The Oaks Ignore Their Pleas

Is Recurring Revenue a “Market”?

Posted in General by Jeff Graves on December 19, 2013

Bain Capital director Salil Deshpande wrote an article for Xconomy yesterday in which he examined the trend of firms to offer pricing plans based on a recurring stream of income for the firm, such as monthly subscriptions or usage fees.  The concept itself is certainly a powerful one, and Deshpande makes the point that recurring revenue plans help provide a smooth stream of revenue for a firm, and make it easier for consumers to “take the plunge” and purchase a product or service.  It’s much easier to think of paying $4.99 a month for Spotify, versus the “traditional” way of shelling out hundreds of dollars up front for immediate access to a ton of music.

He goes on to outline the challenges of implementing a recurring revenue model, but the article itself got me thinking about the essence of product management in the digital age.  As an investor, my sense is that Deshpande looks at firms who create a successful recurring revenue stream in a positive light, as well he should.  But simply creating a stream of revenue, while essential to a viable business, is not where companies should be focused.  Firms that simply look for ways to take advantage of the recurring revenue model are not looking out for customers, they’re looking out for their own pocketbooks, and that’s not a model for success.  Our focus should always be on solving problems for people and enterprises first and foremost, and then determining how much (and how often) to charge for that service.  

At the end of the article, he references a number of firms whose product IS essentially enabling recurring revenue models for other companies, and so I suppose in that regard, “recurring revenue” does become a product in it’s own right.  But focusing on a revenue model ahead of a product (which Deshpande does NOT imply, btw), is absolutely putting the cart before the horse.

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