I publish a hyperlocal business newsletter, called the Berkshire Confidence Index, or BCI. In the Spring 2018 BCI survey, which was sent out to nearly 4,000 local business owners, I added the question, “What type of revenue streams do you have?” The answers provided were consumables, sunk-money consumables, subscriptions, sunk-money subscriptions, auto-renewals and contracts. In that order, from suckiest to best, those are the types of revenue models that will help you have sales predictability.
The overwhelming response to the question was “not applicable.” Respondents didn’t think it was pertinent to their industry. Moving from selling goods or services as an order taker, ringing the cash register like it was 2006, was what they did in their businesses, and there was just no changing that. But I didn’t offer “not applicable” as an option, because I have data that shows that not only can you improve your sales by changing the way you charge, but it’s the way your customers want to interact with you.
A quick tutorial, by way of example: A consumable would be a coffee shop where all revenue is transaction-based. A sunk-money consumable would be if you “sunk money” into a Keurig coffee maker and now you buy their coffee pods. A subscription would be that every year I get a renewal from my local fitness center, asking me to make an active decision to recommit. A sunk-money subscription would be my Peleton stationary bike I bought, for which I also pay a subscription to take the classes. The Peleton subscription is a better model than the fitness center because they don’t ask me to recommit every year, they just put me on auto-renewal and charge my credit card every month. And, then there are contracts — ironclad commitments, the most valuable form of recurring revenue.
More than 44,000 companies have gone through a business value growth process called the Value Builder System, and there have not been many where it wasn’t applicable. Not each of those 44,000 switched from cash register transactions to contracts. Most augmented sales by selling an additional service or complementary product by some means other than what they had been stuck doing.
You might not believe that thinking differently is applicable to your industry, but I’d argue that since it’s what your customers prefer, it is applicable.
The 2019 End of Ownership survey, as published by Zurora, which polled 13,000 consumers, found that nearly three-quarters of adults believe that they will subscribe to more services and own fewer physical goods. More than half of adults (57 percent) want to own “less stuff,” which could be achieved through subscriptions, auto-renewals, or contracts.
From Jan. 1, 2012 to June 30, 2019, subscription businesses grew revenue about five times faster than both the revenues of the S&P 500 companies and overall retail sales. This includes many of the industries you might be part of that you think aren’t applicable, such as manufacturing, media and business services.
Every day we hear about a new way an industry — your industry — is being disrupted by a larger, national player. Often, technology is blamed, but that’s partly misplaced blame. Technology isn’t the disrupter; technology simply makes it easier for the customer to do business with your competition because it’s giving them the payment options they prefer.
Think about your newest and biggest national competition. Now, compare how they are charging customers versus the way you are charging customers. Your customers want to have a more predictable relationship with you. And if they don’t get it from you, they’ll get it from your competition.
Maybe you’re a clothing retailer, and you rely on someone walking into your shop to buy a new shirt. I encourage you to think differently. You could provide a service, for a recurring fee, to have a stylist send your customers a trunk of new clothes to try, based on what you think they might like. That recurring stylist fee can be deducted from any purchase your customer makes.
Or you sell fitness equipment and the cash register rings when people make a New Year’s resolution. Then you find that many customers don’t use that equipment, so you have very little recurring maintenance revenue.
You can sell a subscription with that product with a built-in streaming class so that people use your product and then they tell everyone else to use it, too, to join their tribe.
Maybe you sell HVAC equipment and you make good margins when a building is constructed, but your revenue goes down when the cycle slows. You can sell a monthly service where you visit the equipment, clean and maintain it. The best businesses on the planet have some component of automatic-renewal subscriptions. And it’s not an internet versus bricks-and-mortar thing. Companies are out there using technology to give your customers (yes, yours) an easy solution — not only one that they prefer, but which is scalable to the business.
One of my favorite examples of changing the paradigm is Heidi Balawender, whom we affectionately refer to as “The Plant Lady.”
If we don’t have flowers and plants in the office, it feels a little like a haunted mansion. She sold us some plants and made it feel more like a chalet. That’s not unusual. Lots of people sell plants and flowers. And then, usually, you never see them again.
Someone at the office waters them, and you just move on after your transaction. But Heidi comes back regularly, checks on the plants, their water and feeding, moves them from time to time, and changes them, depending on the season, or any event we might be hosting. She took what would have been a traditional transaction and smartly moved it upstream to a sunk-money consumable.
That’s your challenge. Create a service your customers want, that you’re not yet offering, and charge for it as an add-on. Every business can convert some revenue to recurring, and if you’re not doing it, I bet your competition is.
This article originally appeared in The Berkshire Eagle on November 27, 2019.