How to double the value of your business
You can double your business’s valuation by creating a recurring revenue stream.
The technology sector clearly understands this phenomenon. It’s why so many technology vendors have moved to subscription pricing. They’d much rather sell you an ongoing subscription than have you pay a one-time fee upfront.
Adobe, best known for their PDF reader, provides one of the many examples. In 2012, their market capitalization was $16B. They switched from a one-time purchase model to monthly subscription pricing. Two years later, their market capitalization had more than doubled – to $35.5B.
How does recurring revenue affect valuation?
Predictability of future revenue and profit provides the answer. Most businesses must make a sale each time they generate revenue. If they sell products, they need an order for each sale. If they sell services, they’re only paid when that service is rendered. This is an unpredictable model. Short-term changes in demand immediately affect the revenue generated by the business. And future growth is hard to predict.
But subscription-based businesses don’t have that same variability. They charge the same amount each month. Short-term changes in demand don’t affect revenue much.
Importantly, the revenue builds. Let’s say you’ve sold one contract for $10/month, so your revenue is $10/month. If you sell a second contract for $10/month, the revenue goes to $20/month. A third contract take your revenue to $30/month. And so on. You don’t have to make a sale for that revenue to come in. It’s a subscription. As long as people are happy with your product or service, the money rolls in.
With recurring revenue, it’s much easier to see the business’s growth path. And because the revenue comes from subscription contracts, the growth is far more likely to happen. Investors love that.
Profit also becomes more predictable. If you know you have revenue of $30/month, you can ensure your expenses remain below this level. And that makes it far more likely you’ll produce ongoing profit.
It takes a while for a business to switch to a recurring revenue model, and there are challenges. But, once the pattern is established, the benefits accumulate.
Recurring revenue isn’t limited to the technology sector. Most businesses can create recurring revenue. Let’s look at a few ways this can be done.
We’ll start with services businesses. Most services businesses are called in when the customer has a problem or there’s a specific task to be done. We call a plumber when there’s a problem with the pipes. We call an electrician when there’s a problem with the wiring. We call a lawyer when we have a legal problem or need a legal document written. We call an accountant when we need our tax done.
The customer identifies a need and contacts the services company. The services company provides the service and then (hopefully) gets paid for that service. Services businesses are reactive businesses. They react after the customer has identified a need.
Moving a services business from reactive to proactive
We can create recurring revenue streams by proactively addressing customer problems. Don’t wait for the problem to occur – prevent the problem happening. Let’s consider a plumber. The householder calls a plumber when a pipe breaks. What the householder wants is healthy pipes. So, the plumber fixes the broken pipe. But plumbers don’t have to wait for the pipes to break. They
could provide regular health checks on the pipes. Using plumbing cameras, they could identify potential problems and deal with them before the damage is done. Householders could be charged a small monthly fee for regular checkups and minor rectification work.
Some plumbers may go further. For a higher monthly fee they’ll fix any problem that occurs free of charge. With enough customers, the risk would be
dispersed, in the same way as insurance companies disperse risk. And customers wouldn’t face a huge bill if something does go wrong.
Think about any business that addresses customer problems. Instead of reacting to a specific task or problem, become proactive. Be clear about the end-result or outcome the customer needs and turn that into a recurring service.
What about product companies?
Whenever we buy a product, there’s an outcome we want to achieve. If we buy a hamburger, we want to be full. If we buy a movie ticket, we want to be entertained. If we buy a sports car, we probably want to be noticed.
For many customers, the product they buy isn’t all they need to achieve their outcome. For example, a sports car isn’t much use if the customer can’t drive. The opportunity for recurring revenue for product companies lies in recurring services. The services should help the customer achieve the outcome they need. Again, a proactive approach to provision of these additional services works best.
Product companies should think about all the things the customers must do themselves, or must source from other providers, to achieve their outcome. Doing more of those things for the customer provides an opportunity for recurring revenue.
Summary
It starts with being clear about the outcome the customer is trying to achieve. For a plumber, the customer wants healthy pipes. For an electrician, the customer wants a safe house. For a lawyer, the customer wants low legal risk. For an accountant, the customer wants to pay the minimum legal tax.
When people buy a product, there’s an outcome they want to achieve. Like being full, entertained or noticed.
Think about all the problems or challenges the customers have in achieving their outcome. Then create a recurring service that proactively addresses these problems or challenges. And now you have a recurring revenue stream.
If the recurring revenue stream becomes significant enough, then your business may do the same as Adobe – double in value.
If your customers are successful, there’s a great chance you’ll be successful. But are you clear about what your customers consider success to be? How do you work that out? And how can you use that knowledge to grow revenue, particularly recurring revenue? In this podcast, you’ll learn a simple way of defining what success looks like for your customers. And you’ll then learn how to use that knowledge to grow your business. You can learn more about outcomes at outcomeleaders.com and customer success at gen3cs.com. Get in touch with Paul at pjh@outcomeleaders.com.
Paul Henderson is an author, speaker and podcaster on customer success. He spent five years designing and running customer success programs across the Asia Pacific. His first book, on execution capability, was published in 2016 and his second, The Outcome Generation, is out soon.
