Strategy Session

How to Create a Recurring Revenue Model That Appeals to Customers

cash flow cycle company's value niche down recurring revenue revenue model May 13, 2022

Have you struggled to identify a recurring revenue model that will work in your  business? 

If so, you’re not alone. 

Most owners understand the benefits of recurring revenue, such as predictable  cash flow and an increase in their company’s valuation, but struggle with where to  start. Just changing your pricing from a one-time transaction to a smaller, recurring  fee does not make a sticky subscription model. 

The first step of creating a recurring revenue model for your business has nothing  to do with your billing platform and everything to do with your target customer. The  secret to reimagining your business into a recurring revenue juggernaut is to niche  way down. 

Niche 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 over the long run. To create that kind of delight, you have to find a pain  point where a group of customers feels uniform. That only happens when you  niche way down. 

For example, when Jorey Ramer, the founder of Super, moved to the San Francisco  Bay area, he purchased a home. Ramer had previously been a renter and was  surprised by the hassles of 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 a subscription model that  would allow homeowners to pay one monthly fee in return for a mobile app where  subscribers can summon a repair person to fix just about anything that could break  

down in a home. 

Last year Ramer raised $20 million from investors, who see the opportunity in putting home repairs on subscription.

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 niching down to  a customer group 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 subniche of homeowners that don’t want the hassle and surprises that  come with homeownership. 

How Peloton Made Their Subscription Sticky 

At Peloton, the fitness company that started with a souped-up stationary bike and  now includes classes on everything from yoga to running, they have adopted a  subscription model. Customers buy the bike (or the treadmill) and then subscribe to  Peloton’s content package. To make Peloton’s subscription sticky, they didn’t just  target people who wanted to get fit, many of whom were happy to go to a gym  before the pandemic. Instead, they 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  forty-something mom with three kids often doesn’t have the time to go to the gym.  Therefore, they defined their target customer as relatively affluent fitness  enthusiasts who don’t have time to go to the gym—a niche of a niche. 

Year to date for 2020, Peloton’s share price has more than tripled. 

If you’re stuck trying to come up with a recurring revenue model that would work  for your industry, segment your customers based on what makes them buy from  you. Then determine if one of your niches has a recurring need for something you  sell.

 

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