Recurring Monthly Revenue: The Modern Revenue Model
As consumers, we don’t buy much outright anymore; over the years we have learned to buy with monthly payments. Most of us recognize this when it comes to larger purchases; like purchasing a home, luxury goods, or a car. This article transcends what’s historically been an ‘ownership’ mentality to the service-based world we find ourselves living in today.
We need to look no further than our own smartphones. When was the last time you:
Bought a music album? Apple Music, Spotify, and many others provide unlimited access to nearly all albums for a monthly fee.
Rented a movie? Amazon Prime, Netflix, and many others give subscribers the ability to watch a multitude of new releases with a monthly or annual payment.
Paid upfront for a cell phone? Every single cellular provider out there will give you a phone at no cost up front with a 2-3 year contract.
If you really pay attention and look around, you will notice that nearly all the products or services we interact with on a daily basis on are morphing into subscription-based expenses that look to you for a monthly payment.
Welcome to the World of the Recurring Monthly Revenue: The RMR Business Model.
Companies are recognizing the power of the RMR and are shifting how they do business:
“Apple may be an iPhone company, but now it’s openly acknowledging how important services are to its business.” (1)
“Microsoft has already been moving more of its products from one-time purchases to subscriptions and Microsoft 365 helps take this further.” (2)
“7 Reasons Starbucks Launched A Subscription Service” (3)
Even Cadillac has launched a subscription based model where (in select markets) instead of buying or leasing a car you can buy a subscription to ‘Cadillac’ and switch your car up to 8 times per year. No oil changes or maintenance required – all you need to do is put gas in it. (4)
What is Driving the Increased Adoption of the Recurring Monthly Revenue Approach?
First off from a consumer’s standpoint:
Attitudes towards ‘ownership’ vs ‘access’ have changed drastically.
Technology (be it software and associated hardware) is evolving faster than ever before.
Most consumers prefer to pay a little over time rather than all at once.
From a business standpoint, the Recurring Monthly Revenue business model can provide a company:
Predictable monthly cash flow
Peace of mind with more accurate financial forecasting
Enhanced enterprise valuation with future cash flows
Another significant advantage of recurring monthly revenue is derived from the increase in the lifetime value of a customer, or LTV. Contrary to traditional transactional business models, RMR based companies are not forced to constantly ‘re-acquire’ their customers, reducing ongoing marketing expenditures and churn rates, and increasing valuations.
A good example of this is Dollar Shave Club who sold to Unilever for 1 Billion. The Dollar Shave Club provides (aside from entertaining YouTube commercials) a wide range of men’s personal care products. They are not the only company in the space, but were one of the few that had scaled their business with a Recurring Monthly Revenue based model. (5)
There are many more examples of significant ‘multiples’ being paid for an established/growing client base (customers) accustomed to making monthly payments for services they regularly use.
Reliance Home Comfort sold for 2.8 Billion in early 2017. Reliance provides 1.7 million Canadian households with water heaters, furnaces and air conditioners. (6)
ADT sold in 2016 to Apollo Global Asset Management for 6.9 Billion. ADT provides millions of households with essential security monitoring and services. (7)
Vivint sold at a 2 Billion valuation to Blackstone back in 2012. Vivint provides security and automation services to households and businesses. (8)
RMR = Cash Flow
The methodology at Intelife Income Trust models itself around this thought process. Our customer facing offering is security, peace of mind, and convenience through smart home automation. The business model is firmly entrenched in building out a client base of tens of thousands of households and businesses across Canada.
Our partners at Intelife Security & Automation have already on-boarded over 10,000 households, many of whom have executed 60-month agreements. Like other services that you’re accustomed to, we charge most of our customers monthly through auto debit or auto credit. The average monthly charge is just shy of $60.
‘Smart Home’ technology adoption is as high as 40% in some parts of the world.
Canada is currently sitting at 5.1% and is expected to hit 27.7% by 2021. (9)
As with your cell phone, other technology, or hardware based purchase, we do not charge our customers much (if anything) up front. Instead, they sign long term agreements in exchange for the latest hardware and ongoing services and monitoring.
Whether it’s your music collection, cellular service, home security or just about anything else you can think of; the business world is progressively moving towards a RMR model.
How will you take advantage of it?
Marcin Drozdz is currently Chairman and President of Intelife Income Trust. An entrepreneur at heart Marcin began his professional career rising through the ranks in the private capital markets in Canada. Marcin has since helped build several companies including a commercial real estate acquisitions company and an alternative business funding group. Marcin also brings awareness to the alternative investment industry through various events, public relations campaigns and educational forums. Some of these campaigns have been featured in Advisor.ca, Canadian Real Estate Wealth Magazine, The Calgary Herald, Edmonton Journal, The Winnipeg Free Press and The Private Investor.
(1) Apple Makes it Clear Services are a Key Part of its Business Model
(2) Microsoft has already been moving more of its products from one-time purchases to subscriptions and Microsoft 365 helps take this further.
(3) 7 Reasons Starbucks Launched A Subscription Service
(4) Cadillac Car Subscription Service
(5) What All Product Entrepreneurs Should Know About Dollar Shave Club's $1 Billion Sale
(6) Li family buys Reliance Home Comfort for $2.8-billion
(7) ADT sale 6.9 B
(8) Blackstone buys Vivint 2B
(9) Household penetration is at 5.1 % in 2017 and is expected to hit 27.7 % in 2021.