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The Importance of Recurring Revenue

John Warrillow, author of Built to Sell, answers questions from readers about building a sellable business.

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Dear John:

Your book talks a lot about the importance of recurring revenue, but my product is a one-time-purchase item. Can I still create a sellable company?

—Brian, Atlanta

Recurring revenue is important because to create a valuable, sellable company, you need to demonstrate how the business will continue to thrive once you're gone. Long-term contracts are the best way to guarantee a stream of revenue in the future, but you can also create recurring revenue through a subscription service or membership club or even just by adding a line of consumables to what you sell.

First, brainstorm how you might evolve your one-time-purchase into a recurring revenue model. For example, consider the following questions:

  • Would customers pay a monthly or annual fee for the latest version of your product? 
  • Is there an educational component of your product that you could sell a monthly subscription to?
  • Similar to the way printers need toner, is there a "consumable" that customers need to buy regularly to keep your product working well?

You might be surprised at the range of businesses that can be turned into a subscription model. For example, Snowboard Addiction is a Whistler, British Columbia-based business that creates and distributes freestyle snowboarding tutorials. Snowboarders download tips on how to pull off the latest moves on the hill.

When Nev Lapwood, Snowboard Addiction's founder, wanted to create a recurring revenue stream, he started offering a subscription. For one annual fee, customers can now download all new tutorials released in the year (Nev and his team create a new video every month or so). With a subscription model in place, Nev's revenue is now more predictable, which is allowing him more time to travel (this month, Nev and his girlfriend are leaving for a five-month vacation to southeast Asia while his business continues to churn out subscription renewals).

If there are no opportunities to create recurring revenue, the next best thing is to demonstrate to an acquirer that you have a systematic and predictable way to get a customer. For example, if you sell diamond engagement rings, document and track your process for getting a groom-to-be as a customer. If you have a predictable sales model, you may still have a valuable business provided you can teach others to sell as predictably and systematically as you can.

Most acquirers would still prefer to buy a recurring revenue stream over a one-time-purchase with a predictable model for finding customers, so spend 90 percent of your time thinking about how to create a tail to what you sell.

John Warrillow is the author of Built To Sell: Creating a Business That Can Thrive Without You, which was released by Portfolio/Penguin on April 28, 2011.

Last updated: Jun 2, 2011

JOHN WARRILLOW | Columnist | Sellability

John Warrillow is the author of Built to Sell: Creating a Business That Can Thrive Without You and the founder of The Sellability Score, a cloud-based software company that helps business owners improve the value of their company.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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