As any business owner knows, Cash is King and when you can develop a method of repeatable, consistent, monthly cash then you’re on top. Let’s face it, the more fixed expenses you can cover with a fixed cashflow the better your business will run for several reasons:
- You have more free time – to devote to things other than “Where are we getting the money for payroll this week?” – In other words, you’re more free to work on your business instead of just in it. Or take a vacation and know money will still be coming in when you get back.
- You can sell your business for more – any business that has consistent recurring revenue is always worth more than a business that does not. Go look at the going rates of laundry mats and car washes. Often they go for many times earnings and even more than 1 times annual revenue.
- You can go that extra mile for your customers – this one is often overlooked, but when you NEED that next big check to pay this week’s bills you might just skip other things that were of higher priority but pay less to get that fat check. Beyond that, you can sometimes do services for customers for free or at a discounted rate to go that extra mile even though it’s a month past warranty simply because you can afford to.
- You can sleep more easily – When you don’t know how you’re going to pay that next bill it can get a bit nerve-racking for any of us. It’s a lot easier when you know you have X amount of billing going out every week or month.
The list can go on and on. If it’s not obvious yet, then just take my word for it, every business wants recurring revenue. Before moving further, I’ll provide my definition of recurring revenue as “Consistent, repeated income from the same customer in a predictable time frame.” In other words, if you have an oil change business, I don’t consider oil changes recurring revenue unless your customer is tied into some sort of maintenance plan or agreement. That’s not recurring revenue because in 3 months, they can go somewhere else to get their oil changed very easily.
Recurring revenue can be broken down to 3 main areas:
- Renting/Leasing Products – In this category would be automobiles, motorcycles and other gas powered vehicles along with any product designed to be very reliable for a long time. The top 2 that come to mind are copier machines and water softeners. Every city has a copier salesman with a lease program “perfectly tailored” to your business needs… We also all have the Culligan man. His business philosophy since 1936 has been “Rent one, Sell one.” What he’s renting and selling are water softeners and the reason he does that is to have cash by selling a softener to cover his costs for renting the next one. He rents the next one to build up reliable consistent recurring revenue that can continue for literally decades.
- Services – The simplest way to think of this is subscriptions – magazines, newspapers, Netflix, Cable TV, internet, cell phones, insurance premiums – All those bills you have to pay each and every month.
- Rent-to-own/Payment Plans – These are just like the “rent/lease” products above except eventually the customer will own them AND they generally don’t last as long. Think of “Rent-to-Own” stores like Rent-a-Center and Aarons. The products they rent-to-own have a relatively short shelf-life. In other words, 5 years from now we all want a bigger TV, newer computer, upgraded furniture, the latest gaming system, and the most advanced new sound system. So guess what the rent to own businesses try to do? They start renting you a new X when the rent-to-own plan for the last one is up so you’re always making a monthly payment. And the second time around it’s a much easier sale because the consumer already has that dollar amount budgeted every month.
Now it’s time to get creative, how can you incorporate those into your business?
If your business sells a product then you can easily incorporate 1,2 and/or 3. You just have to decide which ones will work best. Is your product prone to frequent and regular updates that your customers are going to want to replace in a few years? Every major electronics and computer store now has a price and a monthly payment next to each product. Those are rent-to-own or finance programs. There are subtle difference between finance plans and rent-to-own plans that normally come down to how the interest is calculated. Either one can be effective. Off the top of my head, I can only think of a few items that you would want to simply rent without your customer ever owning the product. Basically any major appliance in your home could fit into that category – Hot water heaters, air conditioning units, heat pumps… All the things people only think about when they don’t work. Why rent those in addition to selling them? The benefit to the consumer is that with a rental, since your business technically owns the product, it’s your responsibility to fix it when it’s broke. In other words, the customer will never have to pay any bill except their monthly rental payment. The benefit to you is the recurring income.
Honestly, I’m not at all familiar with those home appliances so it may make a lot more sense to simply sell the customer a new unit along with an extended warranty/maintenance program. That way you can get the up-front sale to cover cash flow and recurring revenue from the service plan forever. After all, if you sell them the plan up-front and get them used to an annual “plumbing inspection” or “air conditioning” maintenance they’re much more likely to continue that every year instead of waiting till 3 or 5 years down the road for maintenance. My last blog was all about creating, selling, and pricing these extended warranties to create another profit stream for your business so check it out for more details.
In my business we’ve incorporated all 3. We have rental options, rent-to-own options (we don’t call it financing for legal reasons), and Platinum Care Plans. Of course we also simply sell our product which is still the preferred method for most clients.
If your business simply provides a service such as computer support, accounting, legal advice, consulting, etc. etc. etc. the same rules still apply. For the computer company you may be able to lease/rent equipment (maybe even consider adding a copier lease division since those are so tied to computers with built-in network printers and scanners these days) or simply setup a monthly service fee where you verify backups, scan for viruses, maintain drives (i.e. defrags, scan disks, space requirements), and help spec out new equipment as needed for a flat monthly fee. Lawyers now provide pre-paid legal services (just google it) and most accountants still have a lot of monthly or quarterly services to supplement the April tax return cash influx. The point is, no matter what your business does, there’s a way to get people to come back again and again. Find those opportunities and in the next recession you’ll be in a much better position than today.
To your recurring success, Bryan