Monday, 13 February 2012

Revenue Resilience: A Simple Guide

What is revenue resilience?
-         Not all revenue is equally certain.  A business which relies on winning a small number of large contracts each year may well earn the same revenue and profit as a business that gets its income from a large volume of contracted subscriptions and a third company that gets all its income from ad-hoc repair and maintenance across a moderate number of existing customers

o   In theory, the riskier nature of the project business should result in higher profit margins (returns to the shareholders) and the stable nature of the subscription business, lower - but this is not always the case in practice
o   Don’t confuse spreading payments for a project with spreading both the cost and the income by using a different business model.  The first impacts cash flow and actually increases risk – so should require an even higher return.

-         All other things being equal, businesses should strive for as much locked-in recurring revenue as possible
How can you translate one-off into recurring revenue?
-          Some examples of spreading payments are
o   A photocopier which is paid for by charging a small amount for every copy made

o   Mobile phones, where the phone is given free in return for a fixed term monthly contract
-         Each of these relies on a higher total income over the life of the contract to cover the cash flow hit and the risk of default.  It is also necessary to build in a compelling proposition to renew the contract before it expires in order to build revenue resilience

-          Some examples of additional recurring revenue are

o   Software license maintenance
o   Membership of a user group
o   Subscription services
o   Service and maintenance contracts

-         An alternative way of looking at this is separating future income from resource or asset limitations

o   Translate a single consultant’s time into a course to be sold online in perpetuity
What is the proposition for the customer?
-          Possible benefits that would induce a customer to sign up for a long-term contract are

o   Access to a continuous stream of new content

o   Access to special offers and discounts

o   A known fixed charge covering all repairs (a form of insurance)

o   The right to free future upgrades
o   Continuous tuning and maintenance of the original product
Customer concentration
-          One final source of revenue risk is over-reliance on a single or a few customers – avoid this