David Cummings on Startups

The Power of Recurring Revenue

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David Cummings

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Early in my entrepreneurial career I sat down with one of the most successful entrepreneurs in town and he said something I’ll never forget: figure out how to build a recurring revenue-based business as it’s the best model. Ever since then, I’ve kept that in mind and focused my efforts on Software-as-a-Service (SaaS) and other types of recurring revenue businesses.

Here are a few benefits of recurring revenue:

  • Cash flow is predictable and timely
  • Critical metrics like cost of customer acquisition, lifetime value of the customer, and renewal rates are well understood
  • Every year starts with a base of recurring revenue making it much easier to grow indefinitely
  • Banks have credit lines specific to recurring revenue businesses that are much more favorable than standard business credit lines
  • Recurring revenue businesses are significantly more valuable than non-recurring revenue businesses, on average, when comparing ones with similar revenue amounts

The next time you’re analyzing potential business models, consider the power of recurring revenue. While recurring revenue is harder to get started, it’s an amazing business model once running.

What else? What are some more thoughts on the power of recurring revenue?

Comments

5 responses to “The Power of Recurring Revenue”

  1. Tanner Leggett Avatar
    Tanner Leggett

    This isn’t exactly on topic, but what are your thoughts and what are the actual difference between trying to build/create an invention/product to sell, rather than creating a business with lots of moving parts and unknowns,
    I hope this question makes sense.

    Reply
  2. Anonymous Engineer Avatar
    Anonymous Engineer

    Many of the business that we’ve sold to, tend to like the recurring model as well because they seem to prefer OPEX to CAPEX expenditures. So this can be a benefit in your sales process. I’m not an accountant so I don’t totally understand it, that’s just been my experience.

    Maybe this link will help: https://www.shoretel.com/blog/why-are-more-cfos-shifting-it-investment-capex-opex-0

    Reply
  3. calvindjohnson Avatar
    calvindjohnson

    This is the exact same advice that I gave to Johnson Cook the week after he graduated from Georgia Tech & was looking to start his first company. I told him to build a “turnstile” type business that went “cha-ching” every time a customer used his service or product. I learned this lesson when I built Georgia’s largest ATM network back in the 1990’s, even authoring the enabling legislation that allowed ATM surcharges. This business quickly turned into a highly profitable cash cow with annual recurring revenues in the millions at a very affordable operating expense level.

    Reply
  4. Brian Leach (@brianleach) Avatar
    Brian Leach (@brianleach)

    They’re much lower stress to run!

    Reply
  5. Joanna Lees Avatar
    Joanna Lees

    A recurring-revenue business model is also often easier to bootstrap. One challenge – remembering to market to and engage existing customers as much as, if not more than, your new prospects. Keeping existing customers is key to keeping that ongoing revenue stream healthy…

    Reply

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