So much business-to-business software these days is based around the recurring revenue model. Much loved of SaaS (software as a service rather than bought outright as a product for your perpetual use) companies, the recurring revenue model eschews the big up front license payment in favour of a lower regular payment, sometimes structured by per user per month, or annualised to per user per year.

Customers like it because it means no up front payment, no being tied into a certain technology or provider for ever, and no maintenance fees on top as they are generally priced into the recurring revenue fee. Software companies like the set-up because it is theoretically easier to sell in the first place and makes it easier to upsell additional products and services which then all recommence on a recurring anniversary. Investors like it because at the start of each new financial year you can count on all or a great majority of the historical recurring revenue, plus all additional new business you close during the year. This makes this kind of company, which is essentially an annuity-based business – the gift that keeps on giving – very valuable, with companies typically being sold for 5 to 10 times their annual revenues.

Some of these types of recurring revenue arrangements are paid a full year in advance, locking in for the customer a good price and for the vendor income that they can bank and account for in financial terms over the course of the year. Then there are arrangements which are looser, where you pay an agreed fee on a monthly basis, and you pay month-to-month, only needing a month or less to give notice of cancellation. In these types of situation, companies have to work much harder to persuade the company to stay vested, because the window for adoption and continued use is much narrower.

When you think about it, lots of businesses outside of software operate what is effectively a recurring revenue business too. They sell something, they hope there will be services down the line, and they hope for repeat business as well. These might be companies in industries that charge subscriptions, membership fees, retainers, premiums and so on. When you’ve sold to a customer, it’s anything between 3 and 4 times as easy to sell to them again as it is to sell to someone new, so companies should do a really good job of managing the future revenue streams and protecting the future business. This should be obvious, because in the recurring revenue business your cost of acquiring the business is usually the same as it is with traditional up-front business, but you have no big sum coming in to offset the considerable cost of sale. Recurring revenue businesses need to make sure their companies stay with them at least 3 years to make the similar kinds of profits over the long term, so retention is much more important while the barriers to exit are much lower. Your dissatisfied customer pays for what they used and they’re off.

So if you’re counting on the revenue coming in from sales you’ve just made, you need a really good plan – and a really good system – to make sure you are profitable over time. Too many recurring revenue companies are in a constant state of treading water because they churn too many customers and their new business wins simply replace the business they lost, rather than building on it. If you don’t have a high renewal rate in the 90’s % (by revenue rather than by number of customers) – or a low churn rate under 10% – in your recurring revenue business, you will die.

Here is a number of things you can do to make sure you are properly managing your future recurring revenues:

– decide who’s responsible for securing future recurring revenues. Do you operate a hunter-farmer system where the new business people break open the new sales and the account management people develop the relationship, or should your sales people manage the recurring revenue from the business they brought in?

– provide them with the training and skills they need to do the role that you’re asking of them

– make sure you have the right system to make it easy for them to set up the recurring opportunity. For example, when you record the new business win, you should be able to record in the same process what the future recurring revenue items are, and when they should fall, so that the system prompts the person at the right time to begin the process of securing the next piece of business. Automating this will stop deals falling through the cracks and will increase your effectiveness, productivity, renewal rate, all those good things that make you more profitable

– measure, measure, measure. If you can’t measure, you can’t manage

– don’t manage, coach. If you have your responsibilities delineated properly, your people know what they’re doing, and your sales team management system is in place to help them sell more and administer less, you can focus on improving their performance and helping them get the important deals over the line

You shouldn’t count your chickens before they hatch, but you should count the revenues you’re counting on, before they go elsewhere.

 

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