The subscription model is in vogue and it is not a fleeting fad. Global research and consulting firm Gartner estimates that three of the four direct-to-consumer companies will offer subscription services by 2023. And that's not just B2C: B2C companies are behind it too. exchange. For clients, subscriptions generally represent lower costs, convenience, and/or highly personalized services; For example, think HelloFresh meal kits or streaming Netflix videos. For companies, recurring revenue offers the possibility of a more stable business model and the opportunity to invest heavily in growth. As software publishers were the first to adopt this model, they were also the first to reap the benefits. Adobe, Workday, and Zendesk are examples of companies that have at least doubled their ratings through recurring revenue. But any business in any sector can take the same route and achieve a similar result, and this is where the trend (as the statistics suggest) is so clearly headed. "The key (for businesses) is to find a way to generate recurring revenue because it will improve the value of your business, whether they want to sell or not. It's important to improve the value of your most important asset and make your business much more easier and more manageable," says John Warillow, author of The Automatic Customer. Here is how recurring revenue can increase the value of your business in more detail.
Professional investors like the predictability of recurring income.
Professional investors like the predictability of the recurring revenue model over the traditional transactional model, and here is an example of why. A €10 million company that generates 70% recurring revenue can count on €7 million at the beginning of each year. Since this figure is relatively stable, management can plan and invest accordingly. Not the same for a US$10 million company with no recurring revenue. This company will have to start its year at zero. You'll be able to forecast based on past performance, but you don't have subscriber contracts or associated revenue to optimize labor and supplies, reduce costs, and base projects. expansion. "When you have a recurring revenue business model, you rarely miss your monthly or quarterly numbers by more than 10 to 20 percent. Your forecasting process is much more accurate. At the beginning of the quarter, you start with a base of growth instead starting from scratch," says Jeff Bussgang, Venture Capitalist. And of course, the more you can demonstrate a guaranteed income, the more valuable your business will be to potential buyers. "With high turnover from a subscription-based business being recurring, its value will be eight times that of a comparable business with very little recurring revenue," says Warillow.
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An agile business model that supports scale.
Recurring revenue systems are designed to support larger operations and allow businesses to respond to customer requests with a variety of easily adjustable and flexible online plans and packages. Amazon is a well-known example of how technology can be used to capitalize on simplifying the sale of one-time purchases and subscriptions. The customer journey is managed automatically, from product discovery to billing, and offers are carefully targeted with the help of customer data. Amazon staff are nowhere else. This automated customer lifecycle management accelerates return on investment and frees up people and resources for the business to invest more in responsiveness and adaptability to changing market conditions and preferences. Clients: Agility rewarded with exponential growth, then premium assessments and competitive advantage.Improve customer lifetime value.
The ability to adapt and respond to customer preferences also increases Customer Lifetime Value (CLTV), which represents the total net profit a company earns from each customer. The more satisfied customers are, the longer they will stay and the more receptive they will be to new offers. Recurring revenue systems allow businesses to maximize CLTV through an established lifetime of regular customer touchpoints, providing the opportunity to earn or lose revenue and build loyalty. This includes contacting subscribers to offer additional products and services. Customer acquisition value (CAC) is the most important metric for subscription companies, Warillow says. This relationship allows to determine if a company has been successful or not. For example, if your customer lifetime value is €3,000 and your customer acquisition cost is €1,000, your LTV:CAC ratio will be 3:1. Warillow explains that this 3:1 ratio is the criteria by which professional investors define whether an underwriting company is "attractive and viable." H.Bloom, a flower subscription service, is a company that has been very successful in maximizing CLTV. On average, buying a bouquet of flowers costs around €30 and, with the exception of Valentine's Day and Mother's Day, buying flowers tends to be an impulse purchase. But by inviting hotels, restaurants, professional offices, spas, and regular customers to sign up for its flower delivery service, H.Bloom was not only able to create a steady stream of capital, but also increase the average lifetime value of customers. . at $4.000, an impressive jump from $30 and a stark illustration of how subscriptions can transform traditional commerce.