Good solid businesses value recurring revenue, in fact, it’s usually the most important element when a business is valued for sale or listed on the ASX.
Predictable revenue allows you to better predict growth and control associated costs. It allows you to benefit from scale. Startups all know this, it’s the basis of all the best new business models.
Telecommunications businesses are valued based on the number of subscribers. For software companies, like Xero for example, it’s the value of monthly software subscriptions. For software services it can be special programs that are akin to retainers or ongoing development agreements for key clients. The old model for software companies was support contracts but, for the same reasons, it was essential to the health of a business. Staffing companies value ongoing contract placements. For consulting and creative companies it’s ongoing retainers or value-based fees. They are all variations of the same thing.
That’s not to say that some one-off revenue isn’t a good thing but it’s better if it’s on top of your core business. Think real estate sales above a rent roll, perm recruitment only in addition to temp.
There are usually greater customer acquisition costs involved for one-off sales businesses. If you think about the types of businesses that traditionally have one-off sales such as real estate, cars, and recruitment they are dominated by sales staff and commission structures. Those things are expensive and difficult to manage. Recurring revenue models place less emphasis on sales staff and more on inbound marketing, customer engagement and service.
The most important element to all of this? The customers that give you recurring revenue need to be valued. Customer experience needs to be the main focus of the business. There is a temptation for some businesses to take signed up customers’ revenue for granted and only try to reduce associated costs. Reducing costs is fine if it’s done with the aim of improving customer service, rather than just maintaining it. The way to do that is with better planning, automation, smart systems and astute management. These are the things we all need in the new economy.