A Lesson in Recurring Revenue

So there is a guy who owns a candy store. One day, while some of his customers are browsing around, a little boy walks inside. The store owner turns to one of his customers and whispers in his ear, “watch how dumb this kid is.” The store owner calls the boy over and in his hand places a dollar and in the other, fifty cents. The man asks the boy, “which one do you want?” The kid quickly grabs the two quarters and runs out of the store. The store owner looks at the customer and says “see, I told you.” Later in the day, the customer walks outside and spots the boy buying ice cream. He approaches him and asks, “why did you take the two quarters and not the dollar?” The boy looks at the customer and responds “if I took the dollar, then the game would end.”

There is a significant lesson to be learned here in regards to recurring revenue. We must make our customers authentically feel that they are getting extraordinary value. In exchange, they will continue their participation.

I can try to sell you a one time, large-fee service or I can sell you something that is a recurring model but at a smaller fee. With a smaller fee, there will be continued engagement. The store owner will continue to play this game, thinking he is winning, because the entertainment only costs him 50 cents. We can do the same with our customers. Reduce your fee but make it recurring so that, in the long run, the revenue you generate will far surpass what you could have made in just one sale.

Comments

6 thoughts on “A Lesson in Recurring Revenue”

  1. Hey, Mike! Great story. Such a good point!

    I’m loving PF but confused about something: Which account do I pay social security from each time I cut myself a check for my salary? (Both the half of social security that I am responsible for as well as the half that my business is responsible for) Would that come from Owner’s Comp or Operating Expense? Thanks a ton! You da bomb!

    1. Diana – Thanks for your question. Social Security is considered a tax. So, you would pay your owner salary, from the owner comp and the rest of salary from Opex. Meaning social security would be taken, effectively, from both a part of your owner comp transfer and a part from your Opex. Then, on a quarterly profit when you do your Tax reimbursement, you do a distribution from the TAX account to you the owner since you already had you taxes taken out of your salary. I hope this helps! – Mike

  2. Hey Mike! Cute story..made me laugh (but not quite ROTFLOL). I have used the recurring revenue model in my accounting business for years. Virtually no receivables, and most of my monthly income is in the bank by the 5th. Sweet! Just finished Profit First over this long weekend. Was introduced to the book by a client who is dumbfounded by all his QuickBooks reports (that we prepare and explain). I truly believe the PF method will work better for him. In fact, PF could work well for my other clients so I’m scheduled for a PFP phone interview later this month. I’m excited!

    As for the book, I’m sure you’ve been told this…taking action twice a month (e.g., 10th and 25th) is a semi-monthly activity, not bi-weekly. Your math examples even support the twice-a-month (semi-monthly) scenario. Doing bi-weekly calculations would be far more tedious. I don’t know, maybe you think the concept of every two weeks is easier to say and grasp than semi-monthly (btw, 25th to the 10th of the next month could be anywhere from 13-16 days, depending on the month). Also, might I suggest a brief Appendix for accountants and bookkeepers? At the very least to point out that PF is merely an allocation of assets (CASH) on the balance sheet. And one important area you gloss over is how does one record the distribution of taxes to the owner? In the case of sole-props, partnerships, LLCs or S-corps, the distribution is recorded as a draw. However, C-corps would have to report the distribution as taxable compensation subject to more withholding and then there would be more tax reimbursement to the owner. It gets circular. Also, in multi-owner companies, each owner has his own personal tax situation, so the tax burdens could vary. Not fair to make varying tax outlays, in particular if owners’ comp & profit are the same. Curious how folks are handling that one.

    Keep up the good work.

    1. Mike – Thank you for this amazing feedback. Yes… I do want to do an accountant/bookkeeper appendix for the book.

      Thank you for pointing out the semi-monthly rhythm. Did I mess that up in the book and put bi-weekly. If so, can you tell me where you see it and I will get it corrected in future printings.

      In regards to the distribution of taxes… in some cases, it can go straight to Uncle Sam (like in the case of an LLC). Other cases it needs to be a “reimbursement” to the owner as a distribution of sorts (like in the case of an SCorp). I leave it vague, by design since I want the reader (entrepreneurs) to consult with their accountant and/or bookkeeper on this. A professional needs to guide them.

      Hope you consider joining us at PFP. You seem like you would be an extraordinary member.

      – Mike

  3. This one is wonderful. I knew this previously too but the story you quoted made more sense. I mostly prefer recurring format for investments. I feel they have larger returns over short time span compared to investing lumpsome amount at one place and block it for years altogether.

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