Recurring revenue: How to take the headache out of chasing sales

19 Mar

How do you feel when you open up for business on 1 January? Is it something like: ‘Wow, how am I going to reach my sales goal for this year? There’s so much to do!’

Wouldn’t it be wonderful if you already had a chunk of your annual sales goal in the bag before you’d even woken up on the first day of the year?

If that sounds too good to be true, it needn’t be. It’s all about having recurring revenues. In this article I’m going to explain what recurring revenues are and how you can generate more of them.

Recurring revenue is revenue that keeps repeating

Recurring revenue describes the situation when customers keep buying a product or service from you again and again. Sometimes they may have a contract with you and they’re buying because they have to. Often it’s just easier or cheaper for them to keep buying from you rather than shop around.

Here are some examples of arrangements that give rise to recurring revenue:

Service contracts (e.g. managing residential lettings).
Subscriptions (e.g. news or data services).
Licences (e.g. business software).
Sales of consumables, where the buyer has bought a piece of equipment and must keep buying a disposable item to use with it. It’s often called the ‘razor and razor blade’ model. Nespresso (coffee machine and pods) is another good example.
Services the customer needs continuously where it would be expensive or inconvenient for them to change suppliers. Accountancy services are a common example.
Membership fees that give access to a service or a facility (e.g. a gym or a professional body).
Maintenance contracts (e.g. keeping business IT systems running smoothly).
A rental agreement covering a piece of equipment.

Why is recurring revenue so valuable?

Recurring revenues are very valuable. Here’s why:

They reduce the scope for nasty surprises compared with a business where every sale is a one-off. Your business should run more smoothly with fewer risks as a result.
By cutting time spent fire-fighting they enable you to focus on growing your business. With more visibility of your future revenues you can plan and invest with more confidence.
For these reasons your business will be more valuable to an investor (if you want to raise funding for expansion) or to a buyer (if you decide to sell up).

With this in mind you should try to maximise the share of your revenues that naturally recur.

Four techniques for maximising recurring revenue

Here are four techniques you can use to boost the share of your sales that comes from repeat business.

Sell recurring complementary services

One option is to identify recurring service revenues that are complementary to your core business and offer those to your customers as well. Equipment maintenance services are a good example.

Offer a ‘subscribe and save’ option

Another is to encourage your customer to ‘subscribe and save’ rather than make a one-off payment. If they take up your offer they pay a discounted regular amount each month in exchange for an agreed quantity of your products until they choose to cancel their subscription.

This works well if the customer buys your product regularly (e.g. I buy protein bars via a subscription). The customer gets a cheaper price for committing to buy something they would have bought anyway. You gain extra visibility of your future sales while ensuring your customer doesn’t try out a similar product from one of your competitors.

Offer an ‘all you can eat’ option

A variation is an all-you-can-eat option (with limits) like Pret A Manger’s Club Pret coffee subscription. This works well when your business costs are mainly fixed (i.e. you could handle more sales without adding much to your costs). The amount you charge must be more than the customer pays under the traditional product-based pricing model.

Transform your product into a service

Finally, you can completely shift from one-off product sales to selling a service bundle. Instead of paying to own a product, the customer pays for the ability to use the product. The software industry shifted to this model a long time ago, swapping CDs for software as a service.

Manufacturing businesses have followed suit, usually via a lease package with an availability/ reliability guarantee. The supplier absorbs the risk of the product breaking down but in return can generate more profit in the long term. Many cars are now sold on full service leases.

Conclusion: Do all you can to maximise your recurring revenues

I recommend you monitor the share of your sales that come from selling the same products to the same customers month after month. Do all you can to maintain and increase them and don’t be shy of boasting about good results. They send a great signal about the value of your business.