Recurring revenue is an important component of the financial models that thriving businesses are using today. Not only does this component help businesses stay relevant in their competitive markets, but it can also take business results to the next level.
Components of a Successful Recurring Revenue Model
This business model can involve several different vendor-consumer arrangements — all which provide regular, recurring income for your business. Here are descriptions of a few of these arrangements:
• Contracts. You enter into a contract with customers, promising service for a specified period of time in return for their fixed, periodic fee (i.e. 2-year cell phone contract).
• Subscriptions or Monitoring. You offer a service to your clients where they pay a regular membership fee or subscription fee to use the service. The fee may change, depending on add-ons they choose. Renewals can be automatic or opt-in (i.e. data backup service, security monitoring).
• “Sunk money” consumables. Consumer makes a one-time initial investment, and then is required to purchase accessories or services ongoing in order to use the product or service (i.e. at-home gourmet coffee maker, requiring custom brewing units).
As you can see, the model creates different ways to achieve income on a continuous basis. Here are some of the ways business can thrive with a recurring revenue model:
Use Technology to Gain Business Advantage
Predictability in business helps you make practical decisions for the future. This is because recurring revenue allows you to know exactly when revenue is coming in, and from where. With today’s technology, you can then use this information to automate revenue collection so you don’t lose out.
With predictability, you can budget several months in advance without fear of failure. So, as long as your customers continue using the service, you are assured of paying your future bills, even when the market is slower.
Explore New Higher-Profit Opportunities
Business owners exploring new revenue steams will naturally look to service offerings they can add. Traditionally, products contribute 70% of revenue and services make up the remaining 30%. With low-cost production lines flooding the market, this scale is shifting, causing businesses to look for alternative, service-related revenue opportunities. These service offerings will often provide a much higher profit margin when compared to products.
The best way to tilt the market to your side is to add a new line of service to what you sell. These can be services your clients need to make your products more useful. This is a perfect move because the demand for services has shot through the roof, and you stand to gain a higher profit margin.
Boost Your Overall Business Valuation
Pursuing a public listing is both expensive and demanding. However, if it’s successful, it grants you an opportunity to generate large amounts of capital and maximize the value of your business. However, the amount you make will depend on the listing price, and the level of confidence financial analysts have in your company.
Financial analysts will have more confidence in your business if you have an established recurring revenue model. This is because the analyst knows you have the ability to generate and sustain long-term profits.
The recurring revenue model gives you a better foresight into the annuitization process, especially during the payout phase. You will be able to model and predict your business value in the even you choose to sell or go public. You will also be able to determine the expected profit from the transaction.
Solidify Your Business Future
Using a recurring revenue model allows you to capture valuable data relating to your clients — their likes, dislikes, buying habits and buying frequency. You will know what customers want and why they behave the way they do. You get this information on a more detailed level when you provide quality customer service and have an ongoing relationship with them as a service provider.
Using this information, you can optimize your services in terms of pricing and product packaging. If you previously had a one-size-fits-all ideology, you can now customize your services, depending on various segments. When your business is on track to succeed for many years into the future, your confidence in planning a beneficial and profitable exit strategy will increase and help you solidify your legacy.
Before you enjoy the benefits of recurring revenue in your business, make sure you have a capable system and experienced people to sustain business interaction with your clients. You can learn more tips on refining your business model and implementing a profitable sales strategy in our e-book below.