My Favorite Rule for Building Profit and Wealth
By: Ruth King
Over the past 40 years I have helped many entrepreneurs build profit and wealth. All of the rules are explained in my new book, Profit or Wealth? Simple Rules for Sustainable Business Growth.
My favorite is to build a recurring revenue program in your business. What’s is a recurring revenue program? In many industries these are maintenance plan customers, customers who receive your products every month or quarter, or a combination of both.
You probably are a recurring revenue customer for a company. If you have a Netflix subscription, a gym membership, a mobile phone monthly payment, use SAS software (or pay a monthly/yearly fee for maintenance), or any other product/service you pay monthly for, you are a recurring revenue customer to that company.
Recurring revenue customers are essential to build your business wealth. The price you receive when you sell or transfer your company to new owners is greatly dependent on the number of recurring revenue customers and their renewal rate.
So, it’s not only the number of plans, it is their price and their renewal rate.
Pricing should be at least break even.
Recurring revenue programs should not be loss leaders. If you don’t earn a little profit (at least $5 per revenue producing hour), then the more recurring customers you have, the more losses you have. And, at some point, with continuing losses, your recurring revenue program will put you out of business. Make sure it is profitable!
Here are two reasons renewal rates are also important:
- Your renewal rate tells you how well you explain the value/benefits of the plans and communicate with your plan customers.
- It makes no sense to enroll an additional 200 recurring revenue customers a year and lose 200 a year. Better to enroll 200 and lose 10.
The questions I always get asked are:
- How many plans should I have?
- What should my renewal rate be?
My answer is usually as many as you can. The goal is to have the entire overhead of your company paid through recurring revenue. When this occurs, even in slower times, you know that you can pay your bills.
If 30% of your customer base is recurring revenue customers and you are covering the entire overhead of your company with your recurring revenue customers, you are doing well.
Renewal rates should be higher than 50%. If you can get them to 90%, you are probably close to the maximum renewal rate since some will move, some will pass away, and some will have a relative who starts a business in your industry.
When you build a strong recurring revenue program you build profit and wealth.
Ruth King is known globally as the “Profitability Master,” and is a a thought leader in entrepreneurship and business. Her books have been recognized as among the greatest in numerous industries. Learn more about all her business activities here.
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