Keeping an eye on recurring revenue
Written on the 7 April 2009
Entrepreneur, consultant, educator and author Dr Tom McKaskill has established a reputation as one of the world’s leading authorities on exit strategies for high-growth enterprises.
IF I had to pick only one characteristic of a business which was essential to business survival, I would pick recurring revenue. Lots of other elements would be in the mix, such as competitive advantage, great staff, loyal customers, good brands, key locations and so on, but nothing beats recurring revenue for staying in business during hard times.
Recurring revenue can mean different things to different sectors and even for different businesses within the same sector. The best forms of recurring revenue, of course, are those protected though contractual agreements. Thus revenue guarantees, long-term supply contracts, service agreements, maintenance contracts, protected territories, exclusive agencies and so on are great to have. Somewhat weaker forms of recurring revenue come from loyalty schemes, preferred product placement and strategic partnerships. The key characteristic of recurring revenue is that you can rely on it to continue even when times get tough.
As a business we can set out to build a recurring revenue stream even without the protection of an agreement. Generally this means creating products or service which have maintenance or upgrade characteristics. We can also do it by having products which need to be renewed or replaced on a regular basis but which also have high switching costs.
High switching costs occur when it is expensive, time consuming or stressful to move from one product or service to a competitor’s offering. Products or services which are embedded into the buyer’s organisation or processes are generally difficult to replace.
We can also build a recurring revenue stream by devoting sales resources to generating preferred or exclusive supplier relationships. While this can be done around discounts and rebates, think about other forms of value you can bring to the customer. Perhaps they might want a higher guarantee of supply or capacity, or products better tailored to their own business. Look at how you can be more strategic or needed by your customer. Can you provide greater value by understanding their business better or making your own business easier to deal with?
A resilient business can fall back on its recurring revenue to survive for some period of time. Thus, while they may not be generating new customers, the current ones stay loyal and generate reliable revenue. At the same time, the business needs to ensure that its recurring expenses can be cut back under its recurring revenue.
Since many expenses are difficult to reduce, this means that recurring revenue needs to be reasonably high if it is to provide protection from a downturn.