Why Should Your Business Model Include Recurring Revenue?

Most successful businesses have a mix of one-off sales and recurring revenue. Unlike one-off sales, recurring revenue is stable and occurs at regular intervals with a high degree of certainty. As a result, it is a strong foundation for your financial and strategic business plan and provides the stable cash flow needed to cover fixed overhead, like salaries and rent.

For seasonal businesses, recurring revenue provides an extra level of security with the operating cash and funding needed to invest in equipment, marketing, and new product development in the off-season. In a downturn, recurring revenue can and often will save the company and smooth the company’s cash flow.

How Does Recurring Revenue Drive Business Value?

Recurring revenue increases the lifetime value of each customer of the business. Companies with recurring receipts are attractive to potential investors and buyers, especially those with regular or residual revenue streams such as membership fees requiring monthly or annual payments. Savvy investors want to know the percentage of total revenues from recurring sources – annual renewals, maintenance agreements, content fees, or monthly retainers. All of this can lead to multiple interested buyers, increased demand for the company, and a bonus valuation for the business owner.

Three Ways You Can Add Recurring Revenue To Your Business Model

Start with your customers. Who better to tell you what they need? Focus on their real-life problems and think of ways you can provide them with a solution.

What new products or services can you add to meet your customers’ needs that you’re not addressing yet?

What can you add that will expand your existing product or service offering?

Get creative. Below are three ways to get started.

1. Products

Think razor and blade; printer and ink. What can you add to offer a robust, end-to-end solution for your customers?

2. Services

Would a membership offering solve a real-life problem for your customers? For example, a membership service that offers an opportunity for them to meet with you in a private group and to meet other members who share their interests. The purpose of the membership is to help members focus on achieving their individual goals, such as improving their health, relationships, or business.

What about adding a retainer-based component to your service offering? With a retainer, your customer pays a monthly or quarterly fee for your services when needed. The services are clearly defined ahead of time to avoid surprises and misunderstandings.

3. Subscription Services

Think Nexflix. What content can you provide for your customer? For example, a subscription service that includes helpful, valuable advice and actionable suggestions to improve the quality of your customer’s life. Things like how to train their dog, play the violin, or cook healthy meals.

If you add a product or service that includes an annual contract, be sure to have an escalation clause to prevent profitability from declining due to future inflation.

Don’t limit your business model. Explore the opportunities that a recurring revenue product or service will bring you and your customers. Set your business up for success now and reap the benefits for years to come.

 

Spend the time now to develop and refine your strategy to include recurring revenues in your business model.