This week, I want to focus on two words that every business owner should know: recurring revenue. Having an understanding of recurring revenue is guaranteed to improve your business, reduce your stress, and increase your profits. As an extremely busy and unusually complicated tax season begins to wind down, it’s good to get back to discussing business principles that will help you dramatically in the long run.
What is Recurring Revenue?
This is one of the very rare cases in which the definition of a business concept is fairly straightforward. Recurring revenue is the portion of a company’s revenue that they can expect to see consistently in the future. Unlike particular one-off sales, recurring revenue is stable, steady, and often predictable. As a result, recurring revenue tends to determine your top and bottom line every year, and a careful analysis of these numbers is crucial not only to maximizing your profits, but maintaining the health of your business as well.
To some, the idea that a business can expect a certain amount of revenue every year may seem odd, but this actually isn’t uncommon. Many businesses make use of long-term contracts, subscription services, cross-selling, and more, all of which allow for a decent sense of predictability, barring extraordinary events (the best and most obvious example: 2020). There are also a number of big-name businesses with massive presence and massive customer loyalty, giving them a greater sense of recurring revenue even without the aforementioned methods.
How Does Recurring Revenue Reduce Stress?
The vast majority of businesses tend to review their numbers on a monthly basis. On the first of every month, business owners tend to start at “zero,” and play things out one month at a time. While this isn’t necessarily a bad idea, this essentially means that most business owners “start over” twelve times a year, and even with steady businesses, there’s no way to guarantee exactly how much you’re going to make every month.
You can make decent estimations, but at the end of the day, perfect consistency isn’t going to happen every time. The only guarantee is that you’ll have good months and slow months. There’s nothing wrong with that, but starting from scratch every four weeks is more likely to make you worry than anything else.
Analyzing recurring revenue allows you to take a big step back and look at the bigger picture. In certain ways, this means planning ahead and analyzing trends to give yourself a better idea of how business is going to play out in the future. Not only will you be more likely to make better business decisions, but you’ll also save yourself the trouble of stressing out over your numbers every month.
What Does a Recurring Revenue Model Look Like?
You may be asking: what does this look like in the real world? I’ll give you two different examples.
The first is a business you’ll find in nearly every town in America: liquor stores. Like any other business, there’s no guarantee for exact numbers, but past trends give owners an idea of what to expect.
Universally, January is the slowest month of the year for these types of stores. Business begins to pick up around minor holidays (especially around St. Patrick’s Day), accelerates during the summer, and practically explodes during the holiday season, from November to December. Knowing which products sell when, too, gives owners an idea of what each month is going to look like.
The next example comes from a client of mine. Years ago, this client was good money creating specialized equipment for manufacturing. During the economic crisis of 2008, business ground to a halt, and he managed to avoid bankruptcy only after taking drastic measures.
Since we began working together, I helped him develop recurring revenue products and services, utilizing some of the methods I discussed earlier. With this model, he now collects revenue on the first of every month, and it’s enough to cover 100% of his overhead. Rent, utilities, payroll, and everything else are all covered right from the start. In this way, he deals with significantly less stress, and any additional projects he takes on during that month are pure profit.
Recurring Revenue Prepares You for the Future
As an added bonus, this offers you some extra protection from those inevitable slower months, gives you a cushion in the event of major economic downturns, and makes the always-stressful process of budgeting much easier. Aside from the obvious stress reduction, having this level of stability is also a HUGE plus for investors, and that alone can present you with a myriad of great opportunities.
Beyond investors, there’s another group of people that love stability in a business: buyers. One way or the other, you can’t work forever—in all likelihood, you don’t even want to. When the time comes and you’re ready to finally cash out, having a stable business model with recurring revenue will make your business extremely attractive to buyers, increasing your chances of getting a good deal and allowing yourself to retire in style. Who doesn’t want that?
Let’s take a look at one more example: Netflix & Blockbuster. It may seem strange, but if you have young children, they almost certainly know about Netflix, and there’s a low chance they know what Blockbuster is. Both were in the business of home videos, but aside from Netflix gaining an edge in streaming, there was one element that separated the two: Netflix’s recurring revenue-based subscription model. Today, Netflix is a hugely successful, multi-billion-dollar business and a household name. Though once a household name, Blockbuster now has a single store left in Oregon and is now something of a novelty. That should say it all.
Like most other topics we discuss, I go into more detail in my book 90-Day Profit Reset: Gain Your Independence from Reduced Cash Flow, Evaporating Customers, and Shrinking Margins, which is available on Amazon in both Kindle and paperback editions. Give it a read, and keep in mind what we discussed about what recurring revenue can do for you. In the meantime, take care, stay healthy.