Recurring revenue is often called the Holy Grail of revenue.
We couldn’t agree more and have seen the positive impact it has on the companies we partner with. There are multiple advantages that come with owning a subscription or membership model business.
Dating back to 1556 when the government of Venice first published the monthly Notizie scritte which cost one gazetta (a small coin), customers have been attracted to the “pay as you use it” model.
Today recurring revenue is all around us and we embrace it through multiple models at home and work:
- Memberships: gyms and clubs
- Simple consumables: local coffee shop
- Simple services: haircuts, tax preparation, lawn care
- Subscriptions: magazines
- Auto-renewal subscriptions: software companies
- Installment hard contracts: mobile phones
- Sunk money subscriptions: Bloomberg Terminals and Amazon Prime
- Sunk money consumables: razor blades, Keurig refills
In our noisy digital world it’s increasingly harder to earn and retain customers. There are more choices, data and price comparisons at the click of a finger. This is why having a loyal subscription or member-based component to your business is critical to growing and maintaining revenue.
Here are eight reasons your business needs recurring revenue. I will dive deep into each of these in future posts
Eliminate marketing investment waste
Many marketing campaigns can be costly and drive little value (that’s why we started Diffactory). Instead of wasting time and money on tactics that don’t work, focus on quantifiable marketing and member/subscriber engagement. Take what you know about your best customers and embrace that knowledge when developing new offerings. Your market research will be easier and marketing transforms into a math equation for clinical decision making, not dart throwing.
Safeguard against flight risks
It costs 3x more to acquire a new customer than it does to retain an existing one. Lock your customers in by delivering an insane value exchange that will keep them happy and part of your membership base. Ultimately you want them to be your biggest source of referrals. Happy customers = organic growth.
Even out demand
Would you like to manage/own a company with lumpy demand for your products/services or would you rather have a nice smooth demand curve? Playing mailbox roulette to see if checks have arrived is enough to send the most seasoned entrepreneur into a panic attack when cash flow tightens. Managing cash flow is easier with a less volatile, smooth demand curve.
Expand core offering in adjacent product and service areas
Engaged customers naturally become more involved in your business, which typically means an interest in other products and services that tie to their core membership. Use this to your advantage by up-selling and cross-selling to your existing members.
Automate recurring sales
Your members are busy and don’t have time to keep track of every account that needs to be renewed. Don’t let them forget about you. Make it easy by automating your sales and renewal process. Your sales forecasting and tracking will be simplified as a result. Just don’t make it hard for them to cancel, please.
Increase Life-time Value (LTV)
One of the toughest business achievements is taking a customer from $0 to $25. But what if every year, you doubled that? That’s a huge achievement and one that will take your business to the next level. Increase the lifetime value of your customers and the value of your business will increase when it comes time to sell.
Set your company up for long-term success in any economic environment
Customers who see value in their subscription are inclined to remain loyal no matter the economic environment. The trickle down result is business protection for you in any market. The lower installment payments your customers make to your company help keep you on their household or company P&L.
Increase your company’s value
You company’s value will be greatly increased by having repeat sales from loyal customers. Your recurring revenue line(s) allow investors or a purchaser to reduce risk in the transaction. Reduced risk warrants a higher valuation or sale price.
In a future post about this topic we will dive deeper into the difference in valuation for an alarm company that just sells alarm systems vs. one that has a monitoring component. Plot spoiler: the one with a monitoring component is substantially more valuable.
What next?
Take a quick look at your bank or credit card statement. Notice all of the following recurring payments you make every month: utilities, housing, transportation, tuition, entertainment, technology, communication, health and fitness….the list is endless.
Is your company showing up regularly on customer bank statements?
If not, why?