A Note on Recurring Revenue for Entrepreneurs

What is it really, and how you should think about it

Companies often strive to generate recurring revenue streams and expand on them.  Valuations for recurring revenue are often 7-10x a multiple of revenue, vs. companies that don’t which are often valued at 2-10x profit. That valuation difference is believed to be because of the advantage of the recurring revenue business model in creating customer stickiness. But that misses the point. The real reason for the difference in valuation is because companies that can reliably generate recurring revenue are offering recurring value to their customers.

To understand recurring revenue, let’s start at the beginning.

What is money?  Money is an IOU for future consumption.

What is revenue?  Revenue is an IOU for value received by someone with the capacity to pay.  The last part is critical; you can solve lots of problems for people without the ability or interest to pay, but you shouldn’t be surprised if you aren’t generating much revenue. If you want revenue, you need to solve problems for people who can pay (or have others pay on their behalf).

Recurring revenue is a recurring token of value for recurring value received. If you offer one-off value to your customers, you will be frustrated if you try to turn this into recurring revenue. 

Here are a couple of additional thoughts on recurring revenue.

1.     Make it about them (your customers), not about you. Don’t expect your customers to spend time or energy thinking about you, your brand, or loyalty to your brand. They don’t have loyalty to you, they are loyal to their own problems getting solved.

2.     Focus on creating recurring value.  What problems are your customers continually solving, and how can you become their reliable infrastructure to solve them?  For example, you might use Gmail and Slack daily, but you aren’t actively thinking about your loyalty to those brands. You simply continue to use them because they are continually useful. And because they are useful, you are happy to pay them on a recurring basis.  By seeing your company as reliable infrastructure, you can let yourself and your team fall into the background, which allows your customer to take center stage. 

Let’s go get it!