As a business owner you’re focused on growing your revenue and building your sales. But, are all revenues created equally when you are trying to determine the value of your business? The short answer is no. Revenue that continues to occur month over month, or monthly recurring revenue (MRR) typically has more value than a one-time purchase or a project-based business model.
Most commonly, MRR is derived from subscription-based sales whether it’s coffee purchased on auto ship or your cell phone or Netflix bill. So how does MRR fit into the world of manufacturing, distribution or B2B service businesses? What advantages can an MRR strategy offer, and how can a business expand into this model?
Think of Monthly Recurring Revenue as the rocket fuel that will dramatically increase your business value. Let’s consider Software-as-a-Service (SaaS) companies. They often trade at multiples of revenue rather than earnings before interest, taxes, depreciation and amortization (EBITDA) because they are primarily MMR. Even if the majority of your revenue is generated by your highly consistent customers, a steady, reliable flow of Monthly Recurring Revenue can pump up the value of your business. MRR that is contractual makes future revenue much more predictable, requires less ongoing sales efforts and reinvestment, and delivers sticky customers – MRR customers are very sticky!
• Distributors/Manufacturers – Strategy: Develop proprietary products and sell them to OEMs. This will typically embed your components into their products and, once this is accomplished, it could be extremely difficult to change them. This is especially true for medical devices and other regulated industries.
• HVAC/Electrical/Other Trades – Strategy: Employ maintenance contracts that deliver monthly or quarterly services. This is a highly effective method of generating that valuable MRR. Make sure you look at your contracts to see if they are assignable and evergreen, that increases their value.
• Freight/Warehousing – Strategy: Employ MRR for inventory management and other services to convey a steady revenue stream and, therefore, a higher business value.
• Subscription Services – these can be used by many different types of businesses, even if it’s not industry standard. Farmstands use CSA services for weekly vegetable pick up; retail clothing chains have created services that send preselected merchandise; sock/coffee/bourbon/spice of the month clubs get marketed for gifting regularly. Creating a new service option for your products may create brand new revenue channels and increase your customer base or optimize your current customer base. Either way, MMR generally raises the value of your revenue at the time of a transaction.
