Strategic Discipline Blog

You own a floral shop.  Holidays like Mother’s Day, just recently celebrated, and Valentine’s Day comprise 30% of your annual revenue stream. In order to achieve foot traffic that will result in impulse sales you can pay as much as $150 a square foot. Worse of all you lose 50% of your inventory every month to waste.  It simply rots before you can sell it.  Your customer is at best variable and seasonal.

Now consider you want to join this industry but do it another way.  You decide to have less than 2% waste and pay less than $30 square foot, and sell to people who buy regularly. 

How would you do that?

H. Bloom did just this.  In an industry that average sale is $29, theirs is $4524!  

We are moving to a transaction economy.  And the key to winning is making your customers automatic.  H. Bloom decided to focus on customers that need floral arrangements regularly.  Businesses like hotels, restaurants, spas, etc., that want flowers to create the proper atmosphere, but don’t want to mess with ordering, setting up and maintaining this resource.

At the Orlando Leadership Summit, John Warrillow, author of The Automatic Customer, provided 4 of the 9 models he’s identified for gaining recurring customers.  You can receive all 9 models in an e-book here. He shared with us the Why, How and Scaling of your business to achieve recurring revenue.

The biggest reason to discover recurring revenue is the impact it will have on your businesses value.  A typical business is luck to sell their business for 1x top line revenue.  In the securities business, (installation of security systems for homes) he noted that companies specializing in just installation of security systems typically receive 75% of their top line revenue when they sell. That’s .75 of every dollar they do on an annualized basis.  On the other hand a security company that does monitor of systems typically receives 2x their top line revenue.  This is because their

The other value your business receives through recurring revenue is something Warrillow called the Trojan Horse Effect, which is his first business model. 

Trojan Horse Effect

Recurring Customers buy more!  The very act of being a subscriber to your business makes you a bigger customer. 

Look at the example for Amazon. I like many of the Leadership Summit attendees are subscribers to Amazon Prime, their subscription based model that initially started to allow Amazon frequent customers to receive free shipping.  It’s expanded to other services including TV and movie streaming. At $99 a year and 40 Million Subscribers this provides Amazon alone with $4 billion in revenue. 

But the value of the subscription is just the tip of the iceberg.  The average Amazon customer spends $625 a year.  The average Amazon Prime customer spends $1500 a year.  That’s 2 ½ times as much! 

Why do Amazon Prime customers spend more?  We want to get our money’s worth!  Being a recurring customer quite simply changes our behavior.  Amazon is testing this model for other services now as well, and has branched out to Amazon Fresh, a subscription grocery model that is having success in California.

Recognize the value of a recurring customer is this Trojan Horse Effect.  Recurring customers will spend more with your business, automatically increasing their value and your businesses’ value with it.

 Simplifier Model

Warrillow offered several examples of this recurring revenue model to help understand it.  It’s based on the idea that often customers are busy, and they don’t know they need your product or service until it’s too late.  In Florida a company called Mosquito Squad delivers mosquito eradication.  Once mosquitoes are buzzing in your yard it’s too late.  Mosquito squad focuses on spraying yards before mosquitos hatch their eggs.  They explain to prospects why it’s important to have more than one treatment in order to stay ahead of mosquitos who literally hatch eggs frequently during the summer.  Their treatment is for 9 sprayings.  They achieve 71% retention of customers annually.

Another example of an industry that can do something very similar is swimming pool companies.  People often forget to get their pool ready in time for pool season and then typically forget to close it down.  Customers also need maintenance to keep the pool at the right chemical balance during swimming season.  Pool companies package a plan that spreads payments out over the season and includes all three events for a packaged price.

Question: What’s the timeline in the life of serving your ideal customer?

Harley Davidson has their Hog Club.  In return for a small membership fee Harley Davidson collects valuable information on their customers.  It only amounts to about 5% in recurring revenue, but again the membership means Hog Club members are more likely to buy more and be loyal return customers.

Software companies have used this model to offer Front of the line service.  It’s like the Fast Pass you can buy at Disney World.   For a membership fee customers get moved to the head of the line when a service issue occurs, assuring they won’t have to wait if they have a problem. 

A clinical psychologist moved.  He called 40 psychologist looking to partner with them and on every call got voicemail.  He realized that if this had been a patient calling it could be catastrophic.  In most cases it took 2 weeks for the patient to schedule an appointment.  He started a subscription for people wanting psychological help.  For $99 a year you move to the front of the que, and within 24 hours you are guaranteed an in face appointment with a psychologist.  In addition to the subscription fee he charges patients he also gets a 40/60 splitt with the psychologist he has enrolled in the plan.

If you believe this model has potential for your business then complete the following exercise:

1. Make a list of your customer segments
2. Rank them in order of willingness to pay to jump the cue. 

Warrillow indicated that a veterinarian created this model and it helped her business explode.

Warrillow shared two other models with us.  We’ll cover those in our next blog.  There’s much more ahead as I return to two blogs a week next week.  

Here's a quick three minute interview with John with Verne Harnish following his presentation at the Leadership Growth Summit: