3 Reasons Recurring Revenue is a Good Idea
What is recurring revenue? It is the revenue you can depend on generating, year after year, with a high degree of certainty. It is the repeat business or long-term contracts you have established with clients who know and trust your business.
For example, you might bundle offers into a monthly subscription, or launch a points system that incentivizes loyalty with free gifts or special discounts. Recurring revenue comes in many forms and is considered the gold standard of business models.
Jim Schleckser, a growth specialist with Inc. CEO Project, maintains that every business should have “recurring revenue woven into its core [and] if you are not thinking along these lines, you are putting the future of your business in jeopardy.”
Strong words! Still, need a bit more convincing? Here are the top three reasons it is a good idea to build recurring revenue into your business model.
1. Frees up more time to grow your business
Consider this: if your company generates $1 million in revenue, and 75% of that total is recurring revenue, you will start each year knowing you can count on at least $750, 000. This immediately frees up time and energy for new product development, expanded marketing, and attracting new customers. Plus, the added financial certainty can help alleviate stress, which goes a long way to improving productivity and your overall wellbeing.
2. Helps maintain positive cash flow
Recurring revenue also helps business owners develop and stick to a reasonable budget. Knowing you can expect to earn a certain amount each month makes it easier to cover both routine and unexpected costs – like accounts payable, employee salaries, last-minute repairs, loan payments, etc.
Ultimately, this predictability yields greater financial visibility. You will be better positioned to ramp up or lower expenses relative to revenue and stay cash flow positive
It is also worth noting that potential investors, private equity, and loan providers tend to regard businesses with recurring revenue as “safer bets” because they are less prone to insolvency. Hoping to attract a business partner or secure a business loan to expand your company’s operations? Showing that you have recurring revenue streams can help strengthen your position.
3. Opens the door to valuable customer insights
Generating recurring sources of income requires looking closely at the particular wants, needs, and behaviors of your target audience.
To build the long-term relationships necessary for repeat business, you must understand what matters most to your customers and how to meet those needs (in ways your competitors do not).
As you research your market and talk with your clients, deeper insights will emerge about their particular preferences and pain points – knowledge that will directly inform your marketing and further refine your product or service offers. Enhanced customization leads to more competitive offers, which in turn supports recurring revenue.
The bottom line? Business owners should focus on building long-term customer relationships, rather than concentrating exclusively on one-off transactions. While lucrative one-time deals are definitely a bonus, recurring contracts are the gifts that keep on giving!