Let’s say you read my post about recurring revenue, and you’re all up for that plan… but are not able to sell products or services in “recurring” packages. For instance, say your customers from last month don’t need a new toilet every month or year.
But let’s also say the benefits of recurring revenue appeal to you, and you want to make your sales or business development process less of an uphill battle, and give your business more predictability. In this and my next few posts, I’m going to comment on a few alternatives to recurring revenue that could generate similar benefits... including Long-Term Contracts.
Long-Term Contracts are Efficient
Long-term contracts with volume buyers may be one of the first places you should look if your business cannot sell your services in recurring revenue packages (i.e. services to same customers, for the same thing, at frequent regular intervals of time like weekly, monthly, or annually).
For instance, you may not be able to sell Homeowner Anderson 10 toilets over 10 months for his home… but if you connect with John Anderson who owns Anderson Property Management and are able to agree to become their preferred plumbing services provider, you just might be able to sell his business (through properties they manage) a toilet a month for 10 years!
Gaining access to long-term contracts of this nature can be a favorable alternative to finding a zillion new customers each year – especially when true recurring revenue isn’t possible.
Efficient Targeted Sales
Let’s say for instance a plumbing business focuses on getting connected with a few key related businesses – ideally profitable and growing ones with few close working relationships with other like-kind service providers (in this case, plumbers) – including: (1) commercial developer, (2) residential developer, (3) property manager, and (4) institution with large facilities – all representing larger-volume buyers of plumbing services.
With just a few contacts – leading to preferred-provider agreements or relationships – the plumber could tap into significant long-term revenue potential. And for that reason, this approach may be the next best thing to true “recurring revenue” for some business types.
Cost Efficient Sales and Advertising
Likewise, if that plumber is in fact able to gain long-term contracts or preferred provider status with a few successful volume buyers, that business may have little or no need for sales staff or advertising – which could result in significant cost-efficiencies.
Known Challenges
I know or suspect what you’re probably thinking… this concept sounds great, but what if my business can’t get a decent price for our services from these businesses? Or… what if they drop us like hot potato if someone else with lower prices comes along?
Both concerns are valid. And while these risks cannot be eliminated, “the answer” takes us to the importance of the “value added” in your business model.
Lowest Pricing Business Model = Trouble
Point blank, my firm belief (from experience) is that any small business will struggle to survive long-term if low price the only competitive characteristic in its business model. Yes, I realize a business may win a long-term contract or preferred provider relationship with low price, but that doesn’t mean it will survive following that business model.
Lots of businesses pre-program future struggles or even failure in this manner, often without realizing it!
Instead, to make it long-term, most small businesses should seek to offer something other businesses don’t, won’t or can’t… and focus their sales strategy on customers who will buy their offerings at a fair and reasonable price.
Better Service, Specialized Service, and the Extra Mile
To defend against gaining long-term contracts only to later lose them based on price alone, small businesses should consider the following:
First, your business must offer high quality service, specialized service or go the extra mile to convince your customers there’s no better place for them to get your services – even when others offer it at lower prices. Without having one or more of these characteristics, this commentary is likely irrelevant, because in those cases there's nothing to keep a buyer from seeking a lower cost bidder.
Second, when seeking to obtain long-term contracts or working relationships with other businesses, seek to serve businesses that do not buy your type of service mostly or solely on low price alone. If you haven’t noticed this already, take note of the fact that businesses that buy on price alone very often have their own problems with the previous paragraph – and are thus at higher risk of losing their own revenue sources.
By doing business with businesses like that, you’d be plugging your business directly in to the flaws of their business model and latching on to their tenuous future. Why do that? Don’t do that!
Seek quality-orientation on all sides – serve businesses that emphasize quality and have committed buyers of their own, serve customers that seek quality and are willing to pay extra for it, and provide high quality in everything your business does.
And this is very important as well: be willing to set the ideal size of your business according to how many "quality-oriented" buyers are available to your business in its market(s) - which in some cases could imply a smaller size for your business than present or desired.
If your business needs some help identifying and considering where good opportunities for beneficial long-term contracts may exist or what its ideal size should be, I encourage you to contact us here today.
Long live small business! Long live small business owners!
Jim Smith, CFP, Founder, PERFORMIDABLE, LLC