A large portion of service-based companies, like fitness studios, seek profit through memberships. Locking a customer into a membership results in a highly sought after business asset: recurring revenue.
What is Recurring Revenue?
Recurring revenue is any portion of the revenue stream that is expected to continue in the future. Typically, it’s regularly collected from members in monthly or annual intervals. Because it’s certain to be received, recurring revenue is highly stable and predictable, allowing for businesses to accurately project future revenue. It is often the goal for businesses to reach a point of consistent recurring revenue, as it signals long term success and sustained profitability.
Impact of Recurring Revenue on Businesses
Businesses operating on recurring revenue models find benefits in these areas:
Sales and Size
In a recent report, software company Zuora found subscription based business grew at 5x the rate of conventional US retailers. In another report, Retention Science said subscriptions services receive over 5 more orders per customer, and customers are 3x as likely to make repeat purchases within the subscription.
Revenue and Valuation
Companies running on recurring revenue models typically see high valuation multipliers, with investors valuing the companies anywhere between 2-8x its annual revenue. Software provider Adobe famously switched to a recurring revenue model in 2012, and 2016 years later, their stock priced tripled.
Customer interactions evolve under recurring revenue models. Employees can create more personal relationships with customers, as they don’t have to constantly attempt to sell the customer. Continuously providing value over the span of the membership retains customers and deepens loyalty. Studies have shown the lifetime value of a customer is nearly doubled under recurring revenue models.
One of the hardest parts of running a business is selling to a customer for the first time. Under recurring revenue, this task is allayed, as its only required once per customer. Because of this, marketing focus can be redirected to other areas of the brand.
Different Membership & Recurring Revenue Models
There are many different membership structures, but here are the most common for fitness centers:
Hard Contract Memberships
Most phone contracts follow this structure. There is an agreement on the exact length of the membership, and the customer is billed monthly or annually. The most important part of this membership is finding a time period that works for both sides. Businesses want a long guarantee, but customers don’t want to be stuck in bad contracts. It’s vital the happy medium is met.
This closely follows the structure of hard contracts, but there is no set time period. Customers incrementally pay a membership fee and gain access to all services. The ability to opt out intrigues customers who don’t want to make overly long commitments. The most popularized auto-renewing memberships are streaming services like giants Netflix and Spotify.
As the name implies, this model is based entirely on usage. People enlist themselves as members of the fitness center, but only pay for the numbers of uses. The most unpredictable of the three, usage memberships are most beneficial to companies with high customer churn. Prominent non-fitness examples of this model are Blue Apron and Dollar Shave Club.
For fitness studios, this is perhaps the most suitable recurring revenue system. Hybrid memberships are constructed around base hard contracts or auto-renewing memberships, with ancillary revenue streams also included. Hybrid memberships work especially well for studios with fitness classes. Most studios offer classes, but not all members use those classes. The ability for members to buy class sessions in addition to the normal gym membership is considered a hybrid membership.
Upper Hand’s membership management platform allows you to build a comprehensive membership plan for your business. Our software grants you everything you need to grow your member base and obtain stable recurring revenue. With features like automated billing, customizable offerings, and easy membership conversion, Upper Hand’s software will set you up to perfectly implement these recurring revenue models.
Click here to see how Upper Hand’s memberships can help your business.