Find Recurring Revenue - But not at any cost
Every investor will tell you that recurring revenue is important.
They are right. It is important. Every business owner is strongly advised to search for ways to make your products and services be able to be charge on a recurring basis. That pricing model might be a subscription product or some other structure where a customer is locked in for a certain fixed period. It might even be a model where you can get a fixed and guaranteed income over a period of time. There is no doubt that you should always try and restructure your products to get:
more locked in revenue from each customer
commitments over months, years or multi-years.
The model of recurring revenue is simple. Try and get as much revenue as you can fixed, non-cancellable and on a recurring basis. There are various forms of this revenue and whether you get paid upfront, monthly, quarterly or even annually. Either way, that fixed amount is guaranteed and secured. That is the approach that you can look to lock in.
However…
It has to make sense. Everywhere you look now, there is a subscription pricing model from technology through to dishwashing liquid Some companies are so desperate to try and make themselves recurring revenue that they lose sight of the customer and what the customer actually wants. While some products and services may make sense to charge on a subscription basis, it might be inappropriate for others to try and charge on the same basis. You have to ask yourself the question: ‘What is in this for the customer and do they want to pay for my product as a subscription?’. You might love to charge this way, but your customers may hate it. Your customer may not want the lock in, they way not want the monthly charge, they may not want the hassle, they may not want the complexity that comes along with such pricing models. The customer has to be blown away with the benefits they get from the (likely) lock in that surrounds such subscription based pricing. If the customer is not blown away, and totally on board, then give your pricing proposition another consideration. It also has to be considered what investment you are making in the underlying product (e.g. technology) and how, for example, a hosted service, makes sense to charge on a subscription recurring basis because you are providing a continued service.
Certainty of revenue (and extreme customer satisfaction) is the focus.
The main thing to be thinking about is how to get revenue certainty and blow away your customer (with a huge benefit) at the same time. It will help you significantly in those quiet times to know that every month you have a guaranteed amount of income and that you are delighting your customers at the same time. The certainty is also worth money to you and your investors as it changes your revenue profile and its certainty and makes you more valuable. There is no doubt that revenue certainty gives you tremendous business value. At the same time, it can be a huge benefit for your customer, it might spread out their spend, allow them to record an ‘expense’ vs. ‘capital’ or help them with cashflow. Again, the premise has to be focused on the customer, and if your customer isn’t hugely advantaged out of this pricing model, then be very careful on pricing based on subscription.
Technology is a good answer.
Some of the solutions that most companies gravitate towards is achieving recurring revenue by building some SaaS technology product and licensing it on an annual or multi-year basis. There is no doubt that the technology business has moved to recurring subscription pricing and they have seen a significant change in their business as a result. There are a huge number of other industries also following that path including the music industry, entertainment, clothing subscription services and even dog food. Technology is certainly a great way of building a sticky recurring revenue base. However, not all solutions can be made subscription and some common sense needs to be applied here. If you are currently in a typical services/consulting environment, ask yourself how you can move to a retainer model, which is really the most basic form of recurring revenue. Anything is more valuable to you than a on-off transaction that doesn’t lead into future sales.
Remember, build recurring revenue for the right reasons.
Always remember to build recurring revenue when it actually provides a better product to the end customer. As a customer centric business, you should always aim to see your customers getting something of value from your product and services and the way they are provided and priced.