The Recurring Revenue Business Model with John Warrillow
Monday, October, 5th, 2015 at 6:00 am by Mike J. Agugliaro
In this week’s episode of The CEO Warrior Podcast, Mike Agugliaro interviews John Warrillow, who is the creator of the Value Builder System, which is a statistically proven methodology for improving a company’s value by up to 71%. John is the author of the bestselling books Built to Sell and The Automatic Customer. During this episode, Mike and John discuss the recurring revenue business model, types of subscriptions, the three-tier system, psychology of choice, and next steps.
Main Questions Asked:
- What is the issue with value in a business today?
- What are examples of recurring revenue business models?
- What is the process to build recurring revenue?
- How do you position a recurring model?
- What are the behaviors behind the recurring revenue model?
- Should recurring models always have different tiers?
- Is there value in a recurring $0 model such as supermarket clubs that work on points?
- Have companies implemented recurring business models just to raise the value of a company for acquisition?
- What are the other steps in the recurring business model?
Key Lessons Learned:
- When you think of the value of a business, you have to think what it looks like through the eyes of potential acquirers.
- An acquirer wants to know how your business will continue when you, as the owner, leave.
- One of the things you can do as a business owner is to create recurring revenue. This gives the acquirer confidence that the business will continue when you leave.
Recurring Revenue Model
- Before building a recurring revenue model, plot what your ideal customer relationship would look like over the course of a year.
- Start by noting each time a customer interacts with your company.
- When it comes to the recurring model, think 10x rather than 10%.
- Often, the perceived value of preferred access, preferential treatment, a personal call is coveted.
- Once a customer subscribes, it changes their behavior and makes them more likely to buy from you again.
- Customers are more loyal to companies and services they have paid to be a member of, as opposed to what they get for free.
- The average customer spends $500 per year on Amazon.
- The Amazon Prime subscriber spends on average $1,500 per year. Why? Customers want to get their money’s worth.
Types of Subscription Models
- This is the ‘set it and forget it’ value proposition.
Front of the Line:
- Gets the customer preferential access to the front of the service queue.
Piece of Mind:
- Offer the customer piece of mind that if there is ever a problem with the product or service, you will guarantee it.
- This is essentially an insurance program that the customer hopes to never have to use such as an alarm system monitoring company.
The Consumables Model:
- This is for goods that naturally run out such as toner cartridges, razor blades, and protein powder.
- Even if this is a small piece of what you sell, having a subscription services means customer are a lot more likely to buy from you due to the continuity program.
Mix and Match:
- For some businesses, it makes sense to mix and match different models to get the idea set-up.
- A simplified model could add in a front of the line service and piece of mind model for subscribers to create a really compelling subscription.
The Three-Tier System:
- There should always be three price points on subscription plans.
- If you give people too many choices, it overwhelms them, and they do nothing.
- If you give people only one choice, it forces them into a binary position.
- If you give someone three choices, they can find one that meets their needs.
The Psychology of Choice
- John believes in giving the customer in an ultimatum in the way you do business. Either you offer service contracts or automatic customer relations.
- If you give customers the choice, they will always call you on the fly instead of choosing a subscription, as it’s non-committal.
- John isn’t a fan of the on-demand economy for business owners, and there is no predictability to it.
- Divide your customers into A, B, & C:
A) Most Loyal Customers
- A’s will say yes regardless.
- These customers are already converted and will buy whatever you say is best.
- Most of us start with the A level customers, but the best bet is to start with the C level customers.
B) Occasional Customers
- The magic in making a subscription plan work is here.
- Introduce your B customer to the subscription and the notion of subscription loyalty instead of being promiscuous.
C) Prospects You Don’t Know Yet
- Start with your C customers and approach them with your subscription model.
- Refine what you are offering.
LTV to CAC Ratio
- This is the static that indicates to a buyer what your company is worth.
- It is the lifetime value of a subscriber to customer acquisition cost ratio.
- In order to scale a subscription model, you are looking for a 3:1 LTV:CAC.
- You need 3x more in economic value (gross revenue) than it costs to win over the subscriber.
- If it costs you $800 to market to the subscriber, to get them to buy, then you need to make $2,400 of gross margin revenue from that customer in the period in which they are a subscriber.
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Links to Resources Mentioned
Value Builder System
Built to Sell (book)
The Automatic Customer (book)
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Implementing a subscription program can change your business forever. Find out how w/ @JohnWarrillow @CEOWarrior www.ceowarrior.com
What type of subscription model is right for your business? Find out w/
@JohnWarrillow @CEOWarrior www.ceowarrior.com