Transactional selling is a sales approach that focuses on making individual sales transactions with customers. This typically involves one-time purchases. In a transactional approach, the primary goal is to close a sale quickly and efficiently. Here, there is often a strong emphasis on product features, pricing, and immediate customer needs.
However, companies are now able to track more data metrics than ever. Consequently, their interaction with clients has evolved from being merely transactional to being more continuous. Companies can use new data to better understand the value they offer customers on a detailed level.
Therefore, in many industries and markets, there is a growing recognition of the importance of building long-term relationships.
Focusing on customer satisfaction delivers repeat business. As a result, some businesses are moving away from a purely transactional selling model. Instead, they are pursuing in a more consultative and relationship-based approach.
With recurring revenue models, customers “subscribe to” and pay for products and services on a regular recurring basis. These models frequently benefit from ongoing assistance and enhancements provided by the vendor to clients.
In the face of unstable economic circumstances, companies need to be ready to handle market fluctuations. Numerous businesses function in sectors that are highly susceptible to a phase of economic decline. Recurring revenue models, such as subscription models, can insulate against this volatility.
What are the benefits of moving to recurring revenue?
Solving pain points for suppliers:
- Guarantees consistent earnings via recurring revenue, resulting in a more reliable cash flow
- Enhances customer interactions to boost the account worth throughout a product's lifespan
- Expands the potential customer base as the initial monetary hurdle to buy is lowered
- Transitions the budget from capital expenditure to operational expenditure, potentially streamlining the sales/procurement procedure
Solving pain points for customers:
- Matches expenses with the product's received value
- Facilitates gradual payments for better cash flow management
- Eliminates purchase risk as suppliers are motivated to sustain performance over time
- Offers adaptability if requirements or usage vary over time
- Minimizes downtime since products are often maintained, fixed, or substituted as part of the contract
- Often, customers feel they receive a higher level of customer service
Risks with transactional selling
Transactional models rely heavily on acquiring new customers consistently. If there's a decline in new customer acquisition or increased competition, it can impact revenue quickly. Your business might be more susceptible to market fluctuations, seasonal trends, and changes in consumer behavior.
Economic downturns or shifts in consumer preferences can have an immediate impact. And since the focus is on one-off transactions, building customer loyalty may be challenging. There's a risk that customers will choose competitors for similar one-time purchases.
Risks with recurring revenue models
Of course, recurring revenue models also come with their own risks. Acquiring customers in recurring models may involve higher upfront costs, including marketing, onboarding, and potentially offering trials or incentives to encourage subscription sign-ups. The risk of customer churn is also significant in recurring models. Losing subscribers can impact revenue, and reducing churn becomes crucial for sustaining long-term profitability.
It may take a longer time to reach profitability in recurring revenue models due to higher initial investments and the time required to recoup acquisition costs.
Recurring models vs. transactional selling
While transactional sales offer agility and quicker revenue generation, recurring revenue models provide stability, the potential for long-term customer relationships, and the opportunity for ongoing revenue streams.
The choice between the two depends on factors such as the nature of the business, target market, and long-term goals. Many modern businesses are adopting hybrid models, incorporating elements of both transactional and recurring approaches to diversify revenue streams and balance risk and reward.
How to move away from transactional selling
Based on Simon-Kucher's extensive experience with these models, we have identified seven key decisions that companies need to make when moving away from transaction selling:
- Expansion approach: Is the recurring revenue model going to be the core of your market proposition, or an additional option in specific competitive scenarios? Regardless of the ultimate goal, our suggestion for established businesses is to experiment and learn with a segment of the business and market before scaling up.
- Pricing structure: Products can be priced on a steady subscription basis or more fluctuating, results-oriented models. The latter is more linked to performance (i.e., value) and the responsibility of risk and reward is mutual. Combined models are also feasible.
- Pricing metric: Your pricing metric should mirror how a customer perceives value, especially crucial in performance-based models. For instance, instead of pricing a piece of machinery, a price per ton excavated or per hour of operation might better correspond to value provided. The capability to precisely measure the data and agreeing on this as a performance measurement standard is crucial.
- Pricing level: In a risk-sharing model, there should be some potential for profit (and possible loss) compared to a conventional model. Ideally, any additional innovation or advantage over the traditional model is automatically recognized. This implies that on a comparable performance basis, the revenue difference is minimal. If customers will achieve higher performance due to, for example, predictive maintenance or upgrades, then they should pay more than they currently do.
- Product range: More diverse product portfolios allow access to a wider variety of customer segments and facilitate more consistent monetization of innovations. Packages include, or scale access to, certain tangible and intangible benefits that customers choose themselves to suit their needs. New features can be added to premium packages or sold separately to ensure that innovations continue to generate revenue.
- Promotion: The messaging and value proposition for the new product or service will need to be modified to reflect the new market entry strategy. Consideration should be given to whether the model should function within the existing business or as a separate brand.
- Sales strategy: It's important to train the sales team for a more consultative sales approach. The new model may require different skills, incentives, and potentially a different sales process or structure. The approval of the budget will be different. Hence, the sales strategy must be adjusted to match the updated revenue structure.
KPIs: Recurring revenue vs. transactional selling
Your most important metrics will vary depending on whether your business is focused on transactional selling or operating on a recurring revenue model.
Your KPIs for transactional selling:
- Sales revenue: The primary focus in transactional selling is on generating immediate sales revenue.
- Conversion rate: A high conversion rate is indicative of effective your sales team's efforts.
- Average Order Value (AOV): Increasing AOV can contribute to higher overall revenue.
- Customer Acquisition Cost (CAC): Knowing the cost to acquire a new customer is critical in transactional selling. It helps in assessing the efficiency and effectiveness of marketing and sales efforts.
Recurring Revenue Models:
- Monthly Recurring Revenue (MRR): MRR is a fundamental metric for subscription-based businesses. It provides visibility into the predictable revenue generated on a monthly basis.
- Churn Rate: Reducing churn is a key focus in recurring revenue models. Measuring the percentage of customers or revenue lost over time helps in understanding and addressing customer retention issues.
- Customer Lifetime Value (CLTV): CLTV is vital for assessing the long-term value of a customer in recurring revenue models. It helps in justifying acquisition costs and guiding marketing strategies.
- Net Revenue Retention (NRR): NRR takes into account expansion and contraction revenue, providing insights into the overall growth or contraction of revenue from existing customers.
- Customer Acquisition Cost (CAC): While also relevant in transactional models, CAC becomes more meaningful when compared to CLTV to ensure sustainable growth.
- Average Revenue Per User (ARPU): ARPU is essential for understanding the average value generated by each subscriber. It can guide pricing strategies and revenue projections.
- Expansion Revenue: Tracking the revenue generated from existing customers through upsells and cross-sells is crucial for increasing the overall customer value.
- Gross Margin: In recurring revenue models, maintaining a healthy gross margin is essential for covering operating expenses and ensuring profitability over the long term.
The key difference lies in the focus on long-term relationships and predictable revenue in recurring models. This is in contrast with the emphasis on immediate transactions and individual sales in transactional selling. While some metrics, such as CAC, can be relevant to both approaches, their interpretation and importance may vary based on the underlying business model.
Preparation and testing are crucial for success
When changing to recurring revenue models, it's important to consider and test various elements in the design and implementation process. Here are three of the most important ones:
- Measurability means being able to confidently measure how well your solution improves business performance for customers. Measurability also helps you avoid revenue leakages as customers try to “game the model”.
- Transitioning to a new revenue model needs clear communication and training to show the financial benefits. It must be well planned. This preparation also helps you to avoid customer backlash and minimize short-term churn.
- Client onboarding: It’s crucial to ensure that customers effectively use the solution. Slow adoption and incorrect use will lessen the benefits for the customer, hurting your profits.
Are transactional sales a thing of the past?
Transactional sales are not necessarily a thing of the past, but there has been a significant shift in many industries toward relationship-based selling models. The evolution of consumer behavior, increased competition, and advancements in technology have contributed to this shift.
Switching to a recurring revenue model may not be appropriate for all businesses or circumstances, for instance, those offering highly personalized solutions. Nonetheless, during periods of market instability, shifting to different revenue structures can aid in extracting value from clients who might be postponing purchases or considering more affordable options.
So, while transactional sales still have relevance, especially in certain retail settings or for specific types of products, the trend is toward relationship-based selling.
Businesses that prioritize understanding customer needs, providing excellent service, and building long-term connections are often better positioned to thrive in the current business landscape. The key is finding the right balance that aligns with the nature of the product or service and the expectations of the target market.
Whatever your industry, we know how to optimize your pricing and sales models. Reach out to Simon-Kucher today!
