A fundamental metric in measuring the value of a business is the degree to which it can generate recurring, repeat profitable revenue from its customers. From businesses as diverse as wireless data providers to potato chip manufacturers, the ability of a business to both consistently predict its future revenue streams and retain its existing customer base on an ongoing basis have traditionally been considered "holy grail" metrics of business value.
The unique structure of business in the 21st century, however, make building recurring revenue business models uniquely challenging:
- The Move to Project-Based Work. More and more, modern business is more of a series of complex projects being driven to completion by amorphous teams of employees, contractors, vendors, and customers versus being one of repetitive process completion (think Henry Ford's assembly line). Project-based work, by its nature, is far more resistant to sustainable recurring revenue dynamics when compared to more traditional work process.
- Purchaser Information and Power. The power of Internet search technologies has greatly leveled the information playing field between buyers and sellers. Buyers, more than ever before, have great visibility not only into competitive pricing for goods and services, but also to the cost structures of their suppliers. This visibility, over time, translates into great margin pressure -- the prototypical example in this regard is how Wal-Mart utilizes a combination of its great purchasing power and data collection and analysis abilities to "squeeze" its suppliers to lower and lower pricing and margins.
- Sustainability of Business Models. The combination of global competition, the speed of technology adoption, and the ability of competitors to "rush-in" and replicate successful business models at dizzying speed has greatly reduced the average length of time a business model sustains itself. In some high tech industries, the period of time from a new product introduction to its "obsolescence" point has been reduced to six months or less! And as more competitors join the global economic fray and as the attention deficit disordered Internet generation gains more economic leadership, this business model "speed" dynamic will only accelerate. By definition, business models that are not "sustainable" are not recurring revenue models.
So what to do? Luckily, the news is not all bleak. The intelligent entrepreneur can adjust his or her thinking and planning to these 21st century economic conditions and still build business value. A few ideas in this regard:
- Embrace Projects. Many incredibly successful businesses are built on project-based work ÇƒÏ think movies, IBM moving away from basing its business on selling boxes to one selling complex IT advisory services, etc. Projects, while in and of themselves not revenue recurring in the traditional sense, can be sold on a repeat basis to a specific or class of client. And as a side benefit they are often more resistant to margin pressure than more traditional process-based work outputs because of their individual uniqueness.
- Make the Internet Work for You. While on the one hand the Internet exposes a business model up to a vast array of global competitors, it also opens the playing field up to an even greater field of new, prospective customers. It is only a bit cavalier to say that if your current customers don't keep buying from you or stop doing so profitably, the good news is that there are literally billions of new customers out there only a click away to replace them.
- Stay Ahead of the Curve. Within today's disappearing business models lay the seeds of tomorrow's recurring revenue franchise. Above all else, 21st century global economic conditions reward and require nimbleness, innovation, and breakthrough thinking. Depending on legacy thinking or resting on past laurels is a recipe for obsolescence -- think Kodak, Sears, etc. Accept, as opposed to resist, that the business that you are doing today will very likely (and must, in many cases) look radically different in 2 years time as it does today to survive and prosper.