The Beauty of Recurring Income

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The best businesses in the world center around Recurring Income. Patrick McKenzie has done a great job of promoting the recurring model in the start up community.

If you have a great idea, you should consider first whether it can be sold as a subscription product. Let’s take a look at some successful companies, some of which aren’t obviously recurring business models, to get your mind jogging:

  • Google AdWords: The most successful advertisers come back month after month, giving Google a source of super recurring income
  • eBay: Individuals and companies advertise to sell their stuff online day in and day out. eBay collects the middleman’s fee
  • Gillette: We need to replace our shaving blades regularly. Same goes for tooth paste, shampoo etc.
  • Coca Cola: Apparently Coke doesn’t leave taste memories so you can keep on drinking it without getting sick of it. Cool, no?
  • KissMetrics, MixPane, Visual Website Optimizer, Optimizely: A few examples of great SaaS

 

4 Hour Work Week Revisited

For people that want to market and sell online, I highly recommend that you read the 4 Hour Work week (despite what your personal views about Tim Ferris may be!)

A lot of his principles still apply:

  1. The main benefit should be encapsulated in one line

    • This should be your Unique Selling Point
    • “1,000 songs in your pocket” for example
  2. It should cost the customer $50 – $200

    • Aim for 8 to 10 times mark up
    • A $100 price tag should cost no more than $10 for example
    • Tim Ferris was talking about a one off cost for the customer. This is where if I was Tim Ferris, I would push for a product where you can charge $20 – $200 monthly. I sold DVDs at $200 and I charge now instead for a monthly membership. It is far, far more profitable — Lifetime Customer Value has increased from $160 to around $580 and counting
    • After you earn $X from a customer at the start, your relationship with that customer has ended in the Tim Ferris scenario. Actually, that should be the start of your relationship. Someone that has already paid you are your best customers and most likely prospect for any new and especially related products. Of course, this assumes that your initial product didn’t suck
  3. It should take no more than 3-4 weeks to manufacture
    • Well, I think this should apply even to SaaS & digital products
    • If it’s going to take longer, try to pre-sell it and see if there’s demand. For example, when I first started an online teaching course, I gave away the first few lessons for free and pre-sold the entire course to 67 people before I created the rest. The first 3 lessons took me a few days to create and then I drip fed the rest of the content.
  4. It should be fully explainable in a good online FAQ
    • In other words, your product should be easy to explain

 

What Kind of Businesses Lend themselves to the Recurring Model?

Yes, it’s true that the recurring model lends itself better to certain kinds of businesses. But as Charlie Munger says, “Inverse, Always Inverse.” Even if a business may not seem to lend itself to the recurring model at first thought, try to think outside the box, be creative and figure out how it can be changed.

Let’s take a look at Bingo Card Creator which is Patrick McKenzie’s creation. I love it that he makes everything public — it made almost $40,000 in net profit 2012 which he shares on his blog (very highly recommended).

You pay $29.95 and you get to use his custom printable bingo card software. My opinion is that this business actually does lend itself to the monthly recurring model. He could charge $15 per month easy and those that use his software all year would auto-magically become a hell of lot more valuable to him. Even some of the ones that don’t use it will pay to use it later.

My assumption is that a lot of his customers use it for more than just a month. The existing customers can continue to use Bingo Card Creator without paying monthly but new customers will have to start paying monthly. I wouldn’t be surprised if initial purchase rate drops somewhat but because of the huge increase in customer value over time, net profit would at least double.

No more starting from $0 every month.

 

Apply this to your Own Business/Idea

I hope this has given you food for thought.

When you consider a business idea, you should use a framework to help you identify whether it will be profitable (I will share mine later one)

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