9 Great Ways To Build Wealth As A Business Owner – Series (5 of 9)
This series of articles follows on from an article we published recently, titled “9 Great Ways To Build Wealth As A Business Owner”, where we mentioned that business owners who focus on building company value over company size, generally get to sell their businesses for a premium when the time comes to exit, allowing them to cash out the maximum with no regrets.
This article looks at Walter Bergeron’s story about Power Control Services and covers the 5th way – Win subscribers, not customers.
Walter Bergeron started his small company servicing circuit boards for large food processing plants. It was a classic service business where Bergeron himself played hero for his customers.
The business model worked fine, but cashflow was lumpy. Bergeron had reached a point where he could no longer sell any more of his time, and their growth stalled.
Knowing something had to change, Bergeron made a 90-degree turn. He began offering a membership model where, instead of calling when a circuit board broke, his clients would be asked to subscribe to a plan enabling them to have their circuit boards serviced at any time. The switch to a membership model transformed the business, and Bergeron quickly grew the company to $7 million in annual sales, at which point he sold it for $10 million — more than double the typical multiple offered to a simple service company.
Value Builders love recurring revenue. Not only does the subscription business model boost your value, it also allows you to better plan your resources to meet demand years into the future. Such is the case with H.Bloom, a subscription- based flower delivery service where its spoilage rate — the proportion of inventory they must dispose of each month because it doesn’t sell — is just 2% per month. Compare that to the typical flower shop that throws out more than half of its inventory because the owner guessed wrong when supplying their store.
As the Bergeron and H.Bloom stories illustrate, most small businesses begin life using the “break/fix” business model. In the break/fix model, 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. The break/fix model is also unpredictable, with demand ebbing and flowing from month to month.
Win Subscribers, Not Customers
By contrast, Value Builders often opt for a recurring revenue–billing arrangement with their customers. These subscriptions, annuity streams, and service contracts create an ongoing stream of income and dramatically grow the lifetime value of a customer. When owners can accurately predict how much money they will get from a subscriber, they can invest more in wooing her.
For Value Builders, the most compelling reason to adopt a recurring revenue model is the impact it has on a company’s valuation. Dollar for dollar, recurring revenue can be worth more than twice that of transactional revenue, depending on your industry.
Start by segmenting your customers into buckets based on what is driving their motivation to buy. Think of customers in a broad context. Consider your end consumer as well as the distribution channel that gets your product or service to customers.
Next, measure the purchase cadence of each buyer segment. Look for a niche that shares a need to buy regularly. For example, H.Bloom discovered boutique hotels buy flowers regularly to give their property an exclusive aura, which is why H.Bloom started its subscription model by targeting hotels.
If you found this article of value, then feel free to read through two other series we’ve published recently:
- 8 Key Drivers Of Company Value That Every Business Owner Should Know
- Unpacking The Subscription Economy
If you want to see how your business scores in “8 Key Drivers of Company Value” right now, take 15-minutes to complete this survey and you’ll get a comprehensive 25+ page report benchmarking your business against its peers, plus 49 tips on how to improve those 8 key areas.