The simplest definition of a recurring revenue model is subscription based pricing. Recurring revenue enables a company to earn regular income over a long period of time from a single sale.
An example of recurring revenue is the support contract many of us sign up for when we purchase a new computer. The funds from the support contracts provide the computer company a regular monthly income that is not reliant on the sale of more equipment.
Building your recurring revenue is a powerful way to establish a strong and profitable business. There are a number of reasons why:
- Perhaps most important for smaller businesses, recurring revenue provides a reliable flow of the cash to keep your business running smoothly.
- The predictability of recurring revenue makes cash flow projections and budgeting much easier. This allows you to plan better for future investments.
- Predictable cash is not just attractive to the business owner, it also appeals to potential investors and lenders. You are going to have a much easier time getting a bank loan if your business is geared toward recurring revenue.
- A solid base of recurring revenue makes it easier to grow your business. Let’s say you have a $1million business and $900K of this income is recurring. Next year you only have to find $100K in income before the growth begins. If your entire business is transactional you would start back at zero and have to find $1million in sales just to equal last year’s performance.
- Finally both your margins and ROI are likely to be higher with a recurring revenue model. The costs and the capital associated with servicing each new customer are both going to be low relative to the long-term sales.
Having established that recurring revenue is a good idea for your business, we look at how you can go about building it into your business model. Here are some ideas:
Create a support and/or maintenance plan. If you sell a high value product then the obvious way to build in recurring income is to offer your customers a monthly support package.
Offer a subscription service. If you are in a knowledge industry consider offering a subscription to regular information, advice or best practices. This approach has worked well in the financial services industry, but could be applied to many fields.
Shift your pricing model. Stop charging a single one time fee for a specific product or service and move to a regular retainer approach. For example, if you run a design business, consider moving your top clients onto a retainer rather than fee for service.
Offer add-on recurring services. Continue to build your recurring revenue by offering add-on services. For example if you run a cleaning company and visit a customer on a weekly basis, consider offering the customer a monthly carpet cleaning service as well.
Establishing a recurring revenue model adds a level of stability that strengthens your business and eases your personal stress levels. If you want help establishing a recurring revenue model in your business please give us a call!