Netflix's Recurring Revenue Tactics Can Scale Any Business

In this video, what I want to talk to you about is how we 2 and a halfxed the lifetime value of our physical products business by adding in recurring revenue. For most businesses, small or large, adding in recurring revenue is going to be the single greatest way to increase your enterprise value. And so, I've been doing a really deep dive on this uh just thinking through it because I'm trying to create a checklist for my own portfolio companies. Um, and so I just figured I would share it with you. And so going through this deep dive, the first thing I want to do is kind of challenge one of the original thoughts that I think comes up all the time is I don't have recurring revenue, I'm not a recurring revenue business, etc. And I think that is binary thinking, which is you either are recurring revenue business or you are not a recurring revenue business when in reality is to what extent are you a recurring revenue business. How recurring is your business is a better question. And so what um after thinking about it for almost a few hours this morning, I was writing down in my lovely iPad here my ideas around recurring revenue. And uh there are eight C's because I'm trying to make this you know memorable for myself too that you can implement to make your recurring revenue more sticky. And so just as a quick side note or tangent on this before we dive in, it doesn't matter what type of business you're in. You're there's always a an extent to which you can become a more recurring revenue business. So a typical example that I'll get in this instance is someone's like, "Well, I'm in real estate. You know, there's nothing recurring about my business. " Which is so silly. It just means that you have a very limited time horizon. Right. And the question is uh one, if you're a realtor, you absolutely have recurring revenue business because you want to have the lifetime value of the customer in every single house they buy and sell. Right. Even if you were selling houses, for example, who else is serving for recurring revenue? It's not the house. The bank is consistently giving you loan after loan. What you're really buying is a mortgage, right? Not the house. It's secured by the house. You're getting a loan for money which is secured against the house. It's not actually the house itself. So to the bank and the real estate agent and the escro company, those are the companies that are generating recurring revenue from this quote single transaction, right? But they're hoping that you would continue to visit with them over and over again. I just wanted to make that shift for anyone. If you're in the car repair business, right? Like and you have an auto shop, of course you want to have recurring revenue. Every business owner a long enough time horizon is recurring if done properly, right? And you can either choose to make it more recurring or less recurring. And so the purpose of this video is to show you how to increase the stickiness, increase the recurring nature of the services and products uh andor access uh that you sell within your company. All right? And I'm doing this within again my own portfolio companies. And so I'm doing this because I want to share uh these

frameworks with you. So the first of these and this may be you know maybe the most obvious is consumption. Right? The goal uh to increase the stickiness of recurring revenue is to increase the consumption. And you can think about this from a physical standpoint, which you can see physical here. See if I have a little error. I know it's a little small. That's what she said. Deal with it. But, uh, consumption, right? The goal is like if we can get someone to eat the food that we're making every single month, they're going to want to buy more of it if it is good. To the same degree, Netflix has a recurring revenue business, and it's not like they have contracts or anything like that, but it is purely based on consumption. You want to continue to consume uh the things that they put out, and so you continue to pay, right? And so Spotify again, you want to continue to consu uh consume the music and so you pay. Right? Now the cool thing is that if we're still thinking along this binary versus continuum thinking process, it is not uh you know do I get my people to consume the product, but it is how well do I get people to consume the product, right? And so for each of these eight C's that I'm about to go through, don't think is it a checkbox of yes or no, but instead to what extent do I do this? And the idea is not that you want to have all eight. I mean it would be magical if you had all eight. But if you can at least think through each of these uh C's um as ways that you can bolster or make your business more recurring uh than it was before and each of these individuals you can do better or worse. So you have continuums within continuums and that sounds complex and that's why we like to use the psychological binary or shorthand of yes or no but reality is not nearly as simple. All right. So the first of these is how can we get someone to increase the consumption of our product and services and so that creates that means going through you know creating better onboarding experiences improving the actual value of the product itself making it more uh addictive in nature etc right so somebody wants to continue to consume it

the second of these is collateral so is there um is there any way that we can secure our uh recurring revenue against something else all right so I'll give you two examples in the physical world if you go to storage they have your physical goods, they have your stuff, right? And so you must continue to pay because they have your stuff, right? It's a secured uh continuity stream. A different way in the digital world, Dropbox is storage. They just have your files and they have your stuff. Google Drive is storage, right? And there's different types of collateral. And so the idea for us as entrepreneurs is how else can we create collateral either physical or digital um that makes that we can secure against this continuity so people want to continue to stay and pay. A different version of this would be like a CRM, right? A CRM has all of your contacts and all of those uh you know all the contacts, all their information, etc. that they are now holding and they're hold I don't want to say hostage but they are relatively holding hostage from you so that you continue to stay right. So that is a second way that we can increase the stickiness of the continuity that we are making. The next is cost of switching. All right. And so this is a lot this has somewhat to do with psychology which you have the time cost sorry the time uh cost of switching which is like it might be very arduous or lots of effort uh to switch over providers of x y and z right um and or uh it might cost you a lot of money to do that and you can even further increase this psychological bias in your favor by increasing the sunk cost fallacy on your prospect. So, a way of doing this, for example, would be if I were selling a $100 a month continuity, if I told someone that they had to spend $5,000 one time to begin working with me, and then it was $100 a month, the likelihood that they would cancel would be significantly lower. I talked about this briefly inside the $100 million offers book, which is the bigger the head, the longer the tail. If you have a really big upfront, it makes it much easier to drive the recurring on the back end. And so, the stickier it will be. And so, you can make that in terms of fees, time, money, investment. Basically, the harder it is to get into something, the psychological bias against the harder it will be to get out. And so, the cost of switching will increase the stickiness of the recurring revenue that you have for physical products or services. The next is choice. All right. So, the idea here is the lack of choices. So, if I had uh if I were the only you know XYZ service provider on an island, I may have a lot of stickiness to my business because there are no competitors. Now, that may be shortlived if someone else sees what I am doing and then see sees the opportunity, right? Um but the idea, you know, patents are a way to decrease the uh choice that uh consumers have for alternatives, right? If you're the only one who holds this patent for this medical drug, then they have to continue to buy from you over and over again. You can argue the ethics around it, but that's not the point of this channel. channel is simply just showing the economics behind the business model. So if there are ways that we can uh decrease the alternatives that someone can have because we have a unique competitive process or a trade secret that we have that allows us to do something differently or better than everyone else. And fundamentally this is the point of differentiation in and of itself is to decrease the alternative to decrease the choices that someone has. If you were the absolute best at XYZ there will no there might not be a choice of anyone else who can do what you can do. This is also the reason that niching down is so uh valuable for many businesses especially if they're starting out because there might not be anyone else who will have their unique combination of skills, resources, etc. to provide the value in the way that they do, right? And so our idea to create a stickier business to have more recurring customers revenue is to decrease the other alternatives, right? Either through directly with patents uh you know indirectly by having no one else on the island or by having some sort of competitive advantage that we have that no one else has, right? Trade secrets of some kind. The fourth is control of the

money flow. This one is one that I added near the end because I was thinking through it. I was like, what else is really sticky? What else makes recurring revenue sticky? And one of the ways is candidly a lack of transparency. And what I mean by that is, you know, uh Uber, you know, for example, they're going to take their fee before they pay. You know, the government takes their fee, which is your taxes if you're an employee, before you pay. Which is why most employees don't have nearly the same gripe with taxes as most business owners. because the business owners see the checks that are coming out every month whereas many of the employees do not. They just see the end result of the money. I'm not saying that no employees don't have issues with taxes. That's not my point here. I'm just saying that if we're talking about to what extent or a degree on a continuum, the more overt the charges are rather than covert uh or before someone can see it or without them seeing it, then the stickier it is because they are less noticing of the fee or charge. Right? And again, my argument here is not the ethics behind this. It's simply that this is something that the more a business or recurring revenue stream has this nature embedded within it then the stickier it will be in general. All right? Because again all of these are continuums within the larger continuum of how sticky or how recurring is your business not whether your business is recurring or not. And so we want to take more and more steps along each of these continuum to overall bolster the recurring revenue nature of our business. All right. The next one uh is cause. All right. And what I mean by that is are people aligned with the cause uh that we are we are standing for. So churches have recurring revenue. People pay 10% they tithe towards the church. Right? And so if people are lined with the cause then they will continue to pay because they're getting value because they associate their identity with that cause. All right. Uh this is why building movements within businesses are so valuable because then we can act and function far more like a church can in the fact that people will associate their identities with the cause and continue to pay because of who they are and because of what they believe that the cause represents charity. There are some people who continue to give over and over again even though the benefit that they're getting right because there is still a product of charity. The product is the feeling that people will get when they pay because they feel good about themselves. And so if we have this nature within, if we can embed this nature within our recurring revenue stream, then we will make it stickier, right? People donate to political parties every single year that is a recurring uh commitment that many people do. People continue to frequent the same brands because they believe the brand stands for something that they too believe in, right? And so this is kind of the more amorphous or vague part of it, but still very real in terms of how you can create stickier recurring revenue. All right, the next one is community. All right. And this one I was really hesitant because I almost put it in with cause, but it felt different enough that I felt like I should pull it out. But people continue to pay for things if they feel like they're becoming a part of a community and they would have to sacrifice their identity. So you'll notice between cause and community um they're both related to uh the identity that someone has, which is they're going to be it's commitment and consistency. They're going to continue to be uh consistent with what they believe to be their identity because people don't like to be inconsistent with who they are. And so if they believe they identify as being a part of a community, then they will continue to want to pay uh for that community. The next one is contracts

that are enforceable. So by and large, I'm not the biggest fan of contracts. I mean, obviously we lawyer up and we have all of our legal resources and that's a necessary, you know, part of doing business. Um but uh having contracts in and of themselves can increase the stickiness. So I'll give you a simple example. So if I said I have a $2,000 month continuity, whatever, right? and you can just pay as you go, right? That will probably net me, if I were to have two things that were equal in value that I'm providing, right? $2,000 a month, someone sign up, let's say, for a six-month contract at $2,000 a month, or what I would say, a $12,000 program that has six payments of $2,000. Now, if I know that my recurring revenue stream as a month-to-month version uh only has, let's say, four months of stick, if I can sell this as a $12,000 package, the likelihood that I get that extra one or two months is high. And so, I'm saying just if two products and services are identical, but we package them differently, the one that is sold with a contract against a total value will likely be stickier because people are committing to a certain period of time. And so, if we have contracts that are enforced, that is just one way of making a contract enforceable. Another way of making contract enforceable and this is somewhat a degree of collateral which is someone has a their creditw worthy right they can ding their credit if uh if they breach their contract right so you do have some sort of collateral which is kind of the nature of making contract sticky is that you want to have some collateral but I felt that this was different enough especially with the example of you know charging $12,000 for uh for 6* 2 versus a monthtomonth of $2,000 a month you may end up getting more people to pay and stay longer simply by positioning it as a six-month agreement that then goes monthtomonth after the 6 months, right? And so just by making that tiny change in terms of how we're positioning, we might be able to increase our LTV or probably lifetime gross profit by 2 or 3x simply by making that one change. All right? Which is a massive improvement for a business. And so just another way that you can think of how can I make my recurring revenue stickier? business more recurring? I'll do a quick recap for you. the eight C's of recurring revenue. And our goal here is to think of this as a continuum checklist, which is if I'm looking at my service, how can I make it how can I get people to consume more of it, right? How can I make it more valuable? How can I make it easier to use? How can I make it so people want to use this over and over again? Number one. Number two, how can I increase the collateral that they have when they do business with me so that they can't leave because I have something that is secured against it, right? Secured against their recurring fee that's coming over and over again. How can I increase the cost of switching? So, how difficult in time, money, or sunk cost or perceived time or perceived money can I make it so people do not want to switch? Next, how can I enter a marketplace where there's fewer choices? Or how can I increase my competitive advantage by making uh trademarks, IP, trade secrets, or continue investing in my product so that no one else can deliver what I can deliver. This is kind of the competitive mode that Warren

Buffett talks about. The controlling of the money flow. Is there a way that we can figure out how to get paid first or get paid off the top or somehow uh tie it so that uh our fees are less uh overt? Again, I'm not talking about the ethics behind it. I'm simply talking about the efficaciousness, right? The efficacy um of this uh way of doing and increasing the stickiness of it. Next, how can we create a cause that we are aligned with so people can identify with what we are, which is they buy shoes from us, not just for the shoes, but for the cause that they identify with in addition to, right, the classic um Tom shoes example. How can we increase the community? Not like, yes, I have a community check. We've already got that taken care of. But how many more ways can we strengthen and tie the community together so that people feel like they're leaving a community, not a business, which is much harder. Uh and then in so doing, make our revenue stickier. And then finally, uh how can we make contracts that are enforceable? Part of that is going to be selling to better or higher quality prospects, but also again um having something uh that we can collateralize the contract against and even simply uh making people agree to a certain amount. People are going to in general be more uh consistent with a commitment that they make. Uh if they say that they're going to stay for 6 months, you will have more people stay for 6 months. if they at least say they're going to stay for 6 months, even if not all of them do, you'll still have more people stay than would otherwise uh do that. Now, that may be harder on the sale, and this is part of business is balancing those things. I hope this made sense for you in terms of how I think through recurring revenue in the business, how we can increase the recurring nature of our business because again, this is not the binary of I have a recurring versus a non-recurring business. It is to what extent is my business recurring and to what extent am I checking off each of these boxes that we just went over. So, those are the eight C's of recurring nature, uh recurring revenue as I know them. put any other ones that you can think of. If you think that there's something totally different or if you think there's examples that that um that tie into any of these C's, throw them in there. I think it'll be a good lively discussion. Um if you found this valuable, my name is Alex Herozi. I own acquisition. com. We have a portfolio of companies that does $85 million a year. So, if you like this, hit the subscribe button and I'll see you guys in the next video. Bye.