Recurring Revenue – A Dangerous Business Model

I see a lot of people who are chasing recurring revenue streams or ‘passive income’. In my opinion they are putting their businesses at risk. The theory goes like this:

“I’m going to create a product or a service and charge £29 per month. If enough people subscribe I will have passive, recurring revenue – yippee!”

I don’t believe this idea is as simple as it sounds because things are moving faster than ever. Business is moving in dog years – every year in business now is like 7 years of business in the 20th century.

This makes recurring revenue models a very risky business for a few reasons.

Firstly, most recurring revenue model businesses LOSE money on a customer for the first 6-18 months. The cost of attracting the client, making the sale and delivering the on boarding process comes in fast but the income comes in slowly. By the time you factor in the costs of servicing a client, the drop-off rates across all clients, it could be year 2 or 3 before you’re making any profit on a client.

3 years is an awfully long amount of time. 3 years ago your phone was different, your house was different, your job was different and the world was different. Trusting that people will continue to pay for several years is a big gamble.

Secondly, fundamentally people pay for value and are only satisfied if they get more value than the money that comes from their bank account.

For you to produce something of value you need relevant insights that are right at the time they are delivered. If you’re selling technology, it’s based on current insights – no point trying to help people with their MySpace page anymore. Not only do your products need to be fresh, but the method of delivery does too.

In a fast paced world, things change year to year. Insights are exceeded year to year and new methods of delivery emerge.

In reality, very few products remain relevant for very long and customers would prefer getting the value as fast as possible NOT spaced out over years.

Let’s look an alternative.

If you did miraculously manage to keep someone paying £29/month for 3 years you’d have billed £1044 all up. What if you instead, found people who really valued your current insights and you solved problems for them. Instead of £29 a month, you focus on selling something for £2000. After you make a sale, you focus all your energy on serving your client fully and delivering them value in months not years.

If this sort of client buys from you once a year or refers you a new client once a year, you’ll make £6000 over 3 years. That’s more than 5x the recurring revenue model.

Signing someone up to a recurring payment model often still requires a sales call, a direct debit form and a service hotline. Is it five times harder to make a sale for £2000? It’s actually easier in most cases because people want their problem solved now – not across the next 36 months.

Some people would say that some businesses are suited to recurring revenue models and I would agree. They are often huge businesses that serve thousands of customers. Telco, insurance and property are all businesses that tend to lend themselves to the recurring revenue model mainly because the cost of establishing an offer in these markets costs millions – that cost has to be broken down across many people and over a long time.

Rethink the ‘passive income’ model. Most of the time it’s not as passive or profitable as you first think. Far better to deliver as much value as you can, as fast as you can for people who really love what you do.