How to Use Recurring Revenue to Grow Your Small Business
One of the most common business challenges faced by new businesses is generating enough money during the first couple of years to stay in business.To increase your chances of your business beating the odds, I would strongly recommend that you consider providing a service that generates recurring revenue.
Here are some tips and insight into how you can use recurring revenue to grow your small business.
What is recurring revenue?
For the purpose of this article, let’s think of recurring revenue in terms of a subscription pricing model.
For example, a friend of mine (who owns a company that offers animal-related services) recently started to offer nuisance wildlife management programs to help farmers and large land owners minimize the costs associated with feral hog and coyote damage.
Rather than charging farmers and land owners a one time fee to come in and trap feral hogs (a short-term solution), he charges a monthly fee to manage the feral hog population on an on-going basis (a much more cost-effective solution).
The pros of recurring revenue:
- Easier revenue projections – the main benefit of a recurring revenue model is that it gives you a good idea of how much money will be coming in next month. The forecasting methods for predicting future product revenues or one-time service revenues are much more complicated. Revenue projections are much easier with a recurring revenue model.
- Easier budgeting – with recurring revenue you should be able to have a more accurate picture of your monthly expenses and income.
- Easier process improvement – likewise, small businesses who have a solid foundation of recurring revenue typically find it much easier to streamline business operations. Really focus in on quality assurance initatives.
Offer recurring add-on services
Another trick for growing your small business with recurring revenue is to offer recurring add-on services that compliment your base service.
For example, let’s say you have a cleaning service in which your base service includes 2 visits each month for basic cleaning services. To increase your recurring revenue you could allow your customers to add additional services to the agreement such as monthly carpet cleaning.
Find a way to scale your recurring revenue
In most cases, the services that generate recurring revenue won’t be that profitable unless you can offer them on a large scale.
Of course, if you DO have a service that would work on a large scale, you still have to be able to effectively scale your operations in order to actually be able to provide it.
In other words, you need money to make money!
So if your recurring service doesn’t generate much profit on a small scale, how can you get the money you need to scale it?
One way to do this is to offer a one-time product or service that utilizes the same assets to generate a high margin.
For example, the first business I launched was a Tallahassee landscaping company. The strategy we initially implemented for growing this business was fairly straight forward; we charged a premium for landscaping projects and used the profits to grow our recurring revenue (maintenance accounts).
This strategy works because people value our landsaping projects and are willing to pay more for a high service level. As a result, the compay has grown 30% faster than its peer-group.
Provide excellent customer service and maintain a high service level
If you are going to build and maintain a solid base of recurring revenue, you’ll need to be able to provide excellent customer service and maintain a high service level.
A few thoughts on providing excellent customer service and delivering a high service level:
- Utilize your marketing and sales process to help understand what your customers value.
- When appropriate, consider implementing quality assurance initiatives to help maintain a high service level. These should compliment your excellent customer service initiatives.
- If possible, utilize a CRM software to help deliver excellent customer service.
At the end of the day, the odds are stacked against new businesses; there’s a good chance that it will fail due to lack of money. If there’s any way that you can incorporate a recurring revenue model into your new business, I would certainly recommend that you at least consider it.
What are some additional ways that you’ve been able to grow your business with recurring revenue?