The Simply Amazing Recurring Revenue Model (with calculations)

There is a beauty in simplicity, but simplicity is in the eye of the beholder. Richard Feynman once said that Euler’s Identity, e^(iπ) + 1 = 0, is “the most remarkable formula in mathematics”, others have compared it to a Shakespearean sonnet. The reason for its beauty is because it is simple to look at and yet incredibly profound. But it is only profound once you have understood it.

We all speak casually of the biggest change to impact nearly every SMB/Enterprise business in the world, most people would say the Cloud, but we think there is a more fundamental (and often over looked) one, Subscription.

Subscription Model

Lowering the cost of entry to market, tick, CAPEX to OPEX, tick, constant up-sell opportunities, tick, cancel any time you like, tick. How many people appreciate the profound simplicity of moving to such a model. If you’ve not thought about it before then let us take you through some numbers.

The Example

Bodhi owns a retail company selling business hardware solutions (computers, keyboards etc). His average monthly revenue is $1M, giving an annual revenue of $12m and this has been consistent for the last three years.

Hardware Sales:

• Year 1 Revenue: $12M

• Year 2 Revenue: $12M

• Year 3 Revenue: $12M

Bodhi then starts to sell subscription software with his hardware. He sells $10,000 per month (just 1% of usual monthly revenue). Look how this changes the next three years revenue

Hardware & Software Sales:

• Year 1 Revenue: $12M + $780K (the commonly understood rule of 78)

• Year 2 Revenue: $12M + $2.22M (the less commonly known year two rule of 144 + 78)

• Year 3 Revenue: $12M + $3.66M (the never spoken about rule of (2 x 144) + 78)

We can now fast forward a few years because we have now found a simple formula.

rn = 144(n-1)vs + 78vs

Where:

rn = annual revenue in year n

n = year

v = value of subscription

s = number of subscriptions sold per month

In year 10 the annual revenue for subscription will be:

rn = (144 x 9 x 1 x 10,000) + (78 x 1 x 10,000)

= 12,960,000 + 780,000

= $13,740,000 = More revenue than in his hardware sales

Reoccurring revenue impact

What would happen if Bodhi sold $50K per month (5% of his hardware revenue) = $68M. How about $100,000 (10% of his hardware sales) = $137M

This is by far the best bit. Bodhi takes a year off in year 11, no one cancels their subscriptions, he does not make any hardware sales but his Y11 revenue is $144M. Bodhi loves predictable revenue, Bodhi loves subscription. Subscription is not a short term play but move now and you will have a beautiful future.

If this excites you and you want to chat about this more, just drop me a line spencer@wearebodhiandco.com