There are two distinctly different revenue models for business:
- Recurring and
I like to think of this as Hunt-Kill-Eat-Repeat vs Plant-Grow-Reap-Repeat. In both cases you must repeat the steps that bring you success, however, one model provides a more predictable revenue stream than the other.
Businesses that either deal with a recurring need or that deliver a product or service that must be constantly replenished tend to fit the Recurring Revenue Model. Examples of businesses which tend to have Recurring Revenue Models are Magazines, Newspapers, Cable Television, Telephone Services, Internet Services, Maid Services, Day Care Services, etc. Each of these types of businesses provide a product or service that has a frequently recurring need. Businesses that provide these types of products or services have an extremely predictable revenue stream and it makes planning for future capital expenditures much easier.
Businesses with Recurring Revenue must understand the life cycle of their client. Almost no business with a recurring revenue model keeps their clients for a lifetime. Clients tend to come and go and one of the first things you must understand is what the value of a Client is. Here are essential questions you must know about recurring revenue clients:
- How long does the average client stay with the company in ‘cycles’… of weeks, months or years?
- What is the average Gross Revenue from the average client each cycle?
- What is the average Contribution Margin from the average client each cycle?
- What is the Cost to Acquire a New Client?
From the above information you can calculate what the Net Present Value of the Contribution Margin of the average client is. So long as the Net Present Value of the Contribution Margin is greater than the Cost of Acquisition by enough to provide a Return on Marketing Investment (“ROMI”) then the business is in good shape.
Once you determine that you are in positive cash flow mode for the business model your next challenge is to figure out how to ramp up your marketing effort to increase the total number of recurring revenue clients without degrading the ROMI. This means, many types of marketing produce a positive return on investment at a low level but cannot be scaled to a large volume without degrading the ROMI.
Businesses which typically have a Recurring Revenue Model include:
- Cell Phone Companies
- Utility Companies
- Magazine Subscriptions
- Yard Service Companies
- Dry Cleaners
- Certified Financial Planners
- Accounting and Tax Consulting Firms
- Management and Marketing Consultants