Why Companies are Adopting Subscription Billing Models

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Volvo recently announced they will make their cars available on a subscription model where consumers will pay one fixed fee per month for access to a car which includes insurance and maintenance.

Everything from tooth brushes to flowers are now available with subscription billing.

Could you offer some sort of recurring plan to your customers? Here are six reasons to consider offering your customers a subscription:

1.     Predictability: When you have subscribers, you can plan what your business needs in the future. For example, the average flower store in America throws out more than half of its inventory each month because it’s too rotten to sell.

At H.Bloom, a subscription-based flower company that sells flowers to hotels and spas, say they throw out less than 2% of their flowers because they can perfectly predict how many flowers are needed to fulfill their orders. 

2.    Eliminate Seasonality: Many businesses suffer through seasonal highs and lows. In fact, a whopping thirty percent of a typical flower store’s revenue comes on Mother’s Day and Valentine’s Day – ultimately leaving them to scramble and make a sale in November.
By contrast, H.Bloom has a steady stream of subscribers that pay each month. At Mister Car Wash – where they offer a subscription for unlimited car washes – they receive revenue from customers in November and April even though very few people in the Northern east wash their cars in rainy months.

3.    Improved Valuation: Recurring revenue boosts the value of your business. Whereas most small companies trade on a multiple of profit, subscription-based businesses often trade on a similar multiple of revenue.

4.    The Trojan Horse Effect: Once you subscribe to a service, you become much more likely to buy other things from the same company. That’s one reason Amazon is so keen to get you to buy subscriptions to things like Prime or Subscribe & Save. Amazon knows that once you become a subscriber, you are much more likely to buy additional products.

5.    The Sale That Keeps On Giving: Unlike the transaction business model where you have to stimulate demand through advertising to get customers to buy, with a subscription based model, you sell one subscription and it keeps giving month after month.

Data & Market Research: When you get a customer to subscribe, you can start to see their spending and consumption habits. This data is the ultimate in market research. It’s how Netflix knows which new shows to produce and which to kibosh.

The Big Thing Holding Back Small Businesses

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Small businesses stay small either by choice, or because they start chasing growth in the wrong places.

When you strip away the layers, it all comes down to darts.

Imagine a dart board with a bull’s eye and around it is a series of wider and wider circles. The bull’s eye is where the people just like you hang out. They are the people (or businesses) who feel the problem your company set out to solve. They are usually your first customers and raving fans.

The further you go outside of your bull’s eye, the less these prospects feel your exact pain.

Why do entrepreneurs go outside their bull’s eye? When you’re a self-funded start-up, you’re scrambling — just trying to bootstrap your way to a company. You don’t have a lot of money to invest in formal marketing, so you rely on word-of-mouth and referrals, which also means you’re often talking to people outside of your bull’s eye.

These prospects may experience the problem you’re trying to solve, but they are slightly different (that’s why they’re not in the bull’s eye). They like your product or service but want a little tweak to it: a customization or a different version. You don’t see the harm in making a change and start to adjust your offering to accommodate the customers outside your bull’s eye.

Your new (slightly-outside-the-bull’s-eye) customer tells her friends about how great you are, and how willing you are to listen to your customers, and she refers a prospect even further outside your bull’s eye who again, asks you for another tweak.

Making these changes to your original product or service to accommodate customers outside your bull’s eye seems innocent enough at the time, but eventually, it undermines your growth.

Why?

To grow a business beyond your efforts, you need to hire employees (or build technology) that can do the work. As humans, we are usually lousy at doing something for the first time, but can master most things with enough repetition.

Think about teaching a toddler how to tie his shoes. The first few attempts are usually rough. It’s a new skill and their tiny hands have never had to make bunny ears before. You break it down for the child and show them how to master each step. It can take weeks, but eventually they get it. As adults, we don’t even think about tying our shoes — we’ve mastered the skill by repetition.

The same is true of your employees. They need time to truly master the delivery or your product or service. Every time you make a tweak for a new customer outside your bull’s eye, it’s like changing the instructions on tying your shoe laces. It’s disorienting for everyone and leads to substandard products and services, which customers receive and are less than enthusiastic about.

Having unhappy customers often leads the owner to step in and “fix” the problem. While some founders can indeed create the customized product or service for their new, outside-the-bull’s-eye customer, they are making their company reliant on them in the process.

A business reliant on its founder will stall out at a handful of employees when the founder runs out of hours in the day.

The secret to avoiding this plateau, and continuing to grow, is to be brutally disciplined in only serving customers in your bull’s eye for much longer than it feels natural. When you want to grow, the temptation is take whatever revenue you can, but the kind of growth that comes from serving customers outside your bull’s eye can be a dead end.

The One Number Owners Need to Stop Focusing On

The value of your business comes down to a single equation: what multiple of your profit is an acquirer willing to pay for your company?

profit × multiple = value

Most owners believe the best way to improve the value of their company is to make more profit – so, they find ways to sell more and more. As experts in their industry, it’s natural that customers want to personally engage with them, which means spending more time on the phones, on the road and face-to-face to increase sales.

With this model, a company can slightly grow, but the owner’s life becomes much more difficult: customers demand more time and service, employees begin to burn out, and soon it feels like there are not enough hours in the day. Revenue flat lines, health can suffer and relationships get strained – all from working too much. Does this feel familiar?

If you’re spending too much time and effort on increasing your profit, you could find yourself diminishing the overall value of your business. The solution? Focus on driving your multiple (the other number in the equation above). Driving your multiple will ultimately help you grow your company value, improve your profit and redeem your freedom.

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What Drives Your Multiple

Differentiated Market Position

Acquirers only buy what they could not easily create, so expect to be paid more if you have close to a monopoly on what you sell and/or are one of the few companies who have been licensed to provide the specific product or service in your market.

Lots of Runway

Most founders think market share is something to strive for, but in the eyes of an acquirer, it can decrease the value of your business because you’ve already sopped up most of the opportunity.

Recurring Revenue

An acquirer is going to want to know how your business will do once you leave – recurring revenue assures them that there will still be a business once the founder hits eject.

Financials

The size and profitability of your company will matter to investors. So will the quality of your bookkeeping.

The You Factor

The most valuable businesses can thrive without their owners. The inverse is also true because the most valuable businesses are masters of independence.

Built to Sell: introducing the Value Builder System

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I’ve been a huge fan of John Warrilow’s since I read Built to Sell a couple of years ago – a book that shows you how to create “a business that can thrive without you”. I’ve been applying the principles of Built to Sell at SME Financial and in my client’s businesses, with great success. Personally, I’ve been gradually stepping back from working in my business, spending more time working on my business and more time with my family – but the business has a higher value than ever before. I believe that’s something every ambitious business owner should be striving for; it grows wealth, creates jobs and secures your financial future.

 Now, I’ve become a Certified Value Builder, so I can use John Warrilow’s Value Builder System to help my clients grow their wealth and build their businesses. SME Financial is one of only two Kiwi organisations offering this service and I’m the only Certified Value Builder in New Zealand who is also a Chartered Accountant.

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The Value Builder System is a proven methodology for increasing the value of any company, and it includes simple ideas and techniques that grow your business’s profitability and make it more saleable. Business with a Value Builder Score of over 80 get 71% higher sales prices than the average business in their industry (find out your Value Builder Score here). By meeting with business owners once a month, the Value Builder System works step-by-step on the eight drivers of company value:

  1. Financial performance

  2. Growth potential

  3. The Switzerland Structure: make your business independent

  4. The valuation teeter-totter: building stronger cashflow

  5. Recurring revenue

  6. Monopoly of control: marketing so you can control your pricing

  7. Customer satisfaction

  8. Hub and spoke: reducing your company’s dependence on you

The beauty of using this system is that it not only grows the value of your company, it releases you from “the owner’s trap”, where you do the selling and deal with the customers and the business starts to fall apart without you. If business always slows down when you’re away and customers always come to you with a problem, you’re stuck in the owner’s trap. The Value Builder System can help you escape from the trap, giving you more free time and reducing your stress.

Want to know more? Give me a call, text me or email me for a free consultation.

A banner year

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This has been a fantastic year for SME – we’re all about to go on our summer break and we’ve definitely earned it during 2018. The year started with a complete refit of our Mt Eden office, which really lifted the environment. The upstairs space has also had some attention, with our new tenants, the team from Cuisine magazine, moving in just before Christmas.

One of the biggest business changes has been launching SME Assurance Services. Shelley’s worked hard to build momentum with this side of the business and it’s beginning to pay off. We’ve got some excellent new clients who are going to help drive this side of the business in 2019.

 We’ve also expanded our client base, growing new customers entirely through word of mouth promotion. It’s a great way to get new clients because we know that our existing clients are happy enough to recommend us, which is a great feeling.

With almost all our clients now using Xero, it was exciting to be a finalist in the Xero awards for New Zealand Accounting Partner of the Year. Kunal went to the awards ceremony in Brisbane and it was a lot of fun, even though we didn’t take out the prize.

Toward the end of 2018, I became a Certified Value Builder, which means I now have access to a whole range of resources to help grow the value of your business and make it more saleable. I’m expecting to grow this side of the business more in the year ahead.

SME had a record month in November 2018, beating the previous record-setting months earlier in the year. This has been our best year ever – and that’s saying something since I’ve been running this company for over 30 years. So a huge thanks to the whole team at SME and all our fabulous clients.

Hopefully you’ve also had an excellent year in 2018 and together we can work toward an even better year in 2019.