I've written before about recurring revenue and how powerful it is. Not only does it create a source of predictable revenue, but it also boosts the valuation of your business. It can even help you get more sleep at night because you're not worried about where your next sale will come from.
But there's yet another factor in understanding the incredible power of recurring revenue in an organization: The impact it has on your sales organization--or lack of one. That's an important lesson we can learn from the online streaming service Netflix, which has built an entire business without the benefit of a traditional sales force you would usually see inside a multi-billion-dollar organization.
Let me explain what I mean.
A Sales-Driven Organization
You can tell a lot about how an organization should be structured based on its business model in embracing recurring revenue. In other words, the less recurring revenue you have, the more sales people you need to have on staff.
For example, I used to work with a company that sold home security equipment. We would install the equipment in a home and then find our next customer since another company provided the monitoring services. That meant we were a company with no recurring revenue, everything was transactional.
Every year, we started from zero--we had no idea what our revenue would be for the year. And the organizational structure reflected this fact. Looking at our organizational chart, 65 percent to 70 percent of people were either directly or indirectly involved in sales. The rest of the company involved people in support roles like marketing and accounting. Again, everything was built around sales, and the size of our sales team reflected this truth.
Sticky Recurring Revenue Means No Sales Force
Now think about how Netflix works. While I don't have access to their org chart, I'm going to make an educated guess that 90 percent of their staff are not in a sales role. That's because when most people sign up for Netflix, agreeing to pay the monthly subscriber fee, they do it online and without ever interacting with a human being.
Netflix has built its business around a recurring revenue model that makes it exceptionally easy for its customers to sign up in minutes and keep their subscription active with just a credit card.
Rather than invest in a sales force, Netflix has plowed its money into its "must see" content--which doubles as their sales force and makes the revenue sticky. Think about it: How many people do you know who signed up for Netflix because someone told them they just needed to watch a particular show or movie that was only available on Netflix?
Netflix also continues to make significant investments in machine learning and artificial intelligence engineers who help them recommend its content to its customers-- "If you liked this, then we think you'll like to watch this next"--which adds a lot of value. If you have ever watched a movie recommended by Netflix, you know what I mean. That's how Netflix wins customers and retains them, by word of mouth.
Software as service firms operate on a similar model. While they will usually have a sales organization, over time, the service and support organizations grow relative to the sales organization, to support the recurring revenue.
An Opportunity to Rethink Your Business Model
The point is that you can learn a lot about an organization by taking a hard look at its business model. And perhaps the time is ripe for you to take such a look at your own business.
If you sell on a transactional basis, you're going to need to build a larger sales force to help ensure you maintain your sales volume. But if you can build recurring revenue into your model, you can shift resources away from sales into other areas that can help you increase and maintain your customer base over time. If you can do that, you'll also increase the value of your business and maybe even get some more sleep.