There are a lot of reasons to love recurring revenue in your business:
- It is easier to grow.
- It is easier to budget.
- It lets you sleep at night.
And, it is worth a lot more money when you sell your business. I talk about the benefits of recurring revenue in my book: Great CEOs Are Lazy.
But what happens when you have a business that doesn't have any recurring revenue? Turns out it's hard to make a switch once you are committed to generating revenue on a transactional basis.
Wine is one of these transactional businesses. Traditionally, the producer makes a huge investment in land and farming to grow the grapes, pick them, ferment the grape juice, age and bottle the wine over a few years and then, finally, they get to see if anyone will purchase the wine. One bottle at a time! This is a tough business to grow, budget, and sell to anyone who doesn't have a romantic notion of owning a winery.
But a number of firms have turned the wine business around by creating sophisticated wine clubs in which they have embraced a new technology-enabled business model that is asset-light and has the potential for rapid growth and high valuations.
The basics of a wine club are that you commit to buy 2 to 4 bottles of wine a month from the club by giving them your credit card, which is a great opt-out model. They curate the wine to your tastes using a variety of methods and, like Netflix, based on your ratings of the wines you get, they improve their selections to your palate. I recently spoke with Xander Oxman, the CEO of Winc, one of the new style wine clubs.
Winc uses a variety of social media and referral techniques to grow their customer base. They are very aware of the costs to acquire a customer and see a payback on their customer acquisition costs in something over 12 months. While there is at least one wine club that uses direct response TV to grow their club, Winc has tried this and found it to have very high customer acquisition costs. Social media like Facebook and Instagram have an economic benefit and can be tightly targeted to people that have an interest in wine and joining a club.
The other critical factor in a recurring revenue business like a wine club is the customer retention. You don't want to make a big investment in getting a customer, only to lose them a few months later. Winc has been successful at keeping their customers for long periods of time, giving them a return of 3-5 times on their customer acquisition costs. Their 4 year customer retention, a lifetime in the membership business, is just under 50%, which shows that customers are happy with the quality delivered for the price. Ultimately, they are voting with their wallets.
Bankers love recurring revenue business and especially when wine is involved, which explains why this segment has attracted a bunch of venture capital. Winc has raised $30.6 million over 5 rounds and Lot 18, another wine club, has raised $44.5 million in 5 rounds. That's a lot of money flowing towards this recurring revenue. Why? Because they see growth and the ability to sell a successful recurring revenue business at a nice profit in the future.
No matter what your business is, from razors and underwear to selling make-up, you can convert it to a recurring revenue business. The wine business is just the latest example of how thinking that way can pay off big time. Now, that's something to drink to!