a tool for fantasy football, and people would generally purchase it in August of each year before their fantasy football draft. So I could look at email addresses for purchases in one year versus the previous one.

        I didn't do anything with demographic information for tracking repeat purchases.

        1. 2

          Makes sense, thanks for the response!

  4. 2

    Hey Louis 👋

    Thanks for posting this, I really appreciate the food for thought. I’ve been wondering about “subscription fatigue” for a long time now and the race to the bottom when it comes to competing for a share of monthly spend.. every new SaaS used to be 30/m, now 12/m. Soon 5.

    Business models, market and distribution channels are as fun to think about as product delivery options, features, and value propositions! But it really feels like we’re still in the dark ages when it comes to deeply understanding the myriad of possibilities available and how to make them successful in various combinations.

    Have a great weekend!

  5. 2

    One thing that recurring revenue stream allows for is lowering upfront payment for customers.

    A SaaS I am building will probably be used a couple of times throughout the year by a typical user. However the price I'd charge for one-off purchase would go into hundreds of dollars (I believe the value provided will be much more), and many users would balk at the amount - it's a risk for them, what if they decide they don't need it aftet a couple of months?

    A monthly pay-as-you-go price of, say, $30 is easier to stomach and lower risk.

    At the same time, recurring revenue will give me incentive to improve the product continuosly and free me from wanting to upsell my customers at every opportunity.

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      Question: what if an end user joins, uses what they need from the product within a month, and then unsubscribes? How do you avoid this?

      1. 1

        If they have no need for the product at all afterwards, I wouldn't be upset if they unsubscribed. If they get lower value out of it (use it within one month), I'm okay with them paying less.

        In fact, since my plan is to give 14 or 30 days free trial, such users may end up getting what they want without paying a dime! Financially, this is even worse for me, but I have to accept it as marketing expense (I don't plan on having a free tier).

        The worst case would be a person subscribing, using the product, cancelling, resubscribing again in a few months, cancelling, etc. I hope this won't happen (often), and that users will still see the need for the tool occasionally (maybe every few months) and decide to stick with it.

        All of this is wild speculation on my part, we'll see what happens when users start coming :)

        1. 1

          Makes sense! Thanks for the detailed response!

  6. 2

    My product is going to start out as a pay-per-use model, which I’m okay with because I have no plans to quit my day job anytime soon (i.e., I don’t need predictable revenue). I imagine it’s one of those products that people may use once a year, maybe more if they’re switching jobs often. All I can do in this case is (1) build a high-quality product that will convince people to come back again and (2) make it as easy as possible for them to reuse it after the first time by saving their data in their account.

    Additionally, I’m one of those that believe you can generate predictable revenue from pay-per-use models, especially if a trend has been consistent over a period of time.

  7. 1

    Good answers here.

    Also, a) buyers like recurring revenue b) you are not starting a 0$ in sales every month

  8. 1

    I’m experimenting with subscription model for JavaScript plugins and things are going quite well (first yearly subscriptions have renewed). As businesses will integrate these plugins in their platforms a subscription is fitting IMHO as I offer non stop support as value. Downside is that once the subscription runs and I raise prices, prices of existing subscriptions stay the same. On the flip side with pricing rising each year existing customers automatically have a discount.

    Currently launching a Wordpress plugin that requires zero integration and is more like a web based application, so I expect to have to offer a lot less support, therefor I’m opting for a pay once get a year of updates and support instead of a subscription (similar to desktop software).

    I very much like the recurring nature of both models (expect more churn with second one) it provides a lot of stability.

    I’m also selling plugins on Envato and with the low prices and unlimited updates license there’s no incentive for customers to pay again and income growth is almost non existent. So imho that’s a no go.

  9. 1

    Recurring revenue is great, but the most important way to think about it is creating things that make money while you sleep. So, selling products is a great, and much easier stepping stone, but consistent income that isn't tied to the amount of hours you spend at your computer is the real goal.

    As far as one-time products go, it's a bit more challenge to create recurring revenue, but it's possible to get close by systematizing and automating your process. It won't be entirely as consistent or as reliable as SaaS, but it can move you in the right direction.

    I spent about three years with health issues where my ability to work was severely limited due to surgeries, pain killers, and general fatigue. Thankfully, at the time, I ran a SaaS application that had grown to a solid six-figure annual revenue. It just kept on chugging, and my income actually increased over that time despite me barely working.

    I've written about it as a comparison to what disability insurance would look like.
    https://garrettdimon.com/2016/recurring-revenue-vs-disability-insurance/

    I can't imagine how I would have managed that without recurring revenue. I sold my company, and since then, I've started working on a variety of projects that aren't SaaS. It's definitely a different type of work. I think the key is really to just think of it as a process. What work can you do today that will grow revenue without being directly tied to the hours you're working?

  10. 1

    An interesting trend happening today is the concept of "supporting someone building a thing you're excited about" (eg. Patreon, Seedinvest, etc, but I experienced that people are just as willing to pay for your prototype if you meet them in person and sell them on joining your team as an early adopter).

    Imagine going to your next startup event and mentioning that you're working on an idea with monthly recurring revenue from two people (even if it's just $2); that already puts you above 80% of the room. I'd argue that the early days of recurring revenue is less about profitability and more about signaling to other people - future customers, partners, cofounders - that you're doing the right thing with your time.

    After I finish prototype, my next milestone will be to sell $1 monthly subscriptions to my app for credibility and the added benefit of measuring monthly usage rates.

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