Do you open your doors for business and wait until a customer arrives? Wouldn’t it be wonderful if you started your month with a large contract base that covered your rent or overhead? Wouldn’t you be delighted if that revenue was there every month, like an annuity?
Recurring revenue streams consist of predictable revenue sources that are expected to continue into the future for a period of time. Annual recurring revenue (ARR) is a beautiful thing. Rather than beginning your month or year at zero dollars, you have a starting base.
If a business can monetize its existing customer base by establishing long-term relationships, it will be way ahead as compared to selling onesies. Furthermore, when you decide to sell your business, recurring revenue takes center stage.
"When you have a recurring revenue business model, you rarely miss your monthly or quarterly numbers by more than 10 to 20 percent," Jeff Bussgang writes in his book, "Venture Capitalist".
"Your forecasting process is much more accurate," he continues. "At the beginning of the quarter, you start with a base to grow from rather than begin at zero. In a SaaS (Software as a Service) or subscription software business, you can predict your churn rate and new business closings to determine your growth rate. Your management team and investors are rarely surprised by major fluctuations in your results."
Consumers are demanding these convenient consumption models. There are various types of recurring revenue models:
Annual Contracts – Smart phone providers and cable TV contracts provide good examples of ARR. Penalties for early termination lessen premature cancellations.
Evergreen contracts – Contracts that continue "forever," such as document storage.
Another example was Ross Perot’s successful company, Electronic Data Systems. They created a revenue model named Business Process Outsourcing. This model placed IT employees in contracted positions and reaped a healthy profit percentage from those contracts. The contracted employees became so valuable to those companies that they could barely do without them. These contracts renewed perpetually.
Product purchases and consumables – Buy a Nespresso coffee machine and forever buy the coffee capsules from them. Keurig beverage pods are widely distributed and available from many sources other than Green Mountain, which happens to own Keurig. Think about the toner for your Dell or HP printer.
Long-term contracts – Term insurance policies lasting 10, 15 or 20 years provide a steady revenue stream. Sales commissions can provide a trailing annuity to the insurance agent.
Subscriptions – Magazine subscriptions are generally available for one-, two- or three-year terms. Although magazine subscriptions are paid in advance, revenue cannot be recognized by the publisher until each issue is delivered. Subscription revenue must be carried as a liability until earned.
There is often a price to pay for repeat business. It can be as simple as a customer-loyalty card or a discount at a restaurant encouraging repeat business. My favorite loyalty program has been my Panera card, which keeps me coming back for a free coffee, pastry, soup or lunch at reasonable intervals. For $8.99 a month Panera now offers unlimited coffee.
Generally speaking, the more you buy, the less you should pay for products and services. The best example of this is the BOGO model, the buy-one-get-one-free deals that most of us are familiar with. These deals have become popular in retail sales, especially at supermarkets.
Up-selling, cross-selling, down-selling and cancellations – Today’s customers are in control as they become better informed and connected to vendors they like and trust. Satisfied customers return as long as they receive ongoing value. Happy customers are open to being upsold or cross-sold, while unhappy customers may be down-sold, or they may cancel doing business altogether. A good example of the latter can be seen with cable TV providers.
Understanding yield – You must offer the right product to the right customer at the right time and at the right price. Price your products or services competitively.
• Overpriced. This results when a customer has a high price and low usage. Think gym memberships. When is the last time you went?
• Underpriced. This results when a customer has a low price and high usage. Think "all you can eat." Low yield results in opportunities to upsell.
• Optimal yield rate or ratio. You can optimize your revenue streams. When you raise prices, observe how much incremental customer loss affects your profit. You may receive more revenue per sale but have fewer sales. Determine the optimal mix of price to value.
The shift is happening – Clearly, there is an ongoing shift into what I call the "new New Economy" (N2e). Educated consumers continue to demand and opt for efficiency, green products, less rather than more, renting versus owning, sharing, subscribing and downsizing. They embrace trusted relationships and vote by spending their money where they believe they are getting the best value.
Dennis Zink is an Exit Strategist, business analyst and consultant. A Certified Value Builder and SCORE mentor, and the past chapter chair of SCORE Manasota. Dennis created and hosts "Been There, Done That! with Dennis Zink," a nationally syndicated business podcast series and "SCORE Business TV" available at manasota.score.org and www.Time4Exit.com. He facilitates CEO roundtables for the Manatee and Venice chambers of commerce. Dennis led a team to create the Exit Strategy Canvas and Exit Strategy Roadmap program that provides real-world methodology for business equity realization. Email him at dennis@Time4Exit.com.
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Customer loyalty through recurring revenue - Sarasota Herald-Tribune
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