Why did you start your business? Business owners start their businesses for a whole host of reasons. I have come across people who have started their business when they:
- thought they could do better on their own, rather than stay with their employer;
- were made redundant and rather than go back into employment they took a risk and went on their own;
- had an idea to make or do something new and different. A new niche or market encouraged them to take a risk.
For many business owners, that initial reason for starting up is wrapped up with a sense of having more freedom. That could be freedom to make their own decisions, take their own risks. Equally it could be the freedom to work where and when it suits their lifestyles.
Typical Business Owners
Unfortunately, for far too many business owners, that freedom doesn’t come in big measures. That work / life balance is always round the next corner. There’s never enough money to buy free time. The business demands more time and effort than expected. That freedom to make decisions turns out to be regularly reacting to problems that seem to get in the way of growing the business.
And that probably describes the world for many business owners, call them ‘typical owners’. Especially with COVID and a recession, they are aspiring just to survive.
Value Builder Owners
But there are some business owners who aspire for more. The research done by the folk at The Value Builder System, shows there are owners, let’s call them ‘value builders’, who apply 9 principles of business that build solid companies and personal wealth. Over my next few blogs I’m looking at those principles in greater detail.
The first four principles were:
- Start with the end in mind
- Prioritise value over revenue
- Own your product
- Protect your equity
Principle 5: Win subscribers not customers
Most small businesses begin life using the “break/fix” business model. In the break/fix model, a customer has a problem, and you swoop in to provide a solution. It’s real hero stuff and when you are a small business, you the owner often is first in line to solve the problem – a real sign you are in the owner’s trap.
This business model may make you feel valued as a problem solver, but it comes at the expense of the value of your company. In the break/fix model, you must create demand, sell your product or service, deliver it, and start all over. Often you are in reactive mode waiting for the call to action. The break/fix model is also unpredictable, with demand ebbing and flowing from month to month.
By contrast, Value Builders often opt for a recurring revenue billing arrangement with their customers. These subscriptions, annuity streams, and service contracts create an ongoing stream of income and dramatically grow the lifetime value of a customer. When owners can accurately predict how much money they will get from a subscriber, they can invest more in wooing her.
For Value Builders, the most compelling reason to adopt a recurring revenue model is the impact it has on a company’s valuation. Pound for pound, recurring revenue can be worth more than twice that of transactional revenue, depending on your industry.
Recurring Revenue Is The Thing
I was talking to Andrew Park, Managing Director of Swan Energy, a specialist energy and carbon compliance consultant about his business model. He built it entirely on recurring revenue. Let him describe his story.
“I built my business on the recurring revenue model as endorsed by Built to Sell: Creating a Business that can Thrive without you, written by John Warrillow, the founder of the Value Builder System. Swan Energy, provides consultancy support to large organisations that are obliged to report under the EU Emissions Trading Scheme (EU ETS). As the scheme requires annual reporting and external verification, we work with our clients throughout the year in readiness for the external verification visit. We charge our clients on a quarterly basis over a typical 3 year contract. I focus on recurring revenue because it fits my requirements for the following 6 reasons:
1. Predictability: My long-term contracts and regular invoicing lets me plan what my business needs in the future. As the business has grown, I have been able to plan recruitment and systems changes.
2. Eliminate Seasonality: Many businesses suffer through seasonal highs and lows. The EU ETS reporting period covers a calendar year but the verification audits all happen at the same time of the year. Our working style with its clients is to spread the work over the year and minimise the ‘year-end rush’. Its recurring revenue model matches income and costs throughout the year.
3. Improved Valuation: Recurring revenue boosts the value of any business. Greater certainty of future income is a massive benefit for me. Obviously having a pipeline of predictable income removes the stress of where next month’s income comes from. That feeling is really valuable itself.
Results from over 40,000 Value Builder Assessments show that increasing the proportion of recurring revenue drives up the sales multiple. A typical SME gets around 3.6 EBITDA multiple whilst a similar business with over 75% recurring revenue gets about a 4.1 multiple.
4. The Trojan Horse Effect: Once you subscribe to a service, you become much more likely to buy other things from the same company. The classic example is Amazon Prime. I have noticed some clients ask for additional services, still involved in environmental reporting. Also, as clients add new sites to their EU ETS portfolio they always come to us for additional services.
5. The Sale That Keeps On Giving: Unlike the transaction business model where I would have to stimulate demand through advertising to get customers to buy, with a subscription-based model, I sell one subscription and it keeps on giving quarter after quarter. Combined with a top level of customer service, we have a very high client retention rate, as evidenced by our recent Net Promoter Score of 67.
6. Data & Market Research: When you get a customer to subscribe, you can start to see their spending and consumption habits. In a B2B relationship like ours the research knowledge is more focused on knowing the client better and working with them throughout the year. It’s true, People buy from People. My business model builds really strong relationships and a deep understanding of what my customers need.
So to sum up, I’ve found that working with Peter and the Value Builder System has enabled me to build a more valuable and sustainable business.”
Subscription Model For Break / Fix Service
The business model worked fine, but cashflow was lumpy. Bergeron had reached a point where he could no longer sell any more of his time, and their growth stalled. Knowing something had to change, Bergeron made a 90-degree turn. He began offering a membership model where, instead of calling when a circuit board broke, his clients would be asked to subscribe to a plan enabling them to have their circuit boards serviced at any time.
The switch to a membership model transformed the business, and Bergeron quickly grew the company to $7 million in annual sales, at which point he sold it for $10 million — more than double the typical multiple offered to a simple service company.
You can hear the full story in his interview from John Warrillow’s Built to Sell Radio, a regular podcast revealing the stories and advice of business owners who have sold their businesses. To hear the full interview, click here.
So, are you building value in your business?
Now you have had time to think about the stories above, are you building value in your business? If you want to be a Value Builder with a recurring revenue model start by segmenting your customers into buckets based on what is driving their motivation to buy.
Think of customers in a broad context. Consider your end consumer as well as the distribution channel that gets your product or service to customers.
Next, measure the purchase cadence of each buyer segment. Look for a niche that shares a need to buy regularly. Then you have the basics of a recurring revenue model: motivation to buy and a regular buying cycle.
You can also take the value builder assessment to see where you are in your business now and identify where you need to make improvements.
In the meantime, please get your free copy of the eBook, Famous Or Rich: 9 Ways Value Builders Prioritise Wealth Over Recognition.