Value Builder Factor 5 – Recurring Revenue
The Automatic Company: 5 Ways To Create a Subscription Business
Look at a recent credit card statement, and you’ll notice something relatively new. Instead of lumpy expenses for a few things you’ve purchased, you’ll likely see a number of small, monthly charges for services you subscribe to. You might see names like Netflix, Spotify, Google, Evernote or The New York Times. These are the pioneers in a radical shift from The Demand Economy to The Subscription Economy.
The Demand Economy
In The Demand Economy, businesses respond to customer demand. You open your store and hope customers will come to shop; you dutifully trudge to the office and hope clients will ask you to help with their next project; you go to the plant hoping you’ll be able to sell the stuff you make. Sure, you can stimulate demand through advertising, but you’re still in the position of hoping the money you’ve spent will get results.
The Subscription Economy
In The Subscription Economy, the business model is turned upside down. You’re in control of your destiny. You proactively offer your service or product to customers on a monthly basis. The benefits of a subscription business are impressive:
Positive cash flow. Subscribers pay up front. The more you sell, the more money you have in the bank.
Higher profitmargins. You can eliminate many costs associated with stimulating demand, such as an expensive retail store to capture foot traffic or advertising campaigns to stimulate “one-off” buyers.
Peace of mind. Typically, you know within three percent how much revenue you’re going to have next month.
Better planning. You’ll have a much better idea of how many employees you’ll need to serve your customers.
In addition to the day-to-day benefits of recurring revenue, an annuity revenue stream also gives you more strategic options. Over at SellabilityScore.com we help owners understand what their company is worth, and recurring revenue is one of the eight most important things you can focus on to increase the value of your business.
Magazine companies pioneered the subscription business model that so many software companies leverage today. But you don’t need to be a cloud-based application to enjoy the benefits of a subscription business. Are you wondering if you could transform your company into a recurring revenue engine? Consider the following models.
If you sell other people’s stuff:
Retailers can offer a monthly goodie box. For $25 per month, Standard Cocoa customers receive a curated box of chocolates from around the world. More than 20,000 women pay $10 per month to receive a “Birchbox” every 30 days that is full of make-up samples. Moms are avoiding baby stores and instead signing up for Bluum.com, a monthly box of mom and baby products delivered to their doorsteps. Even old-school retail giant Walmart is getting in on the subscription action: for $7 per month Walmart’s skunkworks company, called “Goodies Co.,” will send you a new box of snacks and treats every 30 days.
If you make stuff:
Manufacturers can isolate a “consumable,” that is, the part of their offering that wears out or runs out. Take, for example, Nestle, the manufacturer of the Nespresso coffee maker. They could offer a subscription of refill coffee capsules each month.
If you advise people:
Consultants can package their best thinking up into a monthly report and charge on an annual subscription model. Forrester Research, Marketing Sherpa and Bloomberg have all done this.
If you keep an eye on things:
Home alarm companies and IT consultants have mastered the ability to charge on a subscription for monitoring what’s important to you. Alarm companies charge you $19.95 a month to “monitor” your house and call the police if someone breaks in. IT consultants charge you a monthly fee to keep an eye on your network and eliminate computer viruses if you get infected. Even some contractors are getting into the subscription business: Hassle Free Homes will keep an eye on your home and proactively fix things that need replacing, like your furnace filter, fire alarm batteries and light bulbs.
If you have a library:
GameFly (video games), Amazon Instant Video, Netflix, Rdio and Spotify all have a library of content they offer on an “all-you-can-eat” subscription. This model can work well for smaller businesses that have built a library of content. Newport Beach-based New Masters Academy offers access to their library of art classes for $19 per month. New Masters Academy has created more than 100 hours of content, so the hard work of creating the library has been done. Now each new subscriber comes with virtually no additional cost.
So, what’s your subscription business going to be?
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Links to the 8 Factors Series:
- The valuation technique used by professional business buyers;
- The three attributes of a scalable business model;
- How to bulletproof your business from demanding employees, overbearing customers, and suppliers who hold you hostage;
- One simple technique for eliminating cash flow worries;
- The one kind of revenue that can triple the value of your business;
- The two essential elements of your marketing plan you need in order to avoid commoditisation and costly price wars;
- The one question you need to ask your customers to predict the likelihood that they will buy again in the future and refer you to others.
- Are you working IN or ON your business
Business Doctors is a business support network dedicated to helping small and medium sized businesses achieve their vision. We are experienced business people, passionate about sharing our skills and experiences. Our aim is to offer hands-on support, dedicated to getting you back on track to growing a profitable and more valuable business.
The Value builder score is an easy way to instantly see how well you are performing against the 8 Factors that drive value in your business. Business Doctors are certified Value Builders combining elements of the system created BY JOHN WARRILLOW with 10 years of hands on experience in helping businesses grow.
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