I cracked Netflix’s RECURRING REVENUE model and make $100,000/day..

Summary

• Adding recurring revenue tremendously increases the value of a business; my portfolio companies benefited from this strategy.
• It's important to think about how recurring your business is, rather than if it is recurring.
• For example, real estate agents and banks experience recurring revenue through repeated customer interactions, despite the industry not typically being seen as subscription-based.
• To increase the recurrence of a business, focus on eight key factors that I call the "Eight C's":
  1. Consumption: Increase product consumption by improving quality and onboarding experiences to ensure customers want to keep using the service, similar to how Netflix operates.
  2. Collateral: Secure recurring payments by offering a physical or digital asset, like storage units for physical items or digital services like Dropbox for files.
  3. Cost of Switching: Make it difficult or costly to switch services by employing strategies like large upfront fees, which play on the sunk cost fallacy.
  4. Choice: Limit customer choices by creating unique offerings or secure patents, resulting in fewer alternatives and higher customer retention.
  5. Control of Money Flow: Enhance stickiness by structuring payments so that fees are less noticeable, like Uber does.
  6. Cause: Align your business with a cause that resonates with customers' identities, such as churches or charitable movements, to strengthen loyalty.
  7. Community: Build a strong community that members identify with, making departure feel like a loss of identity.
  8. Contracts: Utilize enforceable contracts to commit customers to a set term, thereby increasing the likelihood they'll stay.
• Enhance business models by making small adjustments to increase customer lifetime value and overall business stickiness.
• Continual improvement across the eight C's can lead to a significant boost in the recurring nature of a business.

Video

How To Take Action

I would suggest focusing on the "Eight C's" I've identified to make businesses more recurring and sticky:

1. Consumption: Encourage customers to use your product more by improving its quality and creating a simple, enjoyable onboarding experience. Think about ways to make your product indispensable to their daily lives, like Netflix has with its streaming services.

2. Collateral: Offer something that your customers will want to keep paying for. This could be a physical asset like a storage unit or digital like an online file storage service. It should be something customers feel they need to maintain access to.

3. Cost of Switching: You might consider making it costly or difficult to switch to another provider. A strategy could include a high upfront fee that takes advantage of the sunk cost fallacy.

4. Choice: Reduce customer choices by creating unique products or services. Patenting your innovations can limit alternatives, which encourages customers to stick with you.

5. Control of Money Flow: You could structure your pricing in a way that’s less noticeable, so customers are less likely to think about the cost. Like how Uber charges riders indirectly through the app rather than them having to hand over cash.

6. Cause: Align your business with a cause that resonates with your customers. If customers feel your business shares their values, they're more likely to stay loyal.

7. Community: Build a strong community around your product. When customers feel part of a group, leaving feels like they're losing a part of their identity.

8. Contracts: Utilize enforceable contracts that commit customers for a fixed term. This provides a clear expectation of the commitment they are making.

Start by identifying which of these "Eight C's" are most applicable and low-cost to implement for your business. For instance, improving your product or creating a better onboarding experience may require less immediate investment than developing new technology or patenting a product. Always remember that every small adjustment can lead to a significant increase in customer lifetime value and business stickiness.

Quotes by Alex Hormozi

"For most businesses, small or large, adding in recurring revenue is going to be the single greatest way to increase your enterprise value"

– Alex Hormozi

"The goal to increase the stickiness of recurring revenue is to increase the consumption"

– Alex Hormozi

"The more overt the charges are rather than covert, the stickier it is because they are less noticing of the fee or charge"

– Alex Hormozi

"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"

– Alex Hormozi

"The harder it is to get into something, the psychological bias against the harder it will be to get out"

– Alex Hormozi

Full Transcript

about is how we two and a half x 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 that is binary thinking which is either our recurring revenue business or you are not a recurring revenue business when in reality is to what extent are you recurring in business how recurring is your business is a better question and so what um after 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 and every single house they buy and sell right 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 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 escrow 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 them over and 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 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 and or access 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 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 i'll 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 the things that they put out and so you continue to pay right and so spotify again you want to continue to consume the music and so you pay right now the cool thing is 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 cs that i'm about to go through don't think is it a check box 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 easily 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 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 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 so the idea for us as entrepreneurs is how else can we create collateral either physical or digital um that 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 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 holding 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 hundred dollar a month continuity if i told someone that they had to spend five thousand dollars one time to begin working with me and then it was 100 a month the likely 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 you can make that in terms of time money investment basically the harder is to get into something the 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 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 short-lived if someone else sees what i am doing and then sees the opportunity right um but the idea you know patents are a way to decrease the choice that uh consumers have for alternatives right if you're the only one who owes 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 the point of this channel is simply just showing the economics behind the business model so if there are ways that we can 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 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 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 to have more recurring 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 was 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 gonna 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 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 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 that we are 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 aligned 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 we can act and function far more like a church can in 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 get when they 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 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 really hesitant because i almost 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 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 gonna be it's commitment and consistency they're going to they're going to continue to be 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 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 i'll give you a simple example so if i said i have a 2 000 a 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 two thousand dollars a month someone sign up let's say for a six month contract at two thousand dollars a month or what i would say a twelve thousand dollar program that has six payments of two thousand dollars 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 twelve thousand dollar package the likely 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 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 credit worthy right they can ding their credit if uh if they 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 twelve thousand dollars for uh for for six times two versus a month a month of two thousand dollars 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 month to month after the six 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 two or three x 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 how can i make my 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 as a continuum checklist which is if i'm looking at my service how can i make it how can i 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 and over again number one number two how can i increase the collateral that they have when they do business with me so that so that they 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 i p trade secrets or continuing to assemble products 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 tie it so that our fees are less overt again i'm not talking about the ethics behind it i'm simply talking about the efficaciousness right the efficacy 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 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 and then in so doing make our revenue stickier and then finally 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 that 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 consistent with the commitment that they make if they say that they're going to stay for for six months you will have more people stay for six months if they at least say they're going to stay for six months even if not all of them do you'll still have more people stay than would otherwise do that now that may be harder on the sale and this is part of businesses 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 ever 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 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 from rosie i own acquisition.com we have a portfolio of companies that's 85 million a year so if you like this hit the subscribe button and i'll see you guys in the next video bye