{"id":4045,"date":"2019-11-27T10:00:49","date_gmt":"2019-11-27T18:00:49","guid":{"rendered":"https:\/\/berkonomics.com\/?p=4045"},"modified":"2019-11-19T16:52:04","modified_gmt":"2019-11-20T00:52:04","slug":"why-recurring-revenues-increase-your-companys-value","status":"publish","type":"post","link":"https:\/\/berkonomics.com\/?p=4045","title":{"rendered":"Why recurring revenues increase your company\u2019s value"},"content":{"rendered":"

The massive shift in revenue models in recent years <\/strong><\/p>\n

Have you noticed how many web apps and content have turned into subscription services \"\"during the last several years? \u00a0Call it the Netflix effect. \u00a0Application developers once considered their products as licensed in what would closely be allied to a single sale. \u00a0Until someone realized that recurring revenues were much more highly valued by the subsequent buyers of similar businesses and investors, and that loyal users would be willing to pay annually.<\/p>\n

Paying for content<\/strong><\/p>\n

Content providers found the same thing when many found that they could charge a subscription fee instead of relying just upon advertising.<\/p>\n

Subscribing to most anything that used to be updated annually<\/strong><\/p>\n

Well, now we have a much larger group of products and services with and without the Internet discovering the same thing.\u00a0 As former buyers, our costs as users goes up, sometimes dramatically. \u00a0But most of us are willing to pay as these products, apps and services have become ingrained into our regular usage, entertainment and especially in the protection of our systems.<\/p>\n

Can you convert your model without losing your customer base?<\/strong><\/p>\n

[ Email readers, continue here…]\u00a0<\/em><\/span> \u00a0So, the conclusion is that most every business can take advantage of continuing, recurring revenues from its customer base.\u00a0 Sometimes, products are designed to make all their profit upon the recurring revenues from supplies or support.\u00a0 We immediately recall the razor and blade analogy to illustrate the point when planning product development and release.<\/p>\n

The case of Xerox in the early years<\/strong><\/p>\n

\"\"Xerox in its formative years, even though barely having enough cash to market its then revolutionary copier, elected to lease rather than sell the units.\u00a0 Even though that reduced short term earnings, lease revenues over time far outweighed any combination of sale and maintenance revenues, and Xerox grew into a major company based upon its innovation and its recurring revenues.<\/p>\n

An investor\u2019s early question<\/strong><\/p>\n

In examining mature software companies, one of my first questions is to ask for the percentage of total revenues coming from recurring sources \u2013 annual renewals, leased software, maintenance agreements, content fees, or monthly retainers.\u00a0 Usually that amount exceeds 50% of total revenues and is often much more.\u00a0 Mature businesses bring less in an M&A transaction than fast-growing companies, but the stability of recurring revenues always gives comfort to the buyer and allows the seller to slow the sales process, find multiple candidate buyers, and create increased demand for the company.<\/p>\n

Call it \u201cpredictable revenue\u201d<\/strong><\/p>\n

Think of the portion of fixed overhead covered by recurring revenues.\u00a0 If the gross profit margin averages fifty percent in a service company, and if fifty percent of all revenues come from recurring sources, then it is probable that the company is stable and operating at or above breakeven, and predictably will sustain its value longer that companies that must sell to survive each year.<\/p>\n

A buyer\u2019s bonus<\/strong><\/p>\n

And in a sale of the company, it is usually better for the seller who will command a bonus valuation based upon some multiple of recurring revenues due to the comfort value to the buyer and the increased lifetime value of each customer to the enterprise.<\/p>\n

Stability during recessions<\/strong><\/p>\n

Finally, in a downturn, and there will be downturns that match the economy when a company begins to mature, recurring revenues can and often will save the company itself and smooth the revenues through the downturn.<\/p>\n

If you have not spent considerable time refining a strategy to include recurring or predictable revenues, do so now.\u00a0 And remember, that once annual contracts are in place if that is your model, they must include escalation clauses based upon some cost index to prevent their profitability from declining involuntarily over the years as inflation eats into the value of each non-indexed contract.<\/p>\n","protected":false},"excerpt":{"rendered":"

The massive shift in revenue models in recent years Have you noticed how many web apps and content have turned into subscription services during the last several years? \u00a0Call it the Netflix effect. \u00a0Application developers once considered their products as … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"_uf_show_specific_survey":0,"_uf_disable_surveys":false,"footnotes":""},"categories":[11],"tags":[],"class_list":["post-4045","post","type-post","status-publish","format-standard","hentry","category-growth"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/posts\/4045","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/berkonomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=4045"}],"version-history":[{"count":0,"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/posts\/4045\/revisions"}],"wp:attachment":[{"href":"https:\/\/berkonomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=4045"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/berkonomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=4045"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/berkonomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=4045"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}