Unlocking the Cash Machine: Recurring Revenue

by John, Orakwe John

The first post in this series identified good and bad markets for building a cash machine.

When building out our revenue models and customer acquisition approach in a good market there are a few rules of thumbs that you need to keep in focus for a well-oiled cash machine.

always seek options to make it easy to charge a lot of money

This may seem obvious but you find a lot of startups take the contrary approach of continually lowering prices as a customer acquisition strategy. This strategy quickly locks you into a long race to the bottom that ruins a lot of companies.

Thus building a solid product always puts you in poll position with options to charge a lot of money. Your product pricing should reflect the value your product provides.

A recurring revenue model, especially for SaaS (Software as a Service) and subscription-based products offers the predictability of income stream which is a highly value asset for any business.

6 years ago, Adobe’s Creative Cloud launched Adobe Systems into the recurring revenue–based subscription model space. Subsequently, Adobe’s stock price in 2016 appreciated nearly 300% of its 2012 value.

Adoption of recurring revenue models by Adobe and software behemoths (Google, Amazon etc.) is compelling evidence that any start-up with cash machine ambitions must anchor on a recurring revenue model.

Some questions you have to answer as you implement the recurring revenue for you cash machine includes:

  • What is the best frequency for recurring charges; charge per month, per quarter, or per year?
  • How much each customer should pay per month?
  • How many customers do we need to achieve a monthly revenue target?

Suppose that our startup has a monthly recurring revenue (MRR) target of $10,000. A new rule of thumb suggests that the fewer customers that can help us meet this target then the easier it would be for us to achieve and grow the target sustainably.

Kevin Kelly's hypothesis stated that creators need only a thousand true fans (customers) giving them $100 a year to make a living. However, Jason Cohen of WP Engine cautions that an even smaller number of true fans i.e. 150 customers is more practical.

In this context, your start-up needs only 150 loyal customers to reach $10,000 in revenue per month i.e. each customer pays an average of $66 per month.

Customer Acquisition Strategies

Now, from Kevin DeWalt to Jason Cohen, there's an absolute wealth of options on customer acquisition and customer development approach. Our focus will be on three (3) pragmatic acquisition methods.

  1. Scratching and clawing: which is done by reaching out to your immediate professional network. Given that you're creating value in a big market, this approach can help you capture the first 50 Customers.

  2. Leverage guest blog posts and Social media by offering coupons to niche blogs and social media influencers. Less effective than paid advertising, but can pull in another 25 customers.

  3. Use basic marketing – tools like Adwords and sponsored posts on relevant websites are the most effective and can pull in a set of 75 paying customers.

An example of scratching and clawing at WP Engine

During the customer development phase at WP Engine, Jason achieved a 100% positive response from WordPress consultants on Linkedin using the email format below:

Hi, I’m a founder of this new WordPress hosting company. It’s supposed to be designed for folks like you so I’d love to talk to you about your pains and your needs.

Now I know your time is valuable, you’re a consultant and so I absolutely do not want you to feel like I’m just trying to grab time from you.

I am very happy to pay whatever you think is fair for an hour of your time even if that’s more than your normal hourly rate cause I appreciate this is a weird one-off thing.

NB: The secret to great customer development is respect; People are most likely to pay you their attention when you place a premium on their time.

In some other not-so-unique instance of scratching and clawing, customers give money to businesses that address their pain even before they'd built anything tangible.

Perhaps, if you talk to enough people about how your idea can ease or erase their pain completely, You'll meet someone who is willing to pay you for the products even before it is built. Certainly, there's no better way to start than to have a market hungry for your products or services.

This is the second article in the series: Unlocking the Cash Machine for your Startup.

Stay tuned for the next article - Unlocking the Cash machine: Pricing Higher