I recently came across a business striving to secure more recurring revenue as part of its strategic review. They understood the two main benefits of recurring revenue: the company’s valuation would increase if it could secure more recurring revenue; it is also incredible useful in terms of being able to accurately predict future revenue and, on the back of it, plan your future resource spend more accurately.

All great – however, their core business revolved around transactional work, where clients typically didn’t require repeat purchases.

This dilemma shed light on a common issue for many businesses I’ve been involved with – how to harness the power of recurring revenue in industries traditionally dominated by one-off transactions. On this issue I have three points to make:

1. Be honest with yourself about the business model that works for your business and your customers. Trying to transition to a model which isn’t a good fit for either, to try and drive up valuation, will probably lead to heartache and lost revenue opportunities.
2. Label your types of opportunities and revenue. In almost all the businesses I’ve been involved with, there’s been a mix of subscription/recurring revenue and transactional one-off revenue. Get into the good habit of labelling each opportunity in your CRM system, as early as possible in the pipeline management process. This information can then flow through your systems so you can more accurately assess your ‘total customer value’ in your opportunities.
3. Don’t underestimate the value of good account management to build your forecasting. I’ve seen many great examples of businesses which have long term account relationships, where it is possible to make a good estimate on future revenue based on historical data and visibility of what’s coming down the track without any firm contractual subscription spend. Make sure you follow a simple ‘plan, do, review’ process with the Finance team at the end of each reporting period, so that you can see how accurate your forecasting was, and discuss why the account behaved differently to how you thought it would. That thinking will then feed into improved forecasting methodology for the next period. Any future investor worth their salt will see the value in a business that can evidence this approach.

Summary: don’t be afraid of building your business on non-recurring revenue. If subscriptions can’t work in your marketplace, then try to identify other ways to build longer term commitment with your customers – do this as part of a quality account management approach.

What are your thoughts on subscription revenue models? Do you think they can work in any industry/market? Or are we too hooked on trying to move clients to this model when sometimes it just doesn’t fit?

#RecurringRevenue #BusinessStrategy #Valuation #Planning #PredictiveAnalytics