Repeat revenue is good, but recurring revenue is great.
One of the key messages I hammer home in my book, Great CEOs Are Lazy, is that companies who embrace recurring revenue streams–which are predictable and reliable–create more stable and valuable businesses.
But when I talk to CEOs about how they can build more recurring revenue into their businesses, they often confuse the concept with something I’ll call “repeat” revenue. While both are valuable, there are key differences between repeat and recurring revenue. For starters, repeat revenue is good, but recurring revenue is great.
Let me explain.
A great example of repeat revenue is your local supermarket. I know that I go to the same supermarket all the time. Not only is it close to my house, it generally has everything that I need. As a result, I spend thousands of dollars at this market every year–which is certainly nothing to sneeze at.
The catch is that there is nothing stopping me from going to another market down the street if I chose to. There are no switching costs, other than maybe that I have to drive one more mile down the road. Sure, I might have a loyalty card that rewards me for shopping with my regular store–but the competitors offer those same kinds of programs as well. In other words, a grocery store doesn’t have any defensible “moats” to help ensure that I will continue to shop with them.
What makes recurring revenue different than repeating revenue is that it includes moats and switching costs which make it much more unlikely your customer will leave you.
A prime example would be a government contractor, who can typically land guaranteed contracts that span five or even ten years. Even better, you might even be able to layer several such contracts together to ladder revenue. The switching costs can be significant since breaking contracts can be extremely difficult if not impossible without significant consequences, even for the government. Having that kind of predictable revenue is incredibly valuable in terms of planning ahead and managing your costs, even if you have to sacrifice a bit of margin along the way.
Another great example of a recurring revenue stream is how your phone company attaches a two-year contract in exchange for giving you a free phone. While some of these deals are going out of fashion, it was a powerful way to help ensure that you would remain their customer for multiple years because the switching cost of breaking your contract would be a big disincentive for looking elsewhere.
A third example to consider is how some businesses can use data as a way to create significant switching costs to create recurring revenue without the need for contracts.
Think about how a cloud-based CRM system might collect all your customer data, emails, and transactions. While you can change vendors any time you want, the potentially enormous cost of moving all the data to another vendor in the kind of format they require could become such a pain that you decide it’s better not to switch unless the new company is just so much better than your current provider.
Now let’s be clear, making it harder for a client to switch can only be done by adding value to the relationship. In the case of the phone company, they give you a shiny new phone in exchange for that 2-year contract. A government contractor is able to offer a lower price in exchange for the predictability of the revenue. You can’t just use your customers and make your business better – you have to make a fair exchange for the benefit of certainty.
So, when you think about creating revenue streams in your business, be thankful for any repeat revenue you might have. It’s a wonderful thing. But if you really want to drive the value of your business through predictable and reliable recurring revenue, think about how you might make it harder for your customers to consider your competition and turn them into lifetime customers instead.
