CHAPTER 5 ON THE DEVELOPMENT OF RECURRING REVENUE ...

ignoredmoodusDéveloppement de logiciels

21 févr. 2014 (il y a 3 années et 1 mois)

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CHAPTER
5


ON THE DEVELOPMENT OF
RECURRING REVENUE
SYSTEMS




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“The secret of business is to know something that
nobody else knows.”



Aristotle Onassis




What Does
Recurring Revenue

Mean?

Eric Mattoon’s Recurring Revenue Systems or “Affiliat
e Marketing”

AVAREN.COM

Spam Filtering

AVAREN Advanced Care or “Managed Services”

Restore Anywhere

Trial and Error

CCP

Books/Music Conventional Sales

Book Sales Taken to the Next Level

Educational Programs / Information Products

Most Efficient Business Mod
el?



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What Does
Recurring Revenue

Mean?




From Investopia
.com’s


What Does
Recurring Revenue

Mean?
The
portion of a company's revenue that is highly likely to continue in the
future. This is revenue that is predictable, stable and can be counted on
in

the future with a high degree of certainty.”

When I first heard the
concept of “recurring revenue” laid out in a well defined way, it was in
the audio book version
Rich Dad Poor Dad
by Robert Kyosaki. In it he
gives us a great example of the concept of “r
ecurring revenue. I’ll try to
recall the story with a few changes.



Kyosaki relays the tale of a town in the Old West whose water source
has become tainted. The town now needs water and lots of it. The town
blacksmith immediately begins working to trans
port water from a river
some distance away. He does this with wagons, buckets, labor, etc. He
begins earning extra income immediately with this activity and is glad.
But should he stop carrying water (typical labor based model) he will
also stop earning th
is extra income.




Alternatively, a local engineer has instead, the idea to build a
pipeline/aqueduct from the river. Rather than immediately going to
work carrying water, he puts some effort into planning. Upon
completion of the pipeline, the blacksmit
h loses his income stream as a
result of obvious enhancements in efficiency, and the engineer is able to
make money
even
while he sleeps. Rather than engaging in continuous
labor like the blacksmith, his only labors after construction would be
planning and

necessary maintenance o
f

the pipeline. He has a steady
income stream and it is one that does not stop when his labors stop.



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Needless to say this “recurring revenue” concept is remarkable when
compared to a labor based model. Having a substantial degr
ee of
business experience already I was alarmed that I had not
studied these
ideas
earlier.

Not only is
the recurring revenue model
a dramatic
improvement over any per/hour labor scenario in terms of potential
productivity, but a well designed system can a
llow one to do the work
of countless individuals while sleeping or otherwise engaged.

In
addition, the way this model lends itself
well
to revenue forecasting and
efficient budgeting.



Of course no system, regardless of how well designed, will ever be
able to function without the involvement of man hours or even other
companies. But it has become clear that the quest for understanding, as
it pertains to the construction of efficient and profitable systems, should
be a focus of at least one individual wi
thin any company.



Eric Mattoon’s Recurring Revenue Systems or “Affiliate Marketing”


While working at
Harte
-
Hanks (NYSE:HHS),
one of my managers was a
guy by the name of Eric. Eric began teaching himself how to manipulate
search engine results and I w
as fortunate to start trying to pick up the
skill as well. Within a year or so Eric had also learned that it was possible
to make money simply by steering traffic. Eric would setup websites
designed to pull in and then redirect visitors to websites who wou
ld pay
him a commission if the visitor purchased something. Within a year or
so, Eric and his brother had dozens of these systems online earning
them thousands per month. Eric has since left me with the impression
that they went about it the wrong way at t
he start. Apparently early on
they built lots of little websites, rather than pouring their energy in a
smaller number of more valuable web properties or portals. He explains
that portal sites (sites with an abundance of unique content relative to
smaller
sites with few
er

pages) stand a much better chance of pulling in
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traffic consistently over time. Most recently I was studying a person
who does nothing but place advertisements on the internet for other
people’s products. The guy doesn’t even maintain webs
ites at all. Just
captures the traffic via the advertisements and earns a commission that
way.



AVAREN.COM


Before implementing the concept of recurring revenue, (AVAREN) had
two main products/services. First was hourly labor
.
Like the blacksmith,
if w
e weren’t working on a customer’s business we weren’t earning
dollars. Second we carried equipment which was generally whatever
our customers needed in the way of computers, servers, networking
equipment, etc. Often we would try to find a way to become a d
ealer of
the products our customers needed so we could capture some of the
technology dollars they spent. After a few years of this we began to
study recurring revenue systems.



Spam Filtering


The first true recurring revenue idea we came up with was
to build an
online spam filtering service for our customers. Force their email
through our spam filter before delivering it on to their email servers.
Not having operated our own spam filtering farm before we determined
it to be a huge time drain relative
to the amount of revenue it
generated. We ultimately moved this operation over to another
company to maintain. This eliminated near all the daily support work we
had to do for this pipeline, and saved us so much time that we actually
make money with the se
rvice now. This is now a business that requires
very little labor to support and is of better quality than when we were
trying to run it ourselves.


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DNS


DNS was an easy one to organize but the revenue generated from it
has always been insignificant. We

began aggregating all of our
customer’s DNS records (on the web translates human
-
friendly
computer hostnames into IP addresses) into a single hosted provider.
We typically charged for this annually.



AVAREN Advanced Care or “Managed Services”


Our thir
d foray into recurring revenue products was to change our
labor delivery model to one that would be billed on a recurring monthly
basis with remote work being the focus rather than performing purely
as onsite contract labor. We would determine an amount ne
cessary to
support a given number of users/servers and have our customers pay us
a
fixed amount per month.



Restore Anywhere


Our fourth recurring revenue product was implemented at the same
time as Advanced Care. Restore Anywhere was a disaster recove
ry
product that backed up our customer’s server systems in a new way. In
addition to managing backup processes at their locations the system
was capable of handling an offsite
push to

remote datacenters as well.
This fully automated solution was a huge lea
p relative to all that had
existed before and allowed us to centralize the monitoring of all our
customer’s backup systems into a single web driven portal. We charged
a flat amount for the lease of the onsite device and then a fixed amount
per gigabyte for

offsite storage. This recurring concept practically sold
itself and had 10’s of thousands in annual sales before it was out of
beta. Supporting them turned out to be more burdensome than we had
imagined as there were more hardware problems than there shou
ld
have been. It became clear that while a huge advance relative to what
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we had been doing before in terms of backup, the devices still required
too much oversight and support time.




As a result of this “product addition” phenomenon, we began to grow
i
nto a situation where we were supporting 5
-
10 different products while
the bulk of our revenue was being generated by one or two. Continuing
on this path, adding additional systems to complement the existing in
an attempt to bring in additional revenue see
med intriguing at first, but
ultimately we realized that we were only adding to the house of cards
that is technical support/labor.



Trial and Error


Now that we have been experimenting with various “recurring
revenue” systems for a few years we have le
arned a great deal from our
experiences. On the one hand, we have seen with our own eyes how
quickly an organization can grow once embracing this concept. On the
other hand we have learned that most of the businesses we have been
engaged in are nowhere nea
r as efficient as could be desired. We have
learned that our businesses generally require an undue amount of
human technical labor in order to maintain the revenue pipelines. I now
believe it makes the most sense to design a system whereby your firm is
res
ponsible for as little of the manual work as possible. Building “houses
of cards” that require an intense degree of internal labor to support
often leave one wishing for less complexity and fewer emergencies. We
understand now that we chose our business mo
del because it was what
we were skilled in, not because it represents the most efficient way to
generate revenue. Let’s explore a few examples of more efficient
revenue systems. As a side note, we should remind ourselves that
businesses can themselves be c
onsidered recurring revenue systems if
successfully passed off to a manager.

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Obviously many of the business models discussed in these pages above
do not strictly fit the definition of “recurring revenue” per
Investopia’s

definition. To meet this definitio
n the revenue would have to be
extremely likely to occur month after month like the fees AVAREN
charges to support our business customers. I

see
no harm however
in
studying variant models that do not fit the definition perfectly.



CCP


One of our custom
ers, a small company we refer to as CCP had the
idea to bring online web stores targeting a specific niche in the furniture
business. They sell supplies and other parts

to people wis
hing to repair
their outdoor furniture. At this point they have brought 3
or 4 different
stores online all catering to this specific niche. Obviously building their
systems has been a challenge and they have had to employ outside
parties like AVAREN to help bring the

infrastructure
online, not to

mention th
e people necessary t
o
verify, pack, and ship the orders.
Certainly not a perfect business model by any stretch but it seems a fair
improvement over the labor/hours model. In fact I think it safe to say
that any type of online business where your biggest problems are supply
and
fulfillment could be considered a dramatic improvement over a
typical
labor based model. It is my understanding that CCP has now
grown their business to over 3M a year.



Books/Music Conventional Sales


Books and music are among the most popular and olde
st of the
recurring revenue methodologies. The model is nice because your
product can be generate
d

once and then you are free to sell it for years
or even decades into the future. Quality and quantity are of course
paramount
here
.

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Book Sales Taken to the

Next Level


The former division of labor between the author and publisher of a
book has been thoroughly upset by the internet. People/companies are
now delivering product electronically and some of them are generating
significant income. A cute example
might be the e
-
book I bought
recently, purported to have been written by a 10 year old kid

and a
consultant
. The book was about how to do well in school with a minimal
amount of effort. At $9.97 it was well worth it as it gave my son and I
something to do
together. There is no way to know how many copies of
this book the
authors
ha
ve
sold, but their ad worked.

Even if the book
only generated 5K a year for the pair, it has undoubtedly been a
valuable experience and will likely lead to even greater achievemen
t.
Again the brilliant aspect of this is that the book was written once and
then sold countless times while being delivered electronically. With sites
like
elance.com

one doesn’t even necessarily have to write

the content
themselves, but instead can farm that out too.




There are a lot of people making money on the internet with direct
publishing
,

as anyone can publish their own paperbacks books these
days. Paperback publishing companies are all over the int
ernet and can
publish a paperback book for as little as $2 per copy. In many cases
these publishing companies will even stock and ship your product for
you. The search feature at Amazon has undoubtedly led to many a sale.
Often these self publishers will a
lso build ecommerce websites and
perform web marketing steps to elicit additional sales.





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Educational Programs / Information Products


A hot new trend becoming apparent in recent years is the trend
towards selling online subscription services.
Often
t
hese are
informational websites on how to pick stocks, how to make money on
the internet, etc. All the same stuff that people have forever sold via
direct mail, postcards, ads in the back of magazines, etc. but now
everything has all gone online. In additi
on to web marketing, these
groups will buy ads on Google and Yahoo, optimize websites for specific
search terms, try to write convincing sales letters and marketing
programs, and wait for people to subscribe for anywhere from $5.95 to
hundreds per month. S
ome of the best sites offer video and audio
content in addition to written. As long as they continue to put up new
content (make it once sell it lots of times) people continue to subscribe
and the cycle is kept going.



Examples of subscription websites:



Canslim.net

offers daily and monthly email services
offering stock tips based upon the investing ideologies
of William J O’Neal.



Philsgang.com

-

Another online

(audio/video) service
to teach one about investing. Phil also offers a number
of software tools for recurring monthly amounts.



David Allen



Self help personality. Teaches people
how to use their time more wisely. “Getting Things
Done” is his catch phrase
. Charges as much as
$480/year for individuals wanting access to online
club.



Frank Kern and Trey Smith

of
Infomillionaire.com


Charge $100/month to subscribe to their online service
where they teach
you their tricks related to how to
make money on the internet.

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SalesForce.com



Took CRM to the cloud. Countless
businesses/users subscribe monthly to this online CRM
solution.



Quickbooks.com



Took their accounting package into
the cloud. Users now pay monthly for basic service
with add
-
ons extra.



Netflix


Users on monthly subscriptions which would
allow Netflix to more readily forecast revenues and
budget

effectively. Also now delivering movies directly
via internet.



Some other examples of recurring revenue systems might be:



Real Estate



self financed sales or leasing



Investment vehicles
such as bonds, annuities, life
settlements, etc



Visa/MasterCard



Na
sdaq



Telephone and cable companies



Alternate Examples



Stratashops.com



Builds ecommerce systems for other
companies and keeps a portion of the proceeds of every
sale.



Stephen Pierce



Writes books on a variety of subjects
including motivation, business

management, how to
make money on the internet, etc. Sells countless
products via internet.



John Reese

of
Income.com

has made millions on the
internet selling courses on how to make money on the
internet.

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John

Carlton



Teaches people to write better/faster
marketing and sales messages. Also sales a variety of
courses online and otherwise. I’ve noticed that he and
his pals fully cooperate with one another trying to get
their lists to buy each other’s products.
They work it
out so that John sends a buyer to Stan then Stan will
pay John a commission. Another example of “affiliate
marketing.”



Google Adwords



People pay pennies per click for
small online advertisements



PostCardProfits



Luke Jaten shows you the bas
ics of
postcard marketing. His idea is to use test marketing in
small batches of a few thousand to provide test data
for later larger campaigns. When he discovers
something that works he expands his mailings into
larger geographic regions.



Most Efficient

Business Model?


Given

the multitude of business models available one eventually must
ask, “What direction
should we go
in?” Here are some additional
thoughts to ponder before coming to a conclusion:





Use systems to automate as much of human workflow
a
s possible.



Use of the internet and internet marketing is assumed
as necessary.



Emphasis could be placed on compelling customers to
perform their own interactions without the assistance
of a sales representative. Examples of this might be:

1.

Allow users to p
lace their own orders online
without need to communicate with company
directly.

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2.

Allow payments to be made directly without
human involvement in this process except for
purposes of oversight.



Ideally customers, once sold, would persist as
customers indefini
tely

(monthly subscription)
, greatly
simplifying the work of a sales department.



In a perfect world fulfillment would occur
electronically, automatically, or there would simply be
no fulfillment (a la Ebay).



The closer these ideas are to the forefront
of our minds the better job
we can do
of integrating them into new business processes.








“Success occurs as a result of well reasoned
productivity.

The pinnacle of which, if I am right, is to
plan your activities to the point where you have enough
pa
ssive income so as to have the freedom to work on
that which you wish.”



Matt Logan