Is “recurring” part of your business vocabulary? This important word means “to happen repeatedly.” Think about your revenue stream. You want it to recur or happen repeatedly. What do you specifically do to build recurring revenue or income streams?
Too often, businesspeople think of income as occurring one sale at a time. Even transactions with repeat customers are treated as separate sales. Nothing is done to make the next sale an automatic transaction. Of course, it is easier for some businesses to create an automatic sales environment. However, most businesses can move toward a recurring-revenue business model for at least some of their income.
Perhaps the basic tool for creating repeat sales is the frequent-purchaser card. Businesses as disparate as office-supply stores, car washes and grocery stores give customers loyalty cards. They punch or track electronically each time the customer buys. For example, coffee shops often provide every 10th cup free. The purpose is to dissuade the customer from having to decide where to have his or her next cup of coffee.
Even better is a subscription program that channels the customer your way for a certain, or continuous, period. I use an online computer-backup service that automatically renews my service subscription unless I take specific action to terminate the subscription. This concept can be applied to many services, such as janitorial and carpet cleaning.
Why do insurance companies encourage their policyholders to pay on a monthly automatic-withdrawal program? Because their analysis shows these customers keep their insurance in force longer than those who must make a payment decision every year or every quarter. Other businesses that provide annual services such as tax preparation or furnace cleaning and maintenance might increase customer loyalty by encouraging automatic advance payments. Perhaps a small discount could be part of the package. In addition, this concept also improves your cash flow.
Recurring revenue models also can increase sales of add-on items. Examples are maintenance contracts, support agreements, extended warranties and service subscriptions. Amazon actually sells its Prime membership subscription as a way to speed delivery of all purchases for a stated annual fee. Amazon can turn around and use it to increase product sales.
Your business also will be more valuable with recurring revenue when it is time to exit. From a business buyer’s viewpoint, recurring revenue reduces future risk. Business buyers will pay more for proven income. If your desire is to sell your business to a family member or a key employee, you probably will have to finance part, perhaps most, of the selling price. The presence of ongoing revenue will reduce your risk of not being paid.
Give recurring revenue some thought. Brainstorm with your employees. Talk to your peers. Read your professional or trade journals. It is almost certain that someone has developed a recurring-revenue model for your industry group. Such models clearly provide a competitive advantage to the sponsoring business. Will that business be yours or your competitors’?
BusinessValueInsights.com. Dan Bowser is president of Value Insights, Inc. of Durango, Chandler, Ariz., and Summerville, Pa.