Business Growth: Recurring Revenue vs. Referring Revenue
Ask any seasoned business broker about the drivers of business value, and you’re sure to get an earful about the value placed on the volume of recurring revenue in a business.
Recurring revenue is coveted in the terms of business value because it’s predictable income. It’s not a one-and-done sale. It means customers will be coming back for more — and on a regular basis — and it changes the multiple that your business is worth.
The growth of contractual subscription commerce (the pinnacle of recurring revenue) has exploded in the last decade. We all love to hate our cellphone plans, but that industry has successfully mastered the recurring revenue model like no other.
Companies continue to stretch their imagination with new ways to increase the probability of recurring revenue. One of the latest is touting the message that it isn’t a contract — but the pain to change is just great enough that you don’t. Companies love recurring revenue models, and their popularity will only continue to grow and evolve.
Which leads to the question …
“In 2018, is a business doomed without Recurring Revenue?”
The reality is, try as you might, not all businesses can conform to the recurring model, and yours may be one of them. Some businesses by design simply are not going to produce recurring revenue, at least not like a cellphone company does.
For example, no matter how successful a real estate company is, they are not going to sell the same homeowner a new home every year. In fact, the average American will only buy three homes in their entire lifetime!
If this sounds like your business, you need to forget about recurring revenue and put an emphasis on another kind of revenue — one that arguably is even more valuable: referring revenue.
Referring revenue is the revenue generated by satisfied customers telling others about your product or service. It is the entire methodology behind what drives the calculation of the Net Promoter Score (NPS) of a business.
Many of the most successful companies in the world pay closer attention to their NPS than just about any other metric of their business. Even companies that have very successful recurring revenue business models (i.e., Apple, Quicken, Netflix, Amazon) place a tremendous about of value on their NPS number, which is a measurement of referring revenue.
How does a business increase referring revenue?
The answer sounds easy enough. Simply deliver your product or service in a way that your customer is so satisfied they can’t help but tell others about how great the experience was. The challenge is getting them to do that — even when they’re extremely satisfied, it doesn’t mean they will tell anyone. Sometimes your customers need a little encouragement.
3 ways to increase your referring revenue
Intentionally send requests to your customers/clients for a Google review. Make it easy and include the link and maybe even some suggested wording, if you think it is appropriate.
We have become of nation of “Google it before you buy it”. Think about it: What’s the first thing you do when you get ready to invest in anything of value? Doesn’t it make sense to have some good reviews about your product or service when a prospect searches for your company? (*And by the way, if you’ve worked with us at Aspire, please feel free to click that Google link and leave us a positive review … if that was your experience.).
Seek out strategic referral partners. Many business transactions trigger a cascade of other activities. Again using the real estate industry as an example, think about all the other industries that are potentially going to benefit from a single real estate transaction? Mortgage/Banking, Title Company, Insurance, Remodeling, Landscape, Moving….it is a long list! Who are complementary businesses that you can partner with to leverage each other resources and more efficiently reach a larger audience?
Directly ask for them. This is the one that people seem to have the hardest time with, the idea of directly asking someone to give you a referral. But a direct referral from someone who is already a customer is one of the strongest endorsements you can get for your product or service.
If I am looking for a real estate agent and I get a personal endorsement about the great experience someone had with a specific agent, the chances of me at least considering that agent leapfrog 99 percent over the other real estate agents in my area.
When was the last time you directly asked a customer or client to give you a referral? It may seem awkward, but most people are happy to help and just need a nudge to take action.
Regardless of your industry, if you ask any business who their best new clients and customers are, they will almost always say the ones that are referred to them. It doesn’t matter if is a cellphone company or a real estate agent, or any one of thousands of other businesses in the country. Make referring revenue part of your strategic plan for business growth.
What about you? How do you think you’re doing with referring revenue? Have you ever thought about ways to leverage it? Is there something else that has worked for you?
Chris Steinlage, Kansas City Business Coach