We all know that businesses succeed or fail based upon the health of their revenues. All revenue streams are not equal. Actually, there are some more healthy than others. Often CEOs, CFOs and entrepreneurs do not check the health of their various revenue streams and undoubtedly regard all revenue as being equal.
Sure, a dollar in revenue is a dollar in revenue. However, the more predictable that revenue dollar arrives in your balance sheet every day or month, the more valuable that dollar becomes for your company’s future. As you begin to multiply these dollars with additional new customers every month, you create a predictable annuity of cash flow and begin to thrive on what is known as a recurring revenue.
Examples of businesses that have successfully built recurring revenue into their business models range from software companies like Microsoft, entertainment companies such as HBO, Showtime and Netflix, CRM companies like Salesforce.com, online companies such as LinkedIn, GoDaddy! and even dating sites like e-Harmony. All of these companies make their products and services indispensable based on the power of their brands and the communities of customers who depend upon them. Remarkably, these companies have found the secret of keeping their existing customers for months and years, becoming less dependent upon the revenue streams from new customers to keep their business growing.
Recurring revenue allows an organization to spend more energy and investment, growing their core business holistically rather than just generating new business revenue greater than the prior year.
A Platform for Growth
For example, if your annual processing volume is $50 million, and 80 percent of which is recurring, you can already bank on receiving $40 million as you kick off your 2017 fiscal year. Now you need only find an additional $10+ million to grow. Compare this to businesses who have no recurring revenue, and must replace their new year revenue from prior year sales levels to just break even. Each year these businesses start at $0 creating extreme difficulty for any sustainable annual growth.
Cost Predictability Matters
Cost predictability is recurring revenue’s critical advantage. You can accurately predict your costs, thus earnings, and plan for growth accordingly. You significantly reduce your risks by knowing and planning for very predictable costs. Margin compression among US payment service providers is why recurring revenue has become the new gold standard for acquirer business models. Every CEO, owner or entrepreneur should be incorporating and/or expanding sustainable recurring revenue strategies in their 2017 annual plans.
Higher Business Valuation
In fact, the more recurring revenue a company has, the higher its valuation and overall health is viewed by prospective investors and buyers.
Consider the example of National Benefit Programs (NBP), who provides high value/discount accessibility to merchants’ most used suppliers like Office Depot and UPS. When a merchant acquirer partners with NBP, their merchants after a 30-day trial period remain subscribers at nearly a 97% rate after the first year. These new recurring revenues will add to your company’s market capitalization with less dependency on interchange margins for your company’s overall valuation. The new source of recurring revenue generated by NBP will add more confidence and commitment for growth investments for 2017.
In contrast, an acquirer with lesser recurring revenue remains dependent upon the variable discount rate margins that are constantly exposed to intense competition and regulation. This is why revenue cannot be compared and valued equally.
Proper Planning Matters
If you are a CEO, CFO or an entrepreneur initiating your fiscal business planning for 2017, you need to be planning on how you can drive higher percentages of your company’s revenues from sustainable, recurring sources. Just small percentage shifts will greatly enhance the value of your company and allow for new sustainable growth investments. Ideally, no business should exist without having some recurring revenue woven into its basic core operation.
If you’re not planning to convert or incorporate more recurring revenue in your 2017 business plan, you may be jeopardizing your business’s future health and ability to grow. You are just spinning your wheels and wasting energy that would be better suited for growth.