Most business owners understand the benefits of a recurring revenue stream. Predictable cash flow provides peace of mind as well as an increase in a company’s valuation. But it can be difficult to know where to start. Just changing the way projects are set up and invoiced does not guarantee recurring business.
Instead of simply switching from single transactions to smaller, recurring fees, think about how to focus on your target customers and how to make a sticky subscription model. Here’s how two companies created successful revenue streams that appealed to their customers. By using these examples as a guide, you can set up your own recurring revenue model.
Drill Down to Your Target Customers
The first step has nothing to do with your billing platform or pricing packages and everything to do with your target customers. The secret to reimagining your business and setting up a recurring revenue juggernaut is to drill down, way down.
For a recurring revenue model to retain subscribers, it needs to provide an outlandishly attractive value proposition to customers who agree to continue with the service month after month. To create that kind of loyalty and delight, you have to find a pain point where a group of customers deals with a similar issue. That only happens when you drill down into your customer base.
For example, when Jorey Ramer moved to the San Francisco Bay area, he purchased his first home. Ramer had previously been a renter and was surprised by all the hassles that came with owning a house.
Ramer realized that everything from the ice maker in his fridge to the lighting in his backyard was susceptible to failing. He decided to create Super, a subscription-based service that would allow homeowners to pay one, flat monthly fee for home repairs. This subscription gave homeowners access to a mobile app where they could summon a repair person to fix just about anything that might break down in their home.
Ramer’s first step in creating Super was not to put out a shingle as a home repair professional with a different billing model. Instead, he focused on drilling down to a customer group or segment with a common need. To begin segmenting, he picked homeowners. Then Ramer went further and identified a subsegment of homeowners who are not do-it-yourself types.
Some homeowners are tinkerers and don’t mind digging into a “honey-do” list every weekend, but Ramer knows those aren’t his people. Instead, he chose to focus on the segment of homeowners that do NOT want the hassle and surprises that come with homeownership.
Perhaps a recurring service package will include spring start ups, in season system checks and then winterization. Or a package might include spring and fall landscaping cleanups along with color plantings. How the services are packaged is not as important as making sure they’re set up to serve the needs of your target customers.
Make the Subscription Sticky
By “sticky,” we mean increase the chances that the customer stays with the subscription month after month. A subscription that meets a need or solves a problem is the most sticky. When the payment pops up on their bank account, a customer chooses to keep that type of subscription because they believe it adds value. They may even view it as a subscription they can’t live without.
Here’s an example: Peloton, the fitness company, started with a souped-up stationary bike. Now they also provide classes on everything from yoga to running, and they adopted a subscription model as well. Customers buy the bike (or the treadmill), and then subscribe to Peloton’s content package to gain access to the classes.
To make Peloton’s subscription sticky, they didn’t just target people who wanted to get fit. Many of those types of customers were happy to go to a gym before the pandemic. Instead, Peloton targeted relatively affluent people who are too busy to go to the gym.
While the single twenty-something sees a spinning class at his local gym as a chance to connect with like-minded people, Peloton knew the relatively affluent forty-something mom with three kids often doesn’t have the time to go to the gym. By clearly defining the needs of their target customer, they were able to address a pain point and make their subscription sticky. As a result, Peloton’s share price more than tripled in 2020.
If you’re struggling to come up with a recurring revenue model that works for your contracting business, think about how Super and Peloton accomplished it. Segment your customers by drilling down to what makes them buy from you and how you can address their pain points. Then determine if one of your segments has a recurring need and how you can set up a subscription that provides consistent value.
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