The Recurring Revenue Ladder
The chance to bring in revenue is what truly drives someone to make an offer to buy your business. Without revenue, a good investment can quickly go sour. Having a rock solid revenue foundation that you can show to a hesitant buyer can push them in the right direction. But, not all streams of revenue is as valuable as others.
Typically, a business will offer some combination of six different forms of revenue, each one more valuable than the last. Let’s dive into these six forms, in order from least valuable to most:
A simple consumable is anything that a business sells that is “one and done.” For example, once a clothing store sells a t-shirt, there is no guarantee that the customer will do business with you again just because they purchased your product. While good marketing and a quality good can create some brand loyalty, this form of revenue is the most prone to seasonal shifts in consumer behavior and changes in current trends.
Sunk money consumables
Brands like Keurig really have the sunk money consumables concept down to a science. Once a consumer has made an investment in a product, such as a coffee machine that only takes a particular type of “pod,” they are going to continue to buy the product to make their investment worth the money. So, once a consumer buys the more expensive machine, the recurring revenue comes in the form of brand-specific products that the machine must have to function.
Subscription services have made a big splash lately with the rise of monthly boxes of curated products. Everything from makeup samples to children’s crafts are delivered to a consumer’s mailbox at regular intervals until they cancel the subscription. This form of recurring revenue is especially valuable when bulk discounts are offered, wherein a new subscriber pays less when purchasing multiple months of the product at once. This assures that the customer is going to stick around for at least the amount of time paid in advance.
Sunk money subscriptions
Sunk money subscriptions combine the concept of “sinking money” into a machine, then subscribing to an ongoing service that accompanies that machine. For example, purchasing an iPad through a phone provider, then paying a monthly fee for internet access is a sunk money subscription. Often the subscription comes in the form of a digital service that pairs with a particular device.
Many digital services exist on an “auto renewal” basis, in which they continue to charge a consumer every month until the consumer says otherwise. Video streaming services like Netflix and Hulu are an auto renewal subscription service, and very successful ones at that. Other examples include cloud storage service providers and gym memberships. This revenue is evergreen and a very valuable commodity for a small business.
The most valuable type of revenue is contract revenue. This form ensures that the revenue is legally obligated to be ongoing due to the terms of the contract. Backing out of a contract is often more expensive than simply following through with it, and it offers the consumer assurances that the business is going to provide a specific set of goods or services that are also legally binding. Contract revenue is very attractive to those looking to buy a business because it is the most reliable form of recurring revenue.
Your goal as a business owner, and eventual seller, is to move down the ladder. If you are currently only selling consumables, finding ways to sell sunk money consumables is your next step. The farther you are along the ladder, the more attractive your business is going to be.
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