It’s all about predictable revenue, high margins and turning your product into a solution.
Many business analysts and advisors believe that recurring revenues are the most attractive type of sales that a company can generate.
Here’s why they are a great, untapped opportunity for many businesses, and how to set up this type of business model.
Recurring revenues are predictable
One recurring revenue sale leads to a fixed amount of revenue being accrued and paid to your company on a regular basis over a long period of time.
As more customers sign up for your recurring revenue product or service, your company will have a reliable, steady amount of cash flow coming in each month (assuming monthly recurring charges).
This predictability allows for better planning with respect to future investments. You know you can count on that money. It also provides a cushion of cash which could allow your company to take on higher-risk, higher-return projects.
Finally, investors and lenders don’t like surprises. Predictable revenues will make your company a more attractive investment target or loan applicant.
Recurring revenues can be high margin
Many proven ways to generate recurring revenues are by their nature high margin. The costs associated with servicing each additional new customer are low relative to the additional revenue that they provide the company.
Recurring revenues offer a high return on investment
Many recurring revenue services are an incremental sale to an existing product or service sale. The financial and human capital resources required to execute this recurring revenue sale are far less than those required for the development and sale of a new, unrelated product.
This boosts the ROI for this type of sale.
Adding recurring revenues to your revenue mix does have its challenges. So, what are the best ways to get your recurring revenue sales off the ground?
Tip: Bill your customers automatically and frequently
It’s important to ensure that your billing system captures the recurring revenues automatically. This helps drive the “predictability” of the revenues by minimising the risk of non-payment or early cancellation.
Your company may need to modify its current procedures or invest in a new billing system.
The frequency of payments for each sale will depend on your business model and industry but can include monthly, quarterly, semi-annual or annual payments.
Some companies offer a hybrid pricing model with an initial one-time fee upfront followed by the series of recurring payments. Others offer discounts for longer-term payment, to incentivise early payments for lengthier periods.
Tip: Train your sales staff on recurring revenues
It’s also important to properly train your sales staff on how to incorporate into the sales process the services that will generate recurring revenues. You may also consider aligning your sales team’s compensation structure with the new focus on recurring revenues.
Even though the initial dollar value of the recurring revenue sales may be low relative to your existing sales, the margins — as mentioned — will almost certainly be higher. Your team will need to start thinking about the lifetime value of a customer, rather than each individual invoice amount.
Generate recurring revenues by turning your product into a “solution”
Turning your product into a “solution” is a proven way to achieve recurring revenues. If you sell products, add a service component to it. Services linked to products are an excellent way to generate recurring revenues. This can be done through:
- Preventive maintenance contracts
- “On call” services similar to retainers charged by attorneys and other professional
- Selling access to future updates and scheduled maintenance
- Offering subscriptions to specialised information, advice or best practices associated with your product
What are you waiting for? How can you implement a recurring sales revenue model in your business?
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