Peloton’s Recurring Revenue Model: One Size Fits All?

Have you struggled to identify a recurring revenue model that works for your business? If so, you’re not alone. Most operators understand the benefits of establishing a stream of recurring revenue, such as predictable cash flow and an increase in their company’s valuation, but struggle with where and how to start. Quick fixes like changing your pricing from a one-time transaction to a smaller, recurring fee does not make a sticky subscription model. The first step to creating a recurring revenue model for your business has little to do with your billing platform, but everything to do with your target customer. The key to jumpstarting recurring revenue in your operation is to identify your ideal niche and build there.

Find Your Niche

For a recurring revenue model to retain subscribers, it needs to provide an overwhelmingly attractive value proposition to customers and continue to do so over the long run. To create that kind of value proposition, you have to find a pain point where a group of customers feels uniform. That very specific target becomes yours to draw customers and recurring revenue from if you establish and focus that niche. 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 home ownership. He 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 for a phone app which connected subscribers to a repair person who would come out to their homes and performs repairs. Last year Ramer raised $20 million from investors, who saw the opportunity in putting home repairs on subscription. Ramer’s first step in creating Super was not to applying a new billing model to an existing home repair business. Rather, he focused on niching down to a customer group with a common need. To begin segmenting, he picked homeowners. Then he narrowed down further and identified a subsegment of homeowners who are not DIYers. Some homeowners are tinkerers and don’t mind tackling home repairs as they come up, but Ramer knew those weren’t his people. Instead, he chose to focus on the subsection of homeowners that don’t want the hassle and surprises that come with homeownership. He found his niche and offered a solution to their problem.

How Peloton Made Their Subscription Sticky

Peloton, a fitness company that started with a higher-end stationary bike and now includes classes on everything from yoga to running, has adopted a subscription model. Customers buy the bike 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. Instead, they defined their target customer as relatively affluent fitness enthusiasts who don’t have time to go to the gym—once again finding a niche within a larger niche. Year to date for 2020, Peloton’s share price has 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.

Companies With Strong Recurring Revenue Streams Are Worth More

Recurring revenue makes your company more predictable, extends the lifetime value of a customer and ultimately makes your business more valuable. By identifying your best offer to position as a service, you create an ongoing stream of income that has the potential to grow the lifetime value of a customer dramatically. When you can accurately predict how much money you will get from a subscriber, you can invest more in them. The most compelling reason to adopt a recurring revenue model is the impact it can have on your company’s valuation. Dollar for dollar, recurring revenue can be worth more than twice that of transactional revenue, depending on your industry.

If you’d like to see what kind of benefit pursuing a niched down service strategy can provide for your business in terms of real numbers and projected valuation, take 5 minutes to sign up for a free valuation and we’ll provide you a Bond Value Assessment, recommendations for improvement of recurring revenue, and more.