One of the best strategies a company can leverage when designing its business is moving to a monthly recurring revenue (or MRR) model.
Startup investors have known this for a long time. There’s a reason why they LOVE investing in B2B SaaS companies. The predictability of MRR models allows them to command much higher business valuations than most other types of businesses. As a result they tend to have higher pre-money valuations when fundraising, and tend to be acquired on very attractive terms. While most companies get acquired for a multiple of EBITDA, B2B SaaS companies are often acquired on a multiple of top-line revenue. They’re that valuable.
The great news is monthly recurring models are not constrained to software companies or even B2B companies. MRR models can be leveraged across a wide range of industries and services.
The Benefits of a MRR model.
Investors and acquirers love MRR models for a whole host of reasons. And as you’ll see, these reasons are just as relevant to small business owners.
MRR models eliminate receivables issues.
A monthly recurring revenue model typically charges customers credit cards automatically. This means there are no account receivables headaches. Having to run customer aging reports and creating cadences for following up with late payors becomes a thing of the past. Having to write off invoices becomes a thing of the past.
The impact on the business owner and their team from a stress perspective is immense. And the time that previously was spent on follow up and collections can now be allocated toward more productive tasks.
Small business owners can use tools like Paysimple to automatically bill customers. If you’re fancy and have some programmers on your team you can create a more seamless experience with other technology by integrating a platform like Stripe.
MRR models smooth out cash flow.
For any business that has lumpy cash flow or has any type of seasonality, implementing a monthly recurring revenue option can be a great way to smooth out that lumpiness and provide more predictability for the business.
If you have a seasonal business like landscaping or tax prep, for example, a MRR model can allow you to maintain year round staff, which would be a huge selling point for attracting team members.
MRR models attract better clients.
We worked with an accounting firm that started offering a fractional CFO service on top of annual tax prep or bookkeeping. What they found was that this model attracted higher caliber clientele. Because they were paying throughout the year, they were also more likely to call when they had questions. And since they were providing updates throughout the year, it actually made tax season - a notoriously busy period for accountants - much less stressful because they were able to do a lot of the prep work prior to the busy season.
MRR models open up better financing options.
If you have predictable revenue each month, banks are much more likely to lend you money or provide you with lines of credit. There are even modern platforms like Pipe that allow you to get financing based on your receivables.
MRR models make your business more capable of being sold.
We talk often about the importance of having a business that is capable of being sold. If you can’t create a business capable of being sold, you’ve effectively just created a job for yourself. When you stop working, the business stops working.
Monthly recurring revenue businesses are simply more attractive businesses to potential acquirers. They attract higher multiples, partially for all the reasons outlined above.
Even if you never plan on selling, you’re effectively buying the business. And you always want to ask is this worth what I’m paying, in terms of opportunity cost. A more predictable, scalable, smoother revenue model gives you a better business as the owner as well.
How to transition to a MRR model.
It’s unlikely you can transition cold turkey to a monthly recurring model. But you certainly can over time.
First take a look at what you offer. If it’s a high price point, one time payment, you can offer your customers the opportunity to simply spread that payment over time.
However, it’s possible you can actually charge more by spreading out the cost over time. As we often will discuss with Intentional Owner Participants, gross margin is the easiest lever to pull to increase profitability, and raising your prices is the easiest way to increase gross margin. If you have 12% pretax net income, and you raise your raise your prices by 12%, you’ve suddenly doubled your profitability. And while a 12% increase on top of a flat fee might create some sticker shock, that amount spread over the year is only a 1% difference per month, which hardly anyone will notice.
In many cases you might want to layer in some additional services to increase the value proposition. For example, a landscaping business could offer to winterize a yard, or provide hearty winter-friendly landscaping or wreaths or planters (interestingly, many commercial landscaping companies already operate on a monthly recurring revenue model).
A professional service firm could offer a service similar to the contract CFO model, with quarterly reviews of work or initiatives relevant to their area of expertise, or a monthly call to discuss things in more detail.
Look at proposals you lost previously due to sticker shock (or otherwise). Also look at customers who used your services but never hired you again. Reach back out to all of these folks and let them know about your new monthly service offering.
There are two important areas you’ll want to pay attention to when you transition to an MRR model. The first is onboarding, or what many people in startup land call “customer success”. You want to make sure that you provide a knock-your-socks-off experience during the period when they might have buyers remorse. You want to give them a quick win as quickly as possible and make them feel reassured they made the right choice. Once they feel good about the choice, they’re much more likely to stick around long term.
The other area is around customers who are considering cancelling. If you have tried to cancel a monthly SaaS type of product, you’ll see that they put ton of energy into designing an offboarding experience that is easy and not frustrating (anyone who’s tried to cancel a gym membership knows the opposite experience). At the same time, they design triggers or calls to action to try and keep them as a customer - consider a short term discount or “pausing” the subscription if they say they have a money issue. Do teardowns of how other companies handle the unsubscribe process to find design patterns you can leverage in your own process.
Unlock the power of monthly recurring revenue.
To help you design a monthly recurring revenue model for your business, we’ve created a MRR Designer worksheet that you can download. It walks you through how to think about your offerings from the perspective of your customer’s annual cadence. The result will be an offering that can community the value and necessity of a monthly subscription to your customers. You can download it here.
Monthly recurring revenue models are simply better. And most companies can take advantage of them if they get creative. Even if you’re skeptical, I encourage you to try it as a thought exercise. You might surprise yourself with that you come up with.