.png?width=100&height=100&name=COVID_Safe_Badge_Digital%20(002).png "COVID_Safe_Badge_Digital (002)"){kind=icon}
INTRODUCTION:
We perform business valuations regularly for clients and look for ways that they can provide a subscription based offering for either part or all of their business. Why?
Well it's no secret that people will pay much more for a business with recurring revenue than one than doesn't. John Warrillow in his book "The Automatic Customer" talks about why a subscriber based business gets a much higher sale prices and how to go about it.
A good example of this is the WhatsApp founders who decided to provide a messaging platform that used the internet instead of expensive mobile carrier networks. They didn't want users getting bombarded with annoying ads when they decided to charge only a $1 per annum subscription fee. This may seem too cheap but because they only do messaging, only 55 employees were required to handle 450,000,000 users.
This led Facebook to acquire the company for $19 billion!
What are some of the attractions of a subscription business then?
Figure 1: Even Bert can't believe the price paid for a business that has subscribers!
1: Cash Flow
What a beautiful thing for cash flow a subscription business is! Most will have a direct debit system in place which is not only charged up front each month but also it negates the need to spend time and money on statements, phone calls, debtors' clerks and bank interest.
From your customers' point of view they are paying as they go which actually can assist their cash flow as well as they won't have to find a lump sum at the end meaning they haven't allocated those funds to somebody else.
When you sit down with your small business accountants to do your three way budget and cash flow forecast, have a look at the massive difference a direct debit revenue line will make compared to other revenue forms when looking at the monthly cash at bank balance!
2: Less Selling
Whilst you should never assume that customers won't notice that periodic fee, the reality is that for many they will just continue to buy as it's all set up and they won't have to reorder whatever it is they have run out of when it comes to your product or service. Razor blade provider Dollar Shave is a master at this.
Having these sales reoccurring will mean less selling in some respects but by getting your sales team to spend some time contacting these paying customers there is an excellent chance they may be able to up sell and get them into something else whilst showing great customer service by interacting more.
3: Less Business Owner Reliant
Subscription based businesses will typically have less owner reliance and this means a much higher business valuation multiple. Home security businesses typically will get 75c in the dollar for the installation revenue but a whopping $2.50 for monitoring services.
Not many of these require the owner to be there day and night earning the revenue and profits. Of course they will still need to run the business to make sure everything stays on track but this can be further minimised by a strong policy and procedures manual and systems.
4: Rollover Beethoven
A business that just keeps thing rolling over with minimal involvement naturally sounds very attractive to potential purchasers. It's not uncommon for insurance companies to offer monthly fees that just keep rolling over each month usually with a letter going out on each anniversary stating price increases etc. Again in many cases customers are less likely to leave and seek alternatives but again this should never be taken for granted.
Figure 2: Rollover Beethoven! Revenue that just automatically rolls over will allow you the business owner to sleep much more easily! Photo courtesy Balmain Baz & Lara Scolari Gallery balmain
5: Certainty In Customers' Minds
One of the great things about paying a set amount each period is that the fee will be fixed which creates more certainty when customers are deciding to buy. If you have a business that can't promise what the final cost might be it is going to be more difficult for a customer to commit to your product or services.
CONCLUSION:
Have a real think about whether your business can become subscription based but don't dismiss it lightly as there are many ways to introduce it even if it's for only some of your product and services.
Not only will your bank balance look much healthier but also you will have potential buyers for your business lining up to pay a much higher price than you could have imagined otherwise.
Please contact us if you would like further information on what can be done in this area.
