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May 03, 2012

Making Money the New Fashion Way - Recurring Revenue and You

By Peter Bernstein, Senior Editor

In a previous posting, I took a look at the business transformation that is sweeping the Internet as “E”verything becomes a service. While falling almost into the category of “having a keen grasp of the obvious,” the facts are that the desirability for business and organizations of all shapes, sizes and locations to be able to have predictability, stability and flexibility in their revenues is driving them to adopt recurring revenue models. There may be gold in traditional one-time sales, but the ability to have continuous revenues is not only good for planning purposes, but also provides a platform for increasing customer loyalty and product differentiation along with risk mitigation. 

As the moderator of a recent webinar “Picking the Right Recurring Revenue Model: Would you rather be Netflix or Blockbuster?” (which featured experts from Aria (News - Alert) Systems and The FactPoint Group), it seems appropriate to share some of the insights from that session.  Instinctively we all understand the value of having recurring revenues, but it turns out that selecting a mix of pricing alternatives to customers that is right for your special circumstances is not as easy as it looks. In fact, this is a case where you can’t tell the players without a scorecard, and once you have the scorecard you need to field a team that gives you the best chance to win. 

What you need to know

With that said, below are a few things that hopefully titillate your interest.

First, there are three commonly used recurring revenue models whose ins and outs are table stakes for getting on the road to success:

  • Subscription: Fixed payment for a good or service over a specific period of time — a day, a month. Other terms may include flat rates and membership.
  • Usage-based: Charges per use or per unit of service. Other terms can include metered usage, pay per use, pay per view and bandwidth billing.
  • Subscription plus usage: Combines fixed subscription for service level, with “overage” billed as extra charges. Other terms would include combination billing.

They all start with the fact stated by Tim Clark (News - Alert), Partner, The FactPoint Group, that, “Combining the subscription with the right pricing model, requires sellers to understand what works for customers.” But things can get complex fast. For instance, based on the recurring revenue type things to be considered include: frequency, product add-on’s, usage, units and overages, upgrades, pricing tiers and various sales taxes. In regards to the choice of pricing model that will be used with the revenue one considerations include: changing quotes and orders, renewals, entitlements, terms and conditions and customized pricing.

What was most interesting was the discussion about each of the above as they relate to the benefits for service sellers, customers and areas where both benefit. I will not spoil your taking a deeper dive except to say that while the benefits to the sellers (the aforementioned predictability, stability and flexibility) tend to be the ones that grab the most attention, the benefits to customers and how the change in the buyer/seller relationship is a win/win for both parties are worth considering. Interestingly they also are centered around the same three terms, despite the different perspective. Recurring revenue models basically are pay-as-you-go and pay-as-you-grow. This results if CapEx and OpEx savings for buyers and sellers, along with enabling the ability to be both proactive as well as reactive. 

The last point given today’s laser-like focus on improving the customer experience and thus creating better customer intimacy which can lead to significant value-added to the seller as trust is translated into up-selling opportunities, less churn and the customer potentially as advocate, is a critical capability.

In fact, as seen in the graphic below, recurring revenue models enable buyers to monetize relationships as customers move from one type of experience to another.

Where Aria Systems comes into the equation is with its Cloud-based billing and subscription management solution. It is an extensible platform that integrated front and back office capabilities to improve customer experiences by enabling the introduction of a recurring revenue model that makes sense for a given user. The webinar has several real-world examples of how Aria Systems has assisted important customers find a model that works for them. These included: Internap (News - Alert), DigitalBridge Communications, Issuu, VMware, Disney and HootSuite.

I have saved what may be the best for last. For those of you with a thirst to learn more, Aria System’s Founder Edward Sullivan has authored “Subscription Billing for Dummies.”  A click on the link will take you to a page where you can download this informative guidebook. I like to think of it as “E”verything I want to know about the subject but until now was almost afraid to ask. Enjoy!

Edited by Carrie Schmelkin
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