Monday, 4 October 2010

How resilient is your turnover?

Not all revenue is equally certain. A business which relies on winning a small number of large contracts each year may well earn the same revenue and profit as a business that gets its income from a large volume of contracted subscriptions and a third company that gets all its income from ad-hoc repair and maintenance across a moderate number of existing customers

o In theory, the riskier nature of the project business should result in higher profit margins (returns to the shareholders) and the stable nature of the subscription business, lower - but this is not always the case in practice
o Don’t confuse spreading payments for a project with spreading both the cost and the income by using a different business model. The first impacts cash flow and actually increases risk – so should require an even higher return.

All other things being equal, businesses should strive for as much locked-in recurring revenue as possible

How can you translate one-off into recurring revenue? Some examples of spreading payments are

o A photocopier which is paid for by charging a small amount for every copy made
o Mobile phones, where the phone is given free in return for a fixed term monthly contract

Each of these relies on a higher total income over the life of the contract to cover the cash flow hit and the risk of default. It is also necessary to build in a compelling proposition to renew the contract before it expires in order to build revenue resilience

Some examples of additional recurring revenue are

o Software license maintenance
o Membership of a user group
o Subscription services
o Service and maintenance contracts

An alternative way of looking at this is separating future income from resource or asset limitations

o Translate a single consultant’s time into a course to be sold online in perpetuity

What is the proposition for the customer? Possible benefits that would induce a customer to sign up for a long-term contract are

o Access to a continuous stream of new content
o Access to special offers and discounts
o A known fixed charge covering all repairs (a form of insurance)
o The right to free future upgrades
o Continuous tuning & maintenance of the original product

One final source of revenue risk is over-reliance on a single or a few customers (high customer concentration) – avoid this.

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