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If you’ve set your sights on increasing the value of your business, consider cultivating customer relationships that generate recurring revenue – a form of revenue that is stable, predictable, and likely to continue. Having a steady revenue stream and reliable cash flow allows you to plan ahead, make projections, and commit to future expenditures. And, if you ever decide to transfer the business, it sends a strong signal to potential buyers that your company is well managed and offers high potential for continued growth.
You don’t have to look far to find examples of recurring revenue models. In fact, many of the largest, most successful companies rely on them. Think Amazon prime memberships, software as a service (SAAS) subscriptions, frequent flyer programs, and loyalty cards. Some programs, like wireless phone and/or internet plans build in a switching cost for customers who change carriers before the end of their contract. The cost often takes the form of a financial penalty or time-consuming phone calls or paperwork for the consumer.
Small companies can also implement programs that produce recurring revenue. These often take the form of membership programs and service plans.
“Think about the trend among HVAC providers to sell annual service contracts,” said Steve Veazey, a Maine district director for SCORE, a non-profit business owner mentoring organization. “Many employees who come out on a service call or to perform routine maintenance are now trained to sell homeowners a 12-month or longer service contract.”
It’s a win-win for the company and the consumer. The former retains a customer and gets dependable income, and the homeowner enjoys a discount on the services.
The opportunity to cross-sell existing customers is another benefit of the recurring revenue model. (Related: Ways to increase the value of your business)
“Nurturing a relationship with an existing customer is far less costly than generating a new customer,” said Mark Cutler, a regional vice president at SCORE New York and New England. “If you consider the lifetime value of a customer, you‘ll find that current customers are your best source of new business.”
Recurring revenue models can work in almost all industries. It just takes a little bit of creative thinking and a bold sales and marketing strategy. For example, Veazey described how one farming business he worked with made their living at weekly farmers’ markets. Sales varied from week to week based on the size of the crowds.
“After the COVID-19 pandemic began, the business went online and sold seasonal shares for pick-up,” said Veazy. “It gave the business a stable customer base, a predictable and dependable source of revenue, and the opportunity to cross sell during the winter months.”
John Sundean, a chapter chair at SCORE Connecticut, has seen effective recurring revenue models in the financial services and legal industries as well.
“I’ve known estate planning attorneys and life insurance professionals who’ve teamed up to offer a more complete range of services,” he said. “These existing alliances can help save valuable time for their clients.” (Related: A strong team: At the intersection of strategy and tactics)
Building recurring revenue works best when you know your customer and have a strong value proposition.
“You’ve got to know what keeps people coming back to you, said Cutler. “Use customer feedback to inform your operations. Actively listen to your customers and learn what value you provide.”
As you give more thought to the benefits of recurring revenue programs, you may be surprised to discover how common they are and how much value they can bring to both your customers and your business. Review the tactics being used by your competitors, look for best practices in your industry, and use these insights to develop innovative programs for your own business.
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SCORE is not a subsidiary or affiliate of Massachusetts Mutual Life Insurance Company (MassMutual) or its affiliated companies. This article was sponsored by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001. www.massmutual.com All opinions are those of the author. MassMutual offers this as educational information only.