The Real Power of Recurring Revenue
Some business models just inherently work better than others.
For example, owning a traditional Flower Shop is typically tough (from a business perspective). On the positive side, you’re making people happy and the margins are very good on the sales that you make…but the downsides are almost overwhelming.
– For starters, demand from the general public is very inconsistent – except for a few holidays (Valentines, Mother’s Day, etc.).
– When it’s slow there’s not a lot you can do to generate demand, and when it’s busy it’s likely that you could be overwhelmed and leave some customers unhappy.
– If you’re located in a city, location is critical, so your rent is going to be sky high.
– And then there’s the wastage…flowers typically don’t last very long and because demand is inconsistent, you have to keep a good stock on hand all the time, which means you end up throwing away a lot of flowers. During slow periods, that could be as high as 30% to 40% wastage…!
That was the challenge facing Bryan Burkhart and Sonu Pandu back in 2010. They were former technology executives who were looking for an industry that needed to be disrupted – and they ended up in the flower industry by creating their company H. Bloom in New York City.
$29 Sale VS. $4000 Sale
After studying the industry and the challenges facing existing flower shops, Bryan and Sonu identified a key change that would make all the difference. A brilliant, yet simple idea – change the way people bought flowers.
Historically, flowers have been an impulse purchase for most customers. However there are a subset of potential customers who would benefit from having flowers designed and delivered on a repeatable schedule. Hotels, restaurants, professional offices, spas…among others were all likely candidates for having a fresh arrangement delivered every couple of weeks. Assuming that they could deliver quality, be timely, friendly and professional, then it would make sense that those businesses would be willing to sign up for a subscription of flowers. A monthly fee that insured a fresh arrangement designed to their parameters on a regular basis.
The typical sale for a flower shop is around $29.
The typical sale for H. Bloom is around $4000 (for the lifetime value of that customer).
Which would you rather sell?
And there are lots of other benefits…because they can easily plan for their demand on any given month, their wastage is around 3%, almost nothing. And because they didn’t need a fancy retail location, they were able to locate in a warehouse district for 20% of the rent costs. Finally – using technology, they could leverage other flower shops who met their quality standards to deliver on their behalf – allowing for a lower cost expansion strategy.
What could Recurring Revenue do for you?
It’s not likely that you’re in a position to completely disrupt an industry and start a new business model. However the H. Bloom example shows that pretty much any industry can incorporate the idea of recurring revenue, even if it’s never been done before. Consider the explosion of razor subscriptions (Dollar Shave, Harry’s, etc.), or curated specialities like Barkbox subscriptions for pet owners, or Standard Cocoa for chocolate lovers. There’s a huge power to recurring revenue…
The reality is that if you can get even a percentage of your business as a recurring revenue stream, you’ll see all kinds of benefits. Because your demand will be more predictable, you can plan your growth more effectively and your cash flow will be easier to manage. Additionally – Recurring Revenue is one of the 8 Value Drivers in the Value Drivers Assessment that directly tie to the overall value and health of your business. Simply put, the more recurring revenue you have in your business, the healthier and more valuable your business is.
If you’d like to learn more about this idea of Recurring Revenue as a different way to look at your business model – you should check out The Automatic Customer by John Warrillow. Not only did John write a compelling book on this topic – but it’s also a great brainstorming tool as you consider what you might be able to do with your own business.
How about you? Does your business have recurring revenue? Could it have more? We’d love to hear your thoughts in the comments below.
Shawn Kinkade Kansas City Business Coach