What is recurring revenue? It’s the revenue you can depend on generating, year after year, with a high degree of certainty. It’s the repeat business or long-term contracts you’ve 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, Inc. maintains that every business should have “recurring revenue woven into its core [and] if you’re not thinking along these lines, you’re putting the future of your business in jeopardy.”
Strong words! Still need a bit more convincing? Here are the top three reasons it’s a good idea to build recurring revenue into your business model.
1. Frees up more time to grow your business
Consider this: if your business generates $1 million in revenue, and 75% of that total is recurring revenue, you’ll 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’ll be better positioned to ramp up or lower expenses relative to revenue, and stay cash flow positive
It’s also worth noting that potential investors, private equity and loan providers tend to regard businesses with recurring revenue as “safer bets” because they’re less prone to insolvency. If you’re hoping to attract a partner or secure a loan to expand your company, showing recurring revenue streams can help strengthen your position.
3. Opens the door to valuable customer insights
Generating recurring revenue streams requires looking closely at the particular wants, needs, and behaviors of your target audience.
In order 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 focussing exclusively on one-off transactions. While lucrative one-time deals are definitely a bonus, recurring contracts are the gifts that keeps on giving!