What your business can learn from Netflix

Why move to a recurring revenue strategy in the first place?

Recurring payments have transformed the way we consume products over the last five years. Movies, TV, music, software, food, clothing and gaming are now regularly paid for in smaller monthly increments.

From a business point of view, moving to recurring revenue brings three main benefits:

1. Recurring revenue reduces your reliance on driving repeat purchase. Having greater stability in revenue forecasting will make your CFO happy, enabling your business to predict revenue months down the line and take action to correct any dips before it needs to.

2. By dropping the price to access your product, acquisition becomes easier and cheaper. Strava and others effectively use tactics like free trials to make it easy to generate large numbers of leads that can then be converted into paying users.

3. Retention rates soar and revenues increase; although the monthly price is lower, businesses generate value over the long term. £9.99 a month seems like nothing, but £9.99 for 12 months over a number of years quickly adds up.

This doesn’t mean you should pivot your business into becoming a subscription model (although this could be an option). Instead, look at the total value you offer to your consumers, and establish if you could create an additional stream of recurring revenue by bundling products and services together.

For a regular fee, could you give your customers exclusive discounts, free delivery, early access to new products and additional support? Not only does this create an additional recurring revenue stream, but it will also reduce reliance on mass discounting and bond your customer to your brand. By creating extra stickiness, you increase the likelihood of people purchasing from you again in the future.

The psychology behind subscription success

People are really bad at comprehending time, regularly reporting we do something (like go to the gym) more often than we actually do. Subscription products tap into this. Simply put, you think you get a lot more value from something than you actually do, resulting in you staying subscribed longer. This all adds up to better retention rates and more revenue per customer over time.

Here are some other ways you can use human psychology to your benefit.

Pain of paying

People treat making small payments differently to parting with large amounts. By breaking a cost up, you remove a barrier known as the ‘pain of paying’. Rarely does a consumer think about the sum of all the payments they will make over the course of their subscription. Instead, they focus on the small monthly cost which is easily affordable, especially when the value of the service received is considered.

Uncertainty of the future

Ownership is becoming less important at a time when choice and flexibility is becoming more so. Subscription models provide exactly this: an easy means of cancelling when it suits the user. Knowing that we can leave something at any time gives us control (if I don't like the product or service, can't use it, or can't afford it, I can quit), compounding our perceived value of the product.

Sometimes less choice is more

Consumers don’t want more choice. In fact, they can become paralysed by it, fearing that with more options, they are more likely to make a bad decision. The best subscription businesses know this, rarely offering more than three or four options (Netflix = basic, standard, premium, The FT = digital, print, digital + print). This reduces barriers to entry by making a decision easier.

What does this mean?

The market has taken note of these benefits and subscription businesses trade at significantly higher price/earnings ratios than non-subscription businesses (Netflix trades at 60 times earnings v Apple’s 29). This has seen their share prices soar, raising capital for further re-investment and generating value for shareholders.

Adobe made the switch and moved its creative packages to a cloud subscription. Despite initial complaints from existing users, they have since grown their user base and increased in valuation over 800%.

Over the next 12 months, expect to see more brands across sectors such as consumer electronics, high street retailers, pay-as-you-go fitness clubs, B2B and food delivery services test recurring revenue strategies alongside their core offering.

What can your business learn from these strategies?

The benefits of recurring revenue are not the sole territory of software or digital-only businesses, but it isn’t for every business either.

Take time to review your brand offering and identify 2-3 new products or services that you could launch to create a recurring revenue bundle. Once you have come up with a group that will offer customers value, test it against the psychological triggers identified earlier:

1. Does the regular fee reduce the pain of paying for your product?

2. Does it offer the customer greater flexibility?

3. Does it reduce friction by removing complexity of choice?

If the output from this framework is positive, then moving your business to a recurring revenue model could be your next move.

If you are keen to explore how subscription services can drive growth in your business, then get in touch with Capgemini Invent.

Richard Carroll is a senior digital marketing and brand consultant at Capgemini Invent.