Recurring revenues are revenues that repeat periodically from a single sale. This is the opposite of non-recurring revenue, which occurs only once. Consider a company that sells installation services for HVAC systems. When they sell an installation, deliver as promised, and get paid, they have non-recurring revenue. It happened once and that’s that. But if the company decides to start offering an HVAC monitoring service for a monthly fee where they remotely track the condition of the HVAC system and alert clients to any problems, they have just added a recurring revenue sale. One sale to a customer could lead to many years of revenues coming in from that one sale.
Why your business should add recurring revenues
Many business analysts believe that recurring revenues are the most attractive type of sales that a company can generate because:
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, 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.
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 by 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 specialized information, advice or best practices associated with your product
How to add recurring revenues to your business is only limited by your creativity.
Tips for getting recurring revenue sales off the ground
Adding recurring revenues to your revenue mix does have its challenges.
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 minimizing the risk of non-payment or early cancellation. Your company may need to modify its current procedures or invest in a new billing system. One method of automatic billing for recurring revenues is ACH (Automated Clearing House), which I wrote about recently.
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 onetime fee upfront followed by the series of recurring payments.
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.
Tip: Build trust through good policies
Finally, have transparent cancellation terms and procedures. If there is any doubt in the customer’s mind as to whether it’s a good idea to sign up for automatic, recurring payments, ensuring them that they truly can cancel offers great peace of mind. There are many horror stories of companies that refuse to stop recurring revenue payments and force customers that want to cancel to go through a series of seemingly pointless steps in the hopes that the customer will grow weary and simply be resigned to the fact that they will keep paying for something they don’t need. Do everything you can to disassociate yourself from that type of nefarious activity.
Mike Periu is the founder of EcoFin Media, LLC an independent producer of financial, economic and entrepreneurial content for television, radio, print and the internet. Over the past ten years he has started three companies and advised over 50 companies on financial strategies including fundraising. Mike also hosts regular small business webinars on a range of topics relevant to business owners.