If you have resolved to make your company more valuable in 2022, you may want to think hard
about how your customers pay.
If you have a transaction business model where customers pay once for what they buy, expect
your company’s value to be a single-digit multiple of your Earnings Before Interest Taxes,
Depreciation and Amortization (EBITDA).
If you have a recurring revenue model, by contrast, where customers subscribe and pay on an
ongoing basis, you can expect your valuation to be a multiple of your revenue.
Buyers pay a pretty penny for companies with recurring revenue because they can clearly see
how your company will make money long after you exit.
Not sure how to create recurring revenue? Here are four models to consider:
Products That Run Out
If you have a product that people run out of, consider offering it on subscription. The retailing
giant Target sells subscriptions to diapers for busy parents who don’t have the time (or interest)
in running to the store to re-stock on Pampers. Dollar Shave Club, which was acquired by
Unilever in 2016 for five times revenue, sells razor blades on subscription. The Honest Company
sells dish detergent and safe household cleaning products to environmentally conscious
consumers and more than 80% of their sales come from subscriptions.
If you’re a consultant and offer specialized advice, consider whether customers might pay
access to a premium membership website where you offer your know-how to subscribers only.
Today there are membership websites for people who want to know about anything from
Search Engine Marketing to running a restaurant.
If you bill by the hour or the project, consider moving to a fixed monthly fee for your service.
That’s what the marketing agency GoBrandGo! did to steady cash flow and create a more
predictable service business.
Ask yourself what your “one-off” customers buy after they buy what you sell. For example, if
you make a company a new website, chances are they are going to need somewhere to host
their site. While your initial website design may be a one-off service, you could offer to host it
for your customer on subscription. If you offer interior design, chances are your customers are
going to want to keep their home looking like the day you presented your design, so they might
be in the market for a regular cleaning service.
If you offer something expensive that customers only need occasionally, consider renting access
to it for those who subscribe. ZipCar subscribers can have access to a car when they need it
without forking over the cash to buy a hunk of steel. WeWork subscribers can have access to
the company’s co-working space without buying a building or committing to a long-term lease.
You don’t have to be a software company to create customers who pay you automatically each
month. There is simply no faster way to improve the value of your business this year than to
add some recurring revenue.
Most founders aren’t thinking in terms of creating a sustainable growth machine when starting a company. That’s a mistake. Whether you’re bootstrapping your business or