Building Recurring Revenue Into Your Business
Recurring revenue is an important part of a healthy business. It provides a certain level of stability, makes it easier to plan, and can even raise the value of your business should you go to sell.
The Importance of Recurring Revenue
When you add a recurring revenue offer to your business it creates a level of stability to the business. A portion of income can estimated; there will be a certain amount of income without needing to sell more. This can take off some of the stress of making payroll month to month. You don’t start from zero every month.
With this, it makes it easier to plan. When you know roughly how much demand there will be month to month, you can more accurately predict how much inventory you will need, or how many staff members, etc.
On top of that, companies with recurring revenue typically sell for a higher multiple. Take for example an installer company or a continual maintenance company. The installation company may only sell for 0.75 multiple of revenue, as they primarily do one-off projects. Compare this to the maintenance company that does a recurring service with a contract and may fetch a multiple of 2-3x. Think of it from a buyers perspective; if a company only does one-off projects, there is no guarantee or level of certainty that there will be business when they take over. But with the recurring business, there is a greater chance that the revenue will continue to come in.
How to Implement
Start by determining what product or service you deliver on a regular basis or if there is something that could be done on a regular basis that would go well will your current one-off purchases. An example of this could be a printer company setting you up with regular ink replacements when you purchase a new printer. Or for a roof cleaning company, setup a regular schedule for gutter cleaning.
A problem you may face initially is lower cash flow; instead of getting a lump sum, it is evenly distributed throughout the year. One way to overcome this is allow the customer to buy more months or even a full year at a time.
For companies with recurring revenue one of the biggest problems they face in the long term is churn. Not everyone will stay with you forever, eventually they will leave. To combat this, you want to make sure it is easy for them to stay and you make it worth it.
Start by creating a rock solid on-boarding process. Introduce them to how everything will work, and make them feel welcome. As you always should, try to provide the best experience possible. Make you customers happy, and always strive to improve their experience. When a customer leaves, thank them for doing business with you. Then ask them why they left. Try to gain a better understanding of what made them leave so that over time you can work to improve, and ultimately increase the retention rate.
Building some form of recurring revenue into a business is important to create stability. It can be done in just about every industry if you are creative enough. For more in depth information on this topic, check out John Warrillow’s book The Automatic Customer.