Why Recurring Revenue?
Why you are going to want to create some recurring revenue as you build the value of your firm. There are a few reasons, but let’s start with increasing the Lifetime Value of a typical customer.
H-Bloom Case Study
Sonu Panda and Bryan Burkart started a company called H-Bloom which sells flowers on subscription. When you hear “flowers on subscription,” you may be surprised by that because most of us are used to buying flowers from a flower store (or grocery store). We buy flowers on Mother’s Day and Valentine’s Day and other than that, we really don’t buy a lot of flowers throughout the year. There are probably a few other key occasions in there, though. Then when we do buy flowers, it’s typically on a one-off – We certainly don’t buy them on a recurring basis.
Panda and Burkhart really set out to change the way how some customers purchase flowers, and in particular, they were really keen on changing the behavior of hotels, restaurants, and spas because they buy flowers on a regular recurring basis. They set up H-Bloom just for people who buy them on a recurring cadence. When a customer buys a contract from HBloom to supply them with flowers, a typical LTV of an HBloom subscriber is $4,524.
Meaning they make ONE purchase to have Hbloom supply that spa or hotel with flowers every two weeks and that equates to more than $4k of purchases over the lifetime of that contract with Hbloom.
It makes selling flowers a much easier proposition – they can invest more into sales and marketing because they know that when someone makes a decision to purchase, the Lifetime Value of that customer is so much longer and so much beefier than if they just buy them on a one-off basis.
A typical flower store purchase in this country is $29. When you compare that with the typical purchase from Hbloom, which equates to an LTV of more than $4k, you can see just how drastic that difference is.
So the Number ONE reason that you want to create some recurring revenue is that it creates a tail to your revenue – the LTV of your customer goes on and expands tremendously.
The second reason you want to focus on recurring revenue is that it makes your business so much more predictable.
At Hbloom they only throw out 2% of their inventory each month compared to the typical flower store that throws out more than 50% of their inventory every month. Why? It’s rotting in the fridge and they’ve ordered the wrong amount of flowers. At Hbloom they know how many subscribers they have, they know exactly which customer gets what kind of flowers, and they buy just the number of flowers that they need in order to fulfill the subscribers that they have.
Now, you may be saying ok, but I don’t have inventory and I don’t have to worry about spoilage, but if you employ people, we would argue that you in fact do have spoilage because those employees coming in on a Monday, they expect a paycheck on Friday.
If you were not able to supply them with work and keep them busy, or in fact if you overwhelm them with work because you have too much, it can be just as difficult and damaging for your business. So it’s really the predictability of your business that we are striving for when we are creating recurring revenue.
The third reason you may want to create some recurring revenue is something that is referred to as the Trojan Horse Model. It means that once a customer becomes a subscriber of yours, once they are purchasing from you on some sort of recurring basis, it makes them even more likely to buy additional products and services from you because they have an existing relationship. They know you, they trust you and they have this momentum to your relationship because you are in touch with them every month – they have given permission for you to communicate with them. And this makes them much more likely to buy additional products beyond the ones they have already contracted with you to buy.
See our article:
How to Create a Recurring Revenue Model that Appeals to Customers