The short answer
Recurring revenue, income that repeats through subscriptions or memberships, is one of the most powerful things you can build into a business. It gives you predictable income and, because buyers pay a premium for predictability, a higher valuation. There are nine proven subscription business models, and at least one can usually work in almost any business.
Key takeaways
- Recurring revenue lifts your valuation: buyers pay a premium for predictable, repeatable income.
- It works in almost any industry: not just software; trades, retail and services can all build it.
- There are nine proven models: from consumables and subscription boxes to private clubs and memberships.
- Predictability changes how you run the business: you can plan growth and understand your customers better.
- Ask 'how could this apply to me?': not 'that would never work in my industry.'
The ultimate dream for many owners is a business that runs with a steady, predictable stream of income hitting the bank account. That is what recurring revenue delivers, and it is not reserved for software companies. Subscription and membership models now run across almost every industry, from wine and dog treats to accounting software and toilet paper.
Recurring revenue is income that repeats, through subscriptions, memberships or ongoing contracts, rather than depending on the next one-off sale. Build it well and you get two things: predictable income, and a more valuable business. This guide covers why it matters, the nine proven models to choose from, and how to make one work for you.
Why recurring revenue matters
Businesses with recurring revenue enjoy a double advantage. First, a steady, predictable income stream, which lets you plan growth knowing the revenue is there to support it, and understand your customers well enough to calculate their lifetime value. Second, and often overlooked, a higher business valuation.
The reason is simple: acquirers pay a premium for the predictability of the income. In valuation terms, there are few things more important than recurring revenue, because it reduces the risk a buyer takes on. Whether you are focused on growth or an eventual exit, embedding a subscription model targets value-driven growth, the kind that also lifts what the business is worth. For how that flows through to a number, see how buyers value a business in Australia.
The nine subscription business models
There are nine well-established subscription business models. As you read them, resist the thought "that would never work in my industry," and ask instead, "how could this apply to me?"
- Membership website. Customers pay a recurring fee for ongoing access to online content, tools or a community.
- All-you-can-eat library. Unlimited access to a library of content for a flat subscription, the model behind streaming and many content businesses.
- Consumables. Auto-replenishing the things people run out of, so they never have to think about it (more on this below).
- Surprise box. A curated box delivered on a schedule, built around discovery and delight.
- Simplifier. Taking a recurring chore off the customer's plate entirely, such as managing home or equipment maintenance for them.
- Network. A model where the value grows as more members join, so each new customer makes the offering more valuable.
- Peace of mind. Customers pay regularly for readiness or protection, insurance-like cover or a maintenance plan that means problems are handled.
- Private club. Membership access to something scarce or exclusive (more on this below).
- Front of the line. A subscription that buys priority: faster service or preferential access for members.
The consumables model in practice
The consumables model suits anything that naturally runs out or is annoying to replenish, from razor blades and dog food to toner cartridges. Dollar Shave Club is the classic example: it delivered name-brand-quality razors to the door each month for a few dollars, taking a thinner margin in exchange for a predictable, forecastable income stream, then added a fun, distinctive brand experience on top. It scaled fast and was acquired by Unilever in 2016 for a reported one billion dollars.
Competing against giants like Amazon on price or delivery is a losing game, so a strong point of difference is essential. Who Gives a Crap built a consumables subscription around recycled toilet paper and a social mission (donating a share of profits to build toilets in the developing world), giving customers a reason to choose it beyond convenience. One thing to plan for: never underestimate the logistics of fulfilling a physical product for thousands of subscribers.
The private club model in practice
The private club model offers access to something of limited supply, on a membership basis, and it works in B2B and B2C, not just prestigious golf clubs. Joe Polish's Genius Network, a mastermind for entrepreneurs charging a five-figure annual membership, is one example; the Harley-Davidson Owners Group, one of the world's largest membership communities, is another. The model suits businesses with something scarce and in-demand among achievement-oriented customers. The secret is not to offer it à la carte: to get access to something truly rare, customers must commit to the ongoing relationship.
Choosing and making a model work
The right model depends on your business, but the principles are consistent. Find a genuine point of difference, because a subscription that competes only on price against a larger player will struggle. Build a strong brand and a reliable delivery of value so customers stay. And plan the operations, particularly fulfilment, before you scale, so growth does not break the model.
Most importantly, keep an open mind. Subscription models work in the most unlikely businesses. The owners who succeed are the ones who ask which part of a model they could borrow, rather than dismissing the idea before testing it.
Recurring revenue and your business value
Come back to the valuation point, because it is the one that matters most at exit. Companies with strong recurring revenue achieve higher valuations, full stop. If increasing the value of your business is the goal, recurring revenue should be near the top of your list, alongside the other drivers covered in 10 steps to increase your business value and owner dependence and your sale price.
Where a good adviser fits
Building recurring revenue is one of the highest-return changes an owner can make, both for how the business runs day to day and for what it is worth when you sell. A good adviser helps you identify which model fits and how it feeds your valuation.
Exit Advisory Group helps owners of businesses in the $3M to $100M range build value and prepare for a strong exit. To understand where your business stands today, explore our business valuations service, or our business sales service if a sale is on the horizon.
Frequently asked questions
What is a recurring revenue business model?
A recurring revenue model is one where customers pay on a repeating basis, through a subscription, membership or ongoing contract, rather than a one-off purchase. It gives the business predictable, forward-looking income, which reduces risk and, because buyers value predictability, lifts the business's valuation.
What are the different subscription business models?
There are nine well-established models: the membership website, the all-you-can-eat content library, the consumables model, the surprise-box model, the simplifier model, the network model, the peace-of-mind model, the private club, and the front-of-the-line model. At least one can usually be adapted to any business.
Why does recurring revenue increase business value?
Buyers pay for confidence in future profit, and recurring revenue is the clearest evidence of it. Predictable, contracted income reduces the risk a buyer takes on, so businesses with strong recurring revenue command higher valuation multiples than comparable businesses relying on one-off sales.
Can a subscription model work in my industry?
Almost certainly, in some form. Subscription and recurring models now run across industries once thought unsuitable, from trades and retail to professional services. The useful question is not whether it applies, but which model, or part of a model, you could adapt to your business.
How does recurring revenue help with an exit?
It targets value-driven growth: the kind that also increases the value of the business. When you come to sell, strong recurring revenue makes the business more attractive and more valuable to acquirers, because it hands them predictable earnings and lower risk from day one.
