Franne McNeal ranks six types of recurring revenue from lowest to highest value: consumables, sunk-money consumables, subscriptions, sunk-money subscriptions, auto-renewable revenue, and contracts. Shifting toward contracts makes a business more predictable and valuable to buyers.
Hi, I'm Franne McNeal, and there are 8 key drivers that drive the scalability of a company. The 5th one is recurring revenue. When a buyer comes in to buy your business, they want to understand how's this business going to continue when you, the owner, leave. And so the more recurring revenue you have, the more valuable your business will be. There's really 6 different forms of recurring revenue. And buyers view the forms a little bit differently. So I'll give you the 6 forms in the David Letterman type of top 10 list. I'll start with the lowest value and then I'll end up with the most valuable in the eyes of the acquirer. The first form of recurring revenue is just simple consumables. So if you have a coffee business, you count on people coming in to buy a cup of coffee 1 time a day, 2 times a day, 3 times a day. The second form is sunk money consumables. That's when you have a machine that people invest in, and then in order to make the machine work, there's additional things that they buy. Could be a coffee machine with the little capsules, could be a printer with the ink. The third way is subscription revenue. So if you've ever subscribed to a magazine, whether it's online or in paper, you know that there's a start date and an end date. And the editors and publishers pretty much know that if you're a subscriber one time, you'll probably subscribe for at least 2 or 3 more years. The 4th form is sunk money subscriptions, where you basically buy some technology, so a platform, And then you also are buying the information on a subscription basis. So it's kind of mashing together 2 of the concepts, the sunk money consumables, but also buying on a subscription. The 5th form of recurring revenue is auto-renewable, where instead of having a start or stop time, it's in perpetuity. So in some ways, like your phone bill. And the 6th form is a contract. So, and that is literally when you sign and say, I will do this for this start date until this start date, and it continues on an auto-renewal or evergreen basis. That's the most valuable form of recurring revenue because it's a contract. Your customer is contractually obliged to buy from you in the future. Absolutely. And of course, that's rock solid. So what are you doing to improve your score in recurring revenue? And think about the hierarchy because that will help you grow your business.
