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.
By December of 2020, Peloton’s share price had 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.