Recurring revenue can make your company more predictable, can extend the lifetime value of a customer and can ultimately make your business more valuable. If you are unsure how to create automatic sales, a simple service contract can be the place to start.
A service contract is an agreement to provide an ongoing level of service in return for a regular payment. It can be a way to transform an ordinary service company into a predictable subscription business.
For example, John Abell’s grandfather started a small Canadian pest control company in 1924 with one office. For many years Abell Pest Control ran on single pest control services, this means that a customer would call for a certain pest problem, such as a wasp nest and Abell would send someone out to fix it.
The business model worked fine, but cashflow was lumpy. Abell had reached a point where it could no longer sell any more of the company’s time, and his growth stalled. Knowing something had to change, Abell made a 90-degree turn.
The Switch
In the early 2000’s Abell began offering a membership model were, instead going out on a call-to-call basis. Abell started offering a subscription plan to allow customers to have regularly scheduled services throughout the year, with protection against 17 different pests for a fixed yearly fee.
The switch to a subscription billing model transformed the business, and Abell quickly grew the company to an estimated $100MM in annual sales.
As the example of Abell Pest Control illustrates, most small businesses begin life using the “break/fix” business model where a customer has a problem, and you swoop in to provide a solution. This business model may make you feel valued as a problem solver, but it comes at the expense of the value of your company. In the break/fix model, you must create demand, sell your product or service, deliver it, and start all over again, which is why acquirers place a lower value on these transactional businesses when compared to subscription-based companies.
By contrast, with a service contract, you create an ongoing stream of income that has the potential to grow the lifetime value of a customer dramatically. When you can accurately predict how much money you will get from a subscriber, you can invest more in wooing them.
The most compelling reason to adopt a recurring revenue model is the impact it can have on your company’s valuation. Dollar for dollar, recurring revenue can be worth more than twice that of transactional revenue, depending on your industry.
Service contracts are a simple and effective way to transform a transactional business into a recurring revenue goldmine.
Contact Whitehorn today and find out how we can help you transform your business.
