Image courtesy of jscreationzs at FreeDigitalPhotos.net
Selling single-instance items is great. Let’s say you have a product that retails for $30 and you sell one per day. At the end of the first month you’ve sold about $900 ($30 x 30) worth of product. At the end of the first year you’ve sold $10,950 ($30 x 365). Not bad. Sell 10/day and you hit almost $110k/year of sales. Even better. 100/day and you’ve passed a million in annual revenue. Congrats! :)
What is recurring revenue?
Recurring revenue is more of a “subscription model” versus a single-instance sale. Clients in a recurring revenue model remain clients for a long time (if your product and service satisfy or exceed their needs – and is a better option than the alternatives) and they pay for the service on a regular basis over that usage period of time.
For an example, let’s say you provide a product or service that is a good value for the client at $5/month. At this price you sell one solution per day like in the earlier example. At the end of the first month you have $150 ($5×30) of sales. At the end of the second month you have another ~$150 in sales but you also have the monthly recurring revenue from the previous month, so you wind up with $300 of revenue for that month. Then $450 the next, etc. So by the end of the first year your revenue should be $11,700 ($150 + $300 + $450 + $600 + $750 +$900 + $1050 + $1200 + $1350 + $1500 + $1650 + $1800).
Where the recurring revenue model really shows its strength is over an extended period of time. Consider this same example and assume that the sales rate remains the same. In the first year the revenue is $11.7k. In the second year the revenue has that same amount of new growth but it also includes the revenue from those clients sold the previous year. So the $1800 from month 12 continues through the second year adding $19.8k ($1.8k x 12) giving a total of $31,500. And guess what – in year three the $3600 from month 24 carries through to give you $54,900 ($3.6k x 12 + $11.7k).
Whether you are impressed with the $54.9k revenue in year three or not, you have to admit that it’s a lot better than the $10.9k from my single-instance sale example – and that example had a price point that was 6x higher than the subscription retail pricing – yet both examples only sold one product/service per day.
When developing your product-pricing perhaps you should consider the option of a recurring revenue / subscription model. Just be sure to also consider the value to your customers/clients. They probably won’t want to pay for their coffee machine monthly for as long as they use it, but they will be more open to the idea of paying monthly when there is a true benefit of value being provided consistently over the usage time frame.