A recurring revenue model has become increasingly important in today’s business landscape. Recurring revenue is an option that some businesses offer for a recurring product or service which customers are billed for at regular intervals. This model provides a consistent flow of income that offers stability. Buyers are now seeking out businesses with a recurring revenue model because of its predictability and potential for growth.
Understanding Recurring Revenue Models
As mentioned above, a recurring revenue model is a business model that is used for products or services that are provided on a regular basis. Customers are billed at regular intervals–monthly, quarterly, annually, etc. A highly popular example of this is subscription services in which customers pay monthly to receive a recurring product. Streaming services might also jump to mind as they are in virtually every household today. Another common type of recurring revenue are consultants or agencies that offer a service for a set period of time. Maintenance and support for a product work similarly, as well.
Recurring revenue is often viewed as the preferred model over one-time revenue for a few reasons. Recurring revenue offers predictable cash flow as opposed to a one time purchase. It also typically leads to a deeper customer relationship so customers are more likely to stay with a recurring service. The cost of acquiring a recurring customer is significantly lower than the cost of constantly trying to find new one-time customers. There is also greater ability to scale the business with a recurring revenue model. For these reasons, it matters what type of business model your business has in valuation of the business.
The Role of Recurring Revenue in Enhancing Business Value
The predictable cash flow that a recurring revenue model provides is attractive for both buyers and investors. This stability often commands higher multiples in business valuations. Building lasting relationships with customers also increases the business’s lifetime value and decreases customer turnover.
Why Buyers Prefer Businesses with Predictable Revenue Streams
A major reason that buys prefer businesses with recurring revenue is because there is a reduced risk for buyers. Predictable revenue provides a consistent financial outlook and stability. It also simplifies operations because it allows for easier financial planning, budgeting, and growth forecasting. It’s also important to buyers that stable revenue models can lead to more efficient use of capital and quicker ROI.
Recurring Revenue and Business Growth Potential
An excellent way to increase organic growth is upselling and cross-selling products. Recurring revenue models create an easier pathway for both. Since recurring revenue models are seen as less risky, they often make a business more appealing for financing. Another aspect that allows businesses to grow and leave competitors behind is locking in customers which reduces vulnerability.
How to Build a Strong Recurring Revenue Model in a Mid-Market Business
The main focus of a recurring revenue model is customer retention through building loyalty. There should be offers that are flexible and customer-centric. This can include options like tiered pricing, annual contracts, and custom solutions to appeal to diverse customer segments. It is also essential to invest in customer support and relationship management. Especially because this business model involves long-term customers, the importance of post-sale support and engagement cannot be understated. If you do not keep customers happy, you will risk losing them.
Businesses with predictable revenue streams are not only more appealing to buyers but are also better positioned for long-term success and resilience in changing markets. The bottom line is recurring revenue models add value, reduce buyer risk, and offer growth potential increasing business value. Choosing to utilize this business model is sure to make such businesses highly desirable in the mid-market. If your business does not offer any recurring products or services, it might just be time to evaluate if there is a way to incorporate it.
Mark Hartmann is a three-time Inc 500|5000 CEO with a rich sales, operations, and leadership background in the insurance, financial services, and healthcare sectors. With extensive experience growing and selling his own businesses, Mark leverages his expertise to help owners grow and sell businesses valued at $1M —$25M. He’s earned a Master of Business Administration from Eastern University, a master of science degree in organizational change management from St. Elizabeth University, and a graduate certificate in executive coaching from Columbia University. Mark’s professional certifications include Certified Mergers and Acquisitions Professional (CM&AP), Certified Business Intermediary (CBI), Certified Exit Planning Advisor (CEPA), and Certified Value Builder (CVB).