https://www.youtube.com/watch?v=jOM0m34dxz4

1 00:00:00.000 --\> 00:01:00.000 in this video what i want to talk to
you about is how we two and a half x the lifetime value of our physical
products business by adding in recurring revenue for most businesses
small or large adding in recurring revenue is going to be the single
greatest way to increase your enterprise value and so i've been doing a
really deep dive on this uh just thinking through it because i'm trying
to create a checklist for my own portfolio companies um and so i just
figured i would share it with you and so going through this deep dive
the first thing i want to do is kind of challenge one of the original
thoughts that i think comes up all the time is i don't have recurring
revenue i'm not a recurring revenue business etc and i think that that
is binary thinking which is either our recurring revenue business or you
are not a recurring revenue business when in reality is to what extent
are you recurring in business how recurring is your business is a better
question and so what um after after thinking about it for almost a few
hours this morning i was writing down in my lovely ipad here my ideas
around recurring revenue and uh there are eight c's because i'm trying
to make this you know memorable for myself too that you can

2 00:01:00.000 --\> 00:02:00.000 implement to make your recurring
revenue more sticky and so just as a quick side note or tangent on this
before we dive in it doesn't matter what type of business you're in
you're there's always a an extent to which you can become a more
recurring revenue business so a typical example that i'll get in this
instance is someone's like well i'm in real estate you know there's
nothing recurring about my business which is so silly it just means that
you have a very limited time horizon right and the question is uh one if
you're a realtor you absolutely have recurring revenue business because
you want to have the lifetime value of the customer and every single
house they buy and sell right right even if you were selling houses for
example who else is serving for recurring revenue it's not the house the
bank is consistently giving you loan after loan after loan what you're
really buying is a mortgage right not the house it's secured by the
house you're getting a loan for money which is secured against the house
it's not actually the house itself so to the bank and the real estate
agent and the escrow company those are the companies that are generating
recurring revenue from this quote single transaction right but they're
hoping that you would continue to visit them over and over and over
again i just wanted to make that shift for anyone if you're in the car
repair

3 00:02:00.000 --\> 00:03:00.000 business right like and you have an
auto shop of course you want to have recurring revenue every business
owner long enough time horizon is recurring if done properly right and
you can either choose to make it more recurring or less recurring and so
the purpose of this video is to show you how to increase the stickiness
increase the recurring nature of the services and products and or access
that you sell within your company all right and i'm doing this within
again my own portfolio companies and so i'm doing this because i want to
share these frameworks with you so the first of these and this may be
you know maybe the most obvious is consumption right the goal uh to
increase the stickiness of recurring revenue is to increase the
consumption and you can think about this from a physical standpoint
which you can see physical here i'll see if i have a little error i know
it's a little small that's what she said deal with it but uh consumption
right the goal is like if we can get someone to eat the food that we're
making every single month they're going to want to buy more of it if it
is good to the same degree netflix has a recurring revenue business and
it's not like they have contracts or anything like that but it is purely
based on consumption you want to continue to consume the things that
they put out and so you

4 00:03:00.000 --\> 00:04:00.000 continue to pay right and so spotify
again you want to continue to consume the music and so you pay right now
the cool thing is is that if we're still thinking along this binary
versus continuum thinking process it is not uh you know do i get my
people to consume the product but it is how well do i get people to
consume the product right and so for each of these eight cs that i'm
about to go through don't think is it a check box of yes or no but
instead to what extent do i do this and the idea is not that you want to
have all eight i mean it would be magical if you had all eight but if
you can easily think through each of these uh c's um as ways that you
can bolster or make your business more recurring uh than it was before
and each of these individuals you can do better or worse so you have you
have continuums within continuums and that sounds complex and that's why
we like to use the psychological binary or shorthand of yes or no but
reality is not nearly as simple all right so the first of these is how
can we get someone to increase the consumption of our product and
services and so that creates that means

5 00:04:00.000 --\> 00:05:00.000 going through you know creating better
onboarding experiences improving the actual value of the product itself
making it more addictive in nature etc right so somebody wants to
continue to consume it the second of these is collateral so is there um
is there any way that we can secure our uh recurring revenue against
something else all right so i'll give you two examples in the physical
world if you go to storage they have your physical goods they have your
stuff right and so you must continue to pay because they have your stuff
right it's a secured uh continuity stream a different way in the digital
world dropbox is storage they just have your files and they have your
stuff google drive is storage right and there's different types of
collateral so the idea for us as entrepreneurs is how else can we create
collateral either physical or digital um that that makes that we can
secure against this continuity so people want to continue to stay and
pay a different version of this would be like a crm right crm has all of
your contacts and all of those uh you know all the contacts all their

6 00:05:00.000 --\> 00:06:00.000 information etc that they are now
holding and they're holding i don't want to say hostage but they are
relatively holding hostage from you so that you continue to stay right
so that is a second way that we can increase the stickiness of the
continuity that we are making the next is cost of switching all right
and so this is a lot this has somewhat to do with psychology which you
have the time cost sorry the time uh cost of switching which is like it
might be very arduous or lots of effort uh to switch over providers of x
y and z right um and or uh it might cost you a lot of money to do that
and you can even further increase this psychological bias in your favor
by increasing the sunk cost fallacy on your prospect so a way of doing
this for example would be if i were selling a hundred dollar a month
continuity if i told someone that they had to spend five thousand
dollars one time to begin working with me and then it was 100 a month
the likely that they would cancel would be significantly lower i talked
about this briefly inside the 100 million offers book which is the
bigger the head the longer the tail if you have a really big upfront it
makes it much easier to drive the recurring on

7 00:06:00.000 --\> 00:07:00.000 the back end and so the stickier it
will be and so you can make that in terms of fees you can make that in
terms of time money investment basically the harder is to get into
something the the psychological bias against the harder it will be to
get out and so the cost of switching will increase the stickiness of the
recurring revenue that you have for physical products or services the
next is choice all right so the idea here is the lack of choices so if i
had uh if i were the only only you know xyz service provider on an
island i may have a lot of stickiness to my business because there are
no competitors now that may be short-lived if someone else sees what i
am doing and then sees the opportunity right um but the idea you know
patents are a way to decrease the choice that uh consumers have for
alternatives right if you're the only one who owes this patent for this
medical drug then they have to continue to buy from you over and over
again you can argue the ethics around it but that's not the point of
this channel the point of this channel is simply just showing the
economics behind the business model so if there are ways that we can
decrease the alternatives that someone can have because we have a unique

8 00:07:00.000 --\> 00:08:00.000 competitive process or a trade secret
that we have that allows us to do something differently or better than
everyone else and fundamentally this is the point of differentiation in
and of itself is to decrease the alternative to decrease the choices
someone has if you were the absolute best at xyz there will no there
might not be a choice of anyone else who can do what you can do this is
also the reason that niching down is so valuable for many businesses
especially if they're starting out because there might not be anyone
else who will have their unique combination of skills resources etc to
provide the value in the way that they do right and so our idea to
create a stickier business to have more recurring customers to have more
recurring revenue is to decrease the other alternatives right either
through directly with patents uh you know indirectly by having no one
else on the island or by having some sort of competitive advantage that
we have that no one else has right trade secrets of some kind the fourth
is control of the money flow this was one that i added near the end
because i was thinking through it i was like what else is really sticky
what else makes recurring revenue sticky and one of the ways is candidly
a lack of transparency and what i mean by that is you know uh uber you

9 00:08:00.000 --\> 00:09:00.000 know for example they're gonna take
their fee before they pay you know the government takes their fee which
is your taxes if you're an employee before you pay which is why most
employees don't have nearly the same gripe with taxes as most business
owners because the business owners see the checks that are coming out
every month whereas many of the employees do not they just see the end
result of the money i'm not saying that no employees don't have issues
with taxes that's not my point here i'm just saying that if we're
talking about to what extent or a degree on a continuum the more overt
the charges are rather than covert uh or before someone can see it or
without them seeing it then the the stickier it is because they are less
noticing of the fee or charge right and again my argument here is not
the ethics behind this it's simply that this is something that the more
a business or recurring revenue stream has this nature embedded within
it then the stickier it will be in general all right because again all
of these are continuums within the larger continuum of how sticky or how
recurring is your business not whether your business is recurring or not
and so we want to take more and more steps along each of these

10 00:09:00.000 --\> 00:10:00.000 continuum to overall bolster bolster
the recurring revenue nature of our business all right the next one uh
is cause all right and what i mean by that is are people aligned with
the cause uh that we are that we are we are we are standing for so
churches have recurring revenue people pay 10 they tithe towards the
church right and so if people are aligned with the cause then they will
continue to pay because they're getting value because they associate
their identity with that cause all right uh this is why building
movements within businesses are so valuable because then we can we can
act and function far more like a church can in in the fact that people
will associate their identities with the cause and continue to pay
because of who they are and because of what they believe that the cause
represents charity there are some people who continue to give over and
over again even though the benefit that they're getting right because
there is still a product of charity the product is the feeling that
people get when they when they pay because they feel good about
themselves and so if we have this nature within if we can embed

11 00:10:00.000 --\> 00:11:00.000 this nature within our recurring
revenue stream then we will make it stickier right people donate to
political parties every single year that is a recurring uh commitment
that many people do people continue to frequent the same brands because
they believe the brand stands for something that they too believe in
right and so this is kind of the more amorphous or vague part of it but
still very very real in terms of how you can create stickier recurring
revenue all right the next one is community all right and this one i was
really really hesitant because i almost i almost put it in with cause
but it felt different enough that i felt like i should pull it out but
people continue to pay for things if they feel like they're they're
becoming a part of a community and they would have to sacrifice their
identity so you'll notice between cause and community um they're both
related to uh the identity that someone has which is they're gonna be
it's commitment and consistency they're going to they're going to
continue to be consistent with what they believe to be their identity
because people don't like to be inconsistent with who they are and so if
they believe they identify as being a part of a community then they will
continue to want to pay uh for that

12 00:11:00.000 --\> 00:12:00.000 community the next one is contracts
that are enforceable so by and large i'm not the biggest fan of
contracts i mean obviously we lawyer up and we have all of our our legal
resources and that's a necessary you know part of doing business um but
uh having contracts in and of themselves can increase the stickiness
i'll give you a simple example so if i said i have a 2 000 a month
continuity whatever right and you can just pay as you go right that will
probably net me if i were to have two things that were equal in value
that i'm providing right two thousand dollars a month someone sign up
let's say for a six month contract at two thousand dollars a month or
what i would say a twelve thousand dollar program that has six payments
of two thousand dollars now if i know that my recurring revenue stream
as a month-to-month version uh only has let's say four months of stick
if i can sell this as a twelve thousand dollar package the likely that i
get that extra one or two months is high and so i'm saying just if two
products and services are identical but we package them differently the
one that is sold with a contract against a against a total value

13 00:12:00.000 --\> 00:13:00.000 will likely be stickier because people
are committing to a certain period of time and so if we have contracts
that are enforced that is just one way of making a contract enforceable
another way of making contract enforceable and this is somewhat a degree
of collateral which is someone has a their credit worthy right they can
ding their credit if uh if they if they breach their contract right so
you do have some sort of collateral which is kind of the nature of
making contract sticky is that you want to have some collateral but i
felt that this was different enough especially with the example of you
know charging twelve thousand dollars for uh for for six times two
versus a month a month of two thousand dollars a month you may end up
getting more people to pay and stay longer simply by positioning it as a
six month agreement that then goes month to month after the six months
right and so just by making that tiny change in terms of how we're
positioning we might be able to increase our ltv or probably lifetime
gross profit by two or three x simply by making that one change all
right which is a massive improvement for a business and so just another
way that you can think of how can i make my recurring revenue stickier
how can i make my business more recurring i'll do a quick recap for you
the eight c's of recurring revenue and our goal here is to think of

14 00:13:00.000 --\> 00:14:00.000 this as a as a continuum checklist
which is if i'm looking at my service how can i make it how can i how
can i get people to consume more of it right how can i make it more
valuable how can i make it easier to use how can i make it so people
want to use this over and over and over again number one number two how
can i increase the collateral that they have when they do business with
me so that so that they they can't leave because i have something that
is secured against it right secured against their recurring fee that's
coming over and over again how can i increase the cost of switching so
how difficult in time money or sunk cost or perceived time or perceived
money can i make it so people do not want to switch next how can i enter
a marketplace where there's fewer choices or how can i increase my
competitive advantage by making uh trademarks i p trade secrets or
continuing to assemble products so that no one else can deliver what i
can deliver this is kind of the competitive mode that warren buffett
talks about the controlling of the money flow is there a way that we can
figure out how to get paid first or get paid off the top or somehow tie
it so that our fees are less

15 00:14:00.000 --\> 00:15:00.000 overt again i'm not talking about the
ethics behind it i'm simply talking about the efficaciousness right the
efficacy of this uh way of doing and increasing the stickiness of it
next how can we create a cause that we are aligned with so people can
identify with what we are which is they buy shoes from us not just for
the shoes but for the cause that they identify with in addition to right
the the classic um tom shoes example how can we increase the community
not like yes i have a community check we've already got that taken care
of but how many more ways can we strengthen and tie the community
together so that people feel like they're leaving a community not a
business which is much harder and then in so doing make our revenue
stickier and then finally how can we make contracts that are enforceable
part of that is going to be selling to better or higher quality
prospects but also again um having something that that we can
collateralize the contract against and even simply uh making people
agree to a certain amount people are going to in general be more
consistent with the commitment that they make if they say that they're
going to stay for for six months you will have more

16 00:15:00.000 --\> 00:16:00.000 people stay for six months if they at
least say they're going to stay for six months even if not all of them
do you'll still have more people stay than would otherwise do that now
that may be harder on the sale and this is part of businesses balancing
those things i hope this made sense for you in terms of how i think
through recurring revenue in the business how we can increase the
recurring nature of our business because again this is not the binary of
i ever recurring versus a non-recurring business it is to what extent is
my business recurring and to what extent am i checking off each of these
boxes that we just went over so those are the eight c's of recurring
nature uh recurring revenue as i know them put any other ones that you
can think of if you think that there's something totally different or if
you think there's examples that that that tie into any of these c's
throw them in there i think it'll be a good lively discussion um if you
found this valuable my name is alex from rosie i own acquisition.com we
have a portfolio of companies that's 85 million a year and i have
nothing to sell you so if you like this hit the subscribe button and
i'll see you guys in the next video bye
