6 Ways to Create Recurring Revenue
00:10 John Warrillow: For your business to be able to operate without you, one of the key ways to do that is to create some recurring revenues so you're not relying on your personal salesmanship to actually sell your products and services. When it comes to recurring revenue, I found that acquirers value it in different lights based on which of the six forms of recurring revenue you're speaking about. I'll give you the six now, from least valuable in the eyes of an acquirer all the way up to most valuable.
00:37 Warrillow: So number six is "Simple Consumables." So Starbucks has a consumables model. Every four or five hours, I have a caffeine addiction, so I need a new Starbucks coffee. Number five up the list from there is a "Sunk-money Consumables," where as a consumer you buy something, a platform that makes you more loyal to that platform. Good coffee example would be the Nespresso coffee maker, right? You pay $500, $600, $700 for a coffee maker, you're much more likely to buy those little capsules from Nespresso. Number four is "Straight-up Subscription Revenue." So if you have ever subscribed to a magazine, as an example, you know that you've subscribed, there's a re-up period, but that magazine company will know that you're a customer for the next 12 or 24 months. When you talk about the third rung in the ladder, it's "Sunk-money Subscriptions." Think about the Bloomberg Terminal. Bloomberg Wall Street traders have the Bloomberg Terminal on their desk. That's a sunk-money. They bought into a platform. They've actually bought the hardware. Then they buy the information that Bloomberg offers on a subscription basis.
01:37 Warrillow: Number two is recurring revenue that is auto-occurring or "evergreen," meaning when you store documents, for example, with Norm Brodsky or with Iron Mountain, they will keep sending you a bill in perpetuity. You're assumed to be a customer forever. And, of course, the most valuable form of recurring revenue is straight contract revenue. So when, for example, iPhone launched in the United States, AT&T insisted that you buy a three-year contract. Why? Because the stock value of AT&T mobility went up and down based on that contract revenue. So those are the six forms of recurring revenue.
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.