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As discussed earlier in this series, one of the most important factors in investing is knowing when to stay invested. This article will talk about how to develop recurring revenue streams so that you do not have to make this decision.
Recurring revenues are those that are constantly being paid for outside of your direct control. For example, if you own a gym, you would probably want to keep the doors open as long as possible since you must pay monthly dues to use the facilities. Or if you manage a restaurant, you would hope to retain enough customers to ensure your livelihood every day.
However, even though you may intend to remain in the profession, life gets in the way and it can be difficult to maintain consistent work. With the right planning and marketing, you can still bring in money while weeding out constant budget cuts.
There are three major components to developing a recurrent income stream. These components include establishing the business, finding an area of specialization, and creating passive income. We will discuss each of these components in more detail here.
I should note that there is no wrong time to begin building a recurring revenue source into your business model. In fact, I recommend doing it as soon as possible given what I mentioned above!
Stay tuned for our next blog post where we will dive deeper into component number two – finding an area of specialization.
A very popular way to calculate CLV is by determining how much money you make off of each individual person who comes into contact with your business. This is called revenue-based CLV or just RBCLV.
The math for this calculation is easy, it’s just multiplying an average cost per user (CPU) by total users. CPU is simply the average price of using your product divided by the number of times it was used. Total users are obtained through either calculating the amount of time spent in engagement with your product or looking at overall growth on social media sites like Facebook.
When you run out of things to do, or when you need to take a break, that is when people come back to make purchases. This is called repeat business.
Most companies aim to create word-of-mouth marketing where their clients tell others about the good service they received. This kind of revenue comes mostly from repeat buyers who trust the company and believe they will get the same quality product or service from them.
You can understand why these individuals continue to shop at a particular store by thinking about it in terms of what the average person would. If most people are getting a good deal, then you should too!
By creating great products and services that meet individual needs, you have built up this trust. Now you just have to keep investing in the brands you already use to reap the benefits.
Customer lifetime value (CLV) is an important metric for understanding the profitability of each segment of your business. It looks at both how much money you spend on advertising to gain new customers as well as the cost of acquiring new users through referral fees or giving away free items.
The CLV calculation takes into account how much money you spent on advertisements, how many clicks your ads got, and how much profit you made per user. All of these factors contribute to the overall number.
A lot of online businesses fail to recognize the importance of recurring income.
When you run out of things to do, something must be done! The same thing applies when running a business – you need to prioritize what tasks are most important so that you can focus on them with no distractions.
For many businesses, staying in front of the television is one such task. They put aside time for this job day after day, but it never gets finished because there’s always something else they have to watch or read. This is very common in the news industry, where publishers keep putting off retirement due to not being able to find someone to replace themselves.
It’s difficult to prioritize TV over reading an article about politics or watching sports since those things require less investment from you. In fact, they often cost you money since advertisers pay to place commercials during these programs.
So instead of investing in internal leadership development, some companies incentivize external hires by paying their health insurance as a perk. It would probably cost more than the employee benefit package to hire someone internally, though, which is why so many people get paid even more for working at a big company.
In the media space, this concept was called “channel-surfing,” and it’s expensive for buyers who prefer content from one channel over another. By spending money to watch ESPN, for example, you could be depriving yourself of better content elsewhere.
Businesses that rely heavily on advertising to survive suffer from this same problem.
After their initial purchase, you’ll want to keep them in the loop by offering them ways to re-engage with your product or service. This can be through newsletters, mobile apps, targeted advertisements, and more.
By adding these additional touches, they will continue to feel like they are getting value from your company even if they have already purchased. This will ensure that repeat business is very possible!
It’s important to note that not every person who purchases your product or service will remain loyal. Some people may buy once and never use the app again because it doesn’t work for them.
However, there are some people out there who really love what you offer and will definitely use your product or service regularly. These individuals are worth investing time into because they represent potential income.
The way to identify this type of individual is by looking at survey data and analytics. By analyzing past behavior, you will be able to determine which products and services appeal to different people and why.
This information can then be used to create new products or services that target the same people who were before. It also helps you develop better marketing strategies by identifying strengths and weaknesses.
When you offer recurring services to your clients, one of the first things you need to do is determine your average transaction (or customer acquisition) price. This is also referred to as the cost per user or CPUS.
The average transaction price is determined by multiplying the average purchase amount per user by the number of users you have. For example, if you buy a software package for $100 a month for 100 users, then your monthly CPU is $10,000!
This does not take into account future service renewals or additional licenses that may be purchased, but it gives you an adequate basis to start with.
Now that we know our average transactional price, we can move onto calculating our customer life time value (CLTV).
The most important thing to know about CLV is that it is not simply calculated by adding up all of the purchases you made, but instead calculating how much money each buyer spent in total.
This is referred to as an incremental cost model for determining CLV. Your CLV will be influenced heavily by the average purchaser – or what we refer to as the average consumer.
The average consumer is defined as someone who spends an average of $X per week on your product or service. For example, if a person spending $Y weekly on your products was one of the most expensive purchasers ever, then this person would no longer qualify to be considered part of the ‘average’ consumer. This is why it is so crucial to have segmented, discrete groups of consumers - those at the very high end are not representative of the overall market.
By using statistical data and marketing research to determine which buyers are more likely to return (and therefore contribute more to CLV), you can better understand who your core audience is. These individuals represent your average consumer and are worth investing time into.
When you calculate the CLV (or what we refer to as average transaction size) of a business, you should look at it differently than before. Before, most businesses calculated monthly or yearly sales, which is great for those that sell products with large up-front costs like a computer or car! But what if a business does not have these?
What if a business sells access to educational courses or software programs? These do not have an expensive purchase price, but they do require an ongoing subscription. By looking at weekly sales instead, our CLV changes slightly. The cost per week is used in place of the monthly fee or annual payment.
By doing this, you take into account any purchases made during a month’s time, or year, rather than just one single sale. This gives us a better understanding of how valuable the service is to a buyer, and thus the CLV.
A common way to calculate customer lifetime value (or CTV) is by calculating how much money individual buyers spend in a given period. This information can be gathered through purchase records or direct conversations with individuals about their spending habits.
By adding up all of these daily costs, you have an overall average for how much money people spent on Product X during the time frame under consideration. The difference between this total and the cost of the product represents the CTV!
The reason why we focus on only buying days instead of full months is because there may not always be complete data for every month. For example, if someone purchased Product X at the end of March, they would not contribute any data to calculations for April-December since it is missing. By looking at just the days that contain data, we are including all of those minutes and hours that person paid for Product X.
