I was talking with a business owner the other day and he indicated that a large percentage of his business is recurring. When I talked with him further I learned that he, in fact, had repeat business not recurring business - and this is a very important distinction that I thought may be of interest to others.
Repeat business is when a customer returns and transacts business, but there is no real predictability to when they will be back or the amount that they will spend. For example, if I take my car to a certain car wash they may know that I'm a repeat customer - I may visit them roughly once every two weeks. However, they have no idea when I'm going to come for certain, whether I'll do a full wash and vacuum or just a wash, or even whether I'll ever come back and transact business with them again.
Recurring business is when a customer buys the same product or service at pre-set intervals and will continue buying that same product or service on schedule until cancelled. An example of this would be a Netflix subscription. Every month at exactly the same time Netflix customers' credit cards are charged, and in return, get access to the company's on-line downloadable movie and TV show collection.
Because of the high level of predictability of revenue, recurring sales businesses tend to be far more attractive to business buyers than repeat or one-time sales business models. If you have a business that has either repeat business or one-time sales there are ways you can create a recurring revenue model that will make your business more attractive to a business buyer.
A few ideas on how this can be achieved:
- Maintenance contracts. If you sell products or services that may require maintenance, perhaps consider selling a monthly recurring maintenance or service contract rather than relying on repeat business when the client needs service.
- Lease, rent, or license rather than ownership. For some businesses having a contract for use rather than selling an item, may help lock in the customer longer-term while also producing a predictable monthly revenue stream.
- Different business model and value proposition. If you are a customer under a traditional HMO or PPO type of health insurance program you may wait until you are sick to see a doctor (other than check-ups) and then once you see the doctor, the doctors bills your insurance. Have you heard of concierge medicine? Some primary care physicians have become tired of dealing with insurance company reimbursement, unpredictability of income, and administration of a complex billing system. So they developed concierge care, where a doctor will take on only a limited number of clients - but in exchange the clients pay the doctor a monthly or annual membership fee. For general primary care issues, the doctor can take care of them. If a specialist is required, the primary care concierge doctor will help their client source and screen the right specialist, and help ensure that their client is receiving and understand the care received from the specialist. The concierge client needs insurance to pay for the specialist, but because they are paying a subscription to the concierge doctor for primary care, they can be comfortable with a high deductible insurance plan. Perhaps there are similar tweaks to traditional business models that could be made in your industry.
For some businesses it may not be possible to set up a recurring revenue business model. Likewise, going from a repeat to recurring business model may not be practical. To the extent that a recurring revenue model can be established, though, it will be an attractive marketability factor when it's time to sell your business.