Noted author and entrepreneur John Warrilow in his great new book, “Built to Sell: Creating a Business that Lasts Without You,” offers entrepreneurs and executives running companies of all sizes fantastic advice as to how to build businesses with high equity and long-lasting value.
Given that 70% of the U.S. economy is services, Warrilow has particularly insightful comments on the “hierarchy of revenues” and their relative equity value.
Warrilow ranks them from worst to best as follows:
No. 6: Consumables – As Warrilow says, “disposable items like toothpaste that customers purchase regularly but that they have no solid motivation to be brand-loyal toward.”
No. 5: Sunk Money Consumables - like razor blades, which are similar to consumables, but have the additional stickiness of the consumer investing in a platform in addition to simple brand-loyalty as being of higher stickiness and thus value than a “no cost of entry” subscription as is typical for most publications.
No. 4: Renewable Subscriptions - like magazines;
No. 3: Sunk Money Renewable Subscriptions - Warrilow flags the example of the Bloomberg terminal, where traders first buy or lease the terminal and then purchase an ongoing information subscription;
No. 2: Auto-Renewal Subscriptions - like #4 and #3 above, but with the aspect of forced continuity, or “good-til-cancelled” subscriptions.
Most subscriptions are now set up this way, but when the subscription is for something, like document storage, that is extremely difficult to switch / cancel once established, the value of an auto-renewal subscriptions grows exponentially.
No. 1: Contracts - the gold standard of recurring revenues, where a customer is locked in, by contract and by law, into an ongoing, recurring revenue relationship.
Warrilow’s full description of each of these types of recurring revenue and their relative merits can be read here.
How about Investors?
While Warrilow focuses most of his book and his analysis from the perspective of the entrepreneur and how to maximize their personal equity value, his analysis is equally valid for investors seeking emerging companies to back.
Businesses that are too project to project based, or based on hard to sell, hard to deliver, customized “solutions”, or too dependent upon the skills and relationships of their owners are almost always characterized by little equity and exit value.
In contrast, companies led by entrepreneurs that understand the hierarchy of customers and revenues - and are constantly moving their businesses ever upward on it - are the sellable, and thus the backable, ones.