THE VALUE OF RECURRING REVENUE
If your plan is to add value to your business in 2022, you might want to start by focusing on how your customers pay.
The classic way that businesses earn money is via a transaction business model. This is where customers pay once for what they purchase. If you are using this model, you can expect the value of your business to be a single-digit multiple of your Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA).
Conversely, a recurring revenue model in one in which customers make ongoing purchases via a subscription. By using this model, you can expect the value of your business to be a multiple of your revenue.
Recurring revenue is seen positively by business buyers, as it is obvious how the business will continue to make money, even long after you have gone.
It may be difficult to know where to start on how to create recurring revenue, but below are a few models worth thinking about:
Products That Run Out
If you sell a product that consumers frequently run out of, you could offer it on a subscription. One such example is the retail giant Target, which offers customers a diaper subscription for busy parents who don’t have the time to rush to the store every time they run out. Subscription razor blade sales are offered by Dollar Shave Club (which Unilever purchased in 2016 for five times revenue). More than 80% of The Honest Company's revenues originate through subscriptions, and they offer safe household cleaning products and dish detergent to people who care about the environment.
Consider whether clients might pay for access to a premium membership website where you give your expertise to subscribers only if you are a consultant and provide specialised guidance. There are membership websites available today for people who wish to learn about everything, from restaurant management to search engine marketing.
Consider switching to a fixed monthly cost for your service if you now bill by the hour or the project. That's what the marketing firm GoBrandGo! accomplished to stabilise cash flow and make the service industry more stable.
When a "one-off" customer purchases something from you, consider what they go on to purchase. As an illustration, if you create a new website for a business, it is likely that they will require a place to host it. You could offer to host the client's website on a subscription basis even though the initial website design may be a one-time service. If you provide interior design services, it's likely that your clients will want to keep their property in immaculate condition, which means they might be seeking for a regular cleaning service.
If you sell a costly product that customers only sometimes need, you might think about renting access to it to subscribers. Subscribers to ZipCar have access to an automobile whenever they need it without having to spend the money to purchase a piece of machinery. Without purchasing a building or signing a long-term lease, WeWork subscribers have access to the company's co-working space.
To get clients that automatically pay you each month, you don't need to run a software business. Adding some recurring revenue is the single fastest strategy to increase the worth of your company this year.
Which businesses are most likely to fit a recurring revenue model?
There are several business kinds that are especially well-suited for the recurring income business model, even though companies from many other industries have been adapting themselves to fit into it.
Businesses that offer access to media material, such as audio, video, and books, have adopted the recurring income model very well. Popular examples are Netflix, HBO, and Spotify.
When users sign up for these services, they do so to get exclusive access to the offerings. The allure of content-based businesses is that you must be a subscriber to that service to have full access to the content you want (whether it be songs, movies, or books). You can access some e-books in Kindle format, for instance, if you have Amazon Prime. You must, however, specifically subscribe to Amazon Kindle to receive unlimited access to e-books.
Instead of making one-time sales, many software companies provide access to their programmes via subscription-based services (SaaS). SaaS removes the expense of early software setup and the challenge of putting new products into action. While the old one-off sales approach makes it difficult for software developers to distribute product upgrades to end customers, the SaaS model transforms it into a straightforward, automated procedure that allows for the smooth addition of new features.
Subscription boxes are a well-known illustration of the product-based subscription model, where buyers sign up to receive boxes of a specific kind of product at predetermined intervals (weekly, monthly, or quarterly). These subscription boxes can be broadly divided into two categories based on demand: convenience and curated.
The products in the subscription box come into the convenience subscriptions category if they are regularly refilled with more of the same products. Customers who purchase these boxes typically know what they will receive and sometimes can choose the precise things they want to include in their box.
Customers who purchase curated subscription boxes, on the other hand, receive a variety of products based on a theme. These clients typically don't know which products will be included and haven't chosen the precise items they'll be receiving. These are also known as "surprise boxes."
The popularity of subscription boxes has greatly benefited from the development of social media and e-commerce. Customers love these boxes for their convenience and unique experience.
Subscriptions are now commonplace in almost every sector, from entertainment to grocery to software and more. There's a good reason why more businesses are moving to subscription-based business models: they usually work.
You can accomplish more if you have recurrent money streams. Creating reliable (as much as they can be, of course) streams of money through the sale of services or goods in advance enables more planning, growth, and expansion.
When your income is reliable and recurrent, you can concentrate more on expanding your business rather than worrying about money.
- Robin Olivier (ActionCURVE NZ)