Recurring Revenue

The marketing folks keep telling me to use keywords, because, after all, what's a blog for but to attract attention from those you want to do business with. Keywords are one of the hooks that do this. I may run afoul of this strategy, slap me on the wrist for doing so, but that won't stop me. I have lots to say, with lots of experience behind me to give me confidence that what I have to say should be said.

Ok, time out for a keyword, Google take note - Recurring Revenue. Stripe seems to explain what this is the best.

Today this is the Holy Grail for all businesses. Turn your product or service sales into ongoing "subscriptions" for either of those. Why not? Valuations show that premiums are paid for businesses that have "recurring revenue" with "low churn". So much so, that premium prices get paid for a revenue base that's recurring, even if that base is far from generating a profit. For a business person with a CPA, it can cause sleepless nights. In the end, profit is the only KPI that takes a business out of the musical chair game, a game I recommend that all business owners avoid. Episode 6 of my Podcast "A CFO's Diary: Pathways to Growth" speaks about the street being full of "dead bodies", in a race to profitability, where profitability only happened once market dominance was attained.

If you think you can win at musical chairs, then this blog's not for you. Feel free to bounce, I'll even pause for a moment...OK, ready? Now let's talk about how to go to the next level this year and the years to come.

Many folks think that Software as a Service (SaaS) and Recurring Revenue are synonymous. They're not. SaaS is a form of recurring revenue but not all recurring revenue is SaaS. SaaS is how software companies have turned their product sales into monthly licensing arrangements. In my accounting world, this is called a "rent vs buy" decision. Smart move by the software builders. There are other recurring revenue models, like:

Subscription - Netflix
This can include a free version (or a "Freemium"), to get you hooked.
License (where most of the SaaS revenue is generated)
If you have something of value, rather than selling it, as I mentioned above you rent it to users.
Pay-as-you-go (PAYG) - Intermedia Cloud Communications
Many Subscription and Licensing models have a PAYG portion, often with a minimum monthly subscription or license.

Is Your Business a Square Peg to Recurring Revenue's Round Hole?

We all know the phrase Square Peg Round Hole. In fact, it's more properly described in the context of "fitting in", as in: "You can't fit a square peg in a round hole". This applies to recurring revenue, not every business fits, right? I question this.

Isn't recurring revenue simply a result of loyalty? In today's Buyer's Journey world, no contract is going to prevent churn and believe me when I say, that recurring revenue without loyalty isn't the kind of recurring revenue that garners premium valuations. For good reason, it doesn't garner profitability either, the true Holy Grail of business. In reverse, an iron-clad contract only recurs if the product or service being supplied is a necessity without options. I'm thinking of Canada's internet providers or banks. If today's buyer has a choice, their contribution to recurring revenue will show up in the churn column.

So, 2 pieces of advice:

Regardless of your hold on them, amaze your customers with their experience doing business with you:
- Google "Amaze" and you get: surprise (someone) greatly; fill (them) with astonishment (meaning great surprise).
Make generating recurring revenue a top priority:
- This will simplify your business planning and execution immensely, resulting in higher margins, growth, and valuation; while at the same time providing everyone an enjoyable working experience.

I challenge anyone to let me know of a type of business that, by amazing their customers, can't turn their sales into recurring revenue.

Now, Here's the Hard Part

Here's the hitch, to amaze your customer is not easy. But it is a must. There's one fundamental fact you need to understand. Your customer is part of your team and needs to be treated the same way that your most important employee is treated. They aren't outsiders receiving the benefits of your product or service, they are participants in this. Listen to them, understand what they want from the relationship, then give it to them. You'll be surprised by what they're then prepared to give back. Things like loyalty, better margins, brand-boosting, more business. Maybe even contracting to pay you for what you provide on a monthly basis for a term longer than one month. That's recurring revenue that can be relied on, planned for, and profited from - both the customer and the provider.

The Retainer Model for Revenue

Accountant Some think the Retainer Model for business is a recurring revenue model. It can be, but isn't always. Retainers are usually accompanied by Engagement Letters (EL) or Statements of Work (SOW), where the product or service that is retained is clearly outlined and is usually to be provided after payment. If it's not provided, usually within a time frame outlined in the EL or SOW, it's not revenue, it's merely a deposit, and usually results in a termination of the arrangement and a churned client. This kind of arrangement can be a very fruitful recurring revenue model. Once a probationary period has passed, and trust grows, a PAYG customer can easily become a Retainer customer. The key word here is trust, which happens when customers are very happy with the services and/or products supplied.

My profession, and most other professions, live in the world of ELs and SOWs. Having worked in it for over 40 years now, I cut my teeth in the transactional hourly rate professional services business. Just as I started earning a living as an accountant, the clients started to think about the value they were getting. Early on in my career, I spent way too much of my time addressing the "nickel and dime" nature of hourly fees. Then, it got worse, not only did my and other professions think hourly billing was a good way to treat a client, but then the concept of a retainer was invented. It wasn't because a trust relationship was developed, it was as in, I don't trust you, Client, so you have to pay me before I spend my time that I'm going to charge you hourly for regardless of outcome or quality of service. This is the antithesis of amazement, and exactly what not to do to earn recurring revenue. Thankfully over the years, this has changed, and all professions are in the same boat as all other businesses, needing to earn client's trust, usually by amazing them, and being able to turn their services into recurring, retainer-based, revenue.

The Role Technology Plays in This

It's always important to speak about the role of technology in the art of amazement. Technology has advanced to where not only can you treat each customer as a unique stakeholder in your business, but you can take it up a notch by amazing them while you are at it. Invest in, then use this technology, and you'll get your own version of recurring revenue.

With this approach maybe you can fit a square peg in a round hole...

Recurring Revenue - Square Peg Round Hole?