Recurring revenue

We published the nation’s only hyper-local business confidence index called the Berkshire Confidence Index, or BCI.  For it I wrote an article titled, “Your Revenue Model Sucks.”

It was one of my favorite articles for the BCI, because providing your customers with the transaction method they prefer can be such a game changer for your business with relatively little effort.  It takes a lot of bravery to embrace the change, but little effort.

Again, I want to view all of this from the perspective of a potential buyer. Not just because you’re looking to sell soon but because treating your company this way will both defend and grow your value.

The buyer is going to look at your company and consider the sustainability of your earnings.  The buyer is going to calculate the answer to the question, “once the owner walks out the door, how likely are revenues to continue?  And how consistently?”  The more recurring your revenue, the more predictable your cash flow, the less risky you are, and the more you are worth.

I want you to be open minded to the idea of creating recurring revenue.  Let’s review the types of revenue that are out there:

Consumables – An example of a consumable would be a coffee shop, where revenue is all transaction based, and most of those sales are based on the proximity of the customer to the shop.

Sunk-money consumables –Keeping with the coffee example, Keurig machines have become very popular.  A Keurig machine uses pods filled with ground coffee to make one cup at a time, as opposed to a whole pot.  The buyer of a Keurig machine is someone who has “sunk money” into the machine and is more likely to continue buying those pods.

Subscriptions – Every year I get a renewal notice from my local fitness center.  I must make an active decision at that point if I want to recommit, or, if I haven’t been going, it’s easy to just not sign up – and not pay the $500 again – since I haven’t seen the value.

Sunk-money subscriptions – If I cancel the membership at the fitness center, I can still use my at-home Peleton stationary bicycle.  I bought the Peleton bike, but if I want to use the bike’s live-stream instruction classes I’ve got to pay a subscription. In this model, I buy, or “sink money” into the bike, just like the Keurig machine. But in this instance I also have an evergreen subscription – I don’t have to make an active decision to buy a spinning class.

Auto-renewal – Sticking with the exercise concept, there is another gym in this area that has done exceedingly well because instead of asking for $500 up front for a yearly membership, they ask for zero down and just $10 per month.  That is much more affordable so more people sign up – including first timers who start their New Year’s resolutions, but never come back.  But the real value to the gym is not just the number of members on its list, but the auto-renewal payments. You just keep paying $10 a month, whether you go or not, and you don’t get a reminder to cancel.  A lot of people don’t go, but it’s only $10 per month so they’ll never cancel.  That’s a lifetime of $10 per month revenue, which is very predictable due to a very low attrition rate.

Contracts – Contracts are a written obligation.  It’s iron clad, and that’s the most valuable form of recurring revenue.

All firms can create recurring revenue, making sales less lumpy, improving predictability of cash flow, increasing income, and making it less stressful to run the business. And it makes you more attractive to buyers.

But more importantly, your customers know and prefer these methods of payment.   Every day you pick up the Wall Street Journal you read about a new way an industry – your industry – is being disrupted by a large, national player. Often technology is blamed, but that’s misplaced blame. Technology isn’t the disruptor; technology simply makes it easier for the customer to do business with your competition because it’s giving them the payment options they prefer.  Think about your newest and biggest national competition. Now compare how they are charging customers versus the way you are charging customers.