There are numerous benefits from a predictable monthly income, says CRAIG ALEXANDER RATTRAY
As a business owner, do you start every month with no clear visibility of your sales? Do you start every month at zero? If so, you are not alone as many businesses operate amidst that uncertainty. In my last article I wrote about the eight key drivers of business value and one of the most overlooked, yet easiest to implement, is recurring revenue.
What is recurring revenue? Investopedia defines it as “the portion of a company’s revenue that is expected to continue in the future. Unlike one-off sales, these revenues are predictable, stable and can be counted on to occur at regular intervals going forward with a relatively high degree of certainty.”
Basically, think of it as a regular and consistent stream of revenue from ongoing customers who pay weekly, monthly or annually. Most of us as consumers have a variety of regular payments that come out of our bank account every month without us giving much thought to it.
The attraction of recurring revenue is that it not only provides greater certainty of trading, performance and cash flow, but because of this, it increases the value of a company.
Why? One of the biggest factors in determining the value of a company is the extent to which visibility of future sales can be seen.
The attraction of recurring revenue to acquirers and investors is this predictability and stability both from an operational and financial perspective.
This reduces risk too and clearly makes a company more desirable due to the quality of these earnings.
Many businesses believe that it does not apply to them, but I can guarantee that any business should be able to find one of the six types of recurring revenue models that they can implement in their business.
The six types of recurring revenue are listed below from least valuable to most valuable:
No. 6: Consumables (e.g., shampoo, toothpaste)
These are disposable items that customers purchase regularly, but they often are not motivated to repurchase from one seller or to be brand loyal.
No. 5: Sunk-money consumables (e.g., razor blades or printer cartridges)
This is where the customer first makes an investment in a platform. For example, once you buy a razor or a printer you are generally locked into buying compatible blades and cartridges.
No. 4: Renewable subscriptions (e.g., Netflix, Office365)
Typically, subscriptions are paid for in advance, creating a positive cash-flow cycle. This can have huge advantages for a company’s cash flow especially where annual subscriptions are paid in advance.
No. 3: Sunk-money renewable subscriptions (e.g., the Bloomberg Terminal)
Many traders and money managers use a Bloomberg Terminal throughout every working day, and they must first buy or lease the terminal in order to subscribe to Bloomberg’s financial information.
No. 2: Automatic-renewal subscriptions (e.g., document storage)
When you store documents, you are automatically charged a fee each month as long as you continue to use the service.
No. 1: Contracts (e.g., mobile phones)
As much as we may despise being tied to them, mobile telephone companies have mastered the art of recurring revenue. Most provide customers with free phones in an attempt to lock them into a two or three-year contract. We know this works well.
So, how do you find a recurring revenue stream for your business?
Review the six types of recurring revenue and think of the products and services you provide. Think of your customer base and how regularly they buy from you.
Create an offer and a model that encourages and incentives customers to stay with you, purchase regularly and never think twice about your competitors.
Make it seamless so that the customer does not even think about the payment coming out of their bank account every month as they receive so much value or something they need every month.
As I said, I can guarantee that every business can implement one of these.
Do it today.
Not only will it increase your certainty, cash flow and company value, it will mean that you don’t start next month at zero.
Craig Alexander Rattray’s column on issues affecting owner managers appears on alternate Mondays