Making your business less dependent on you has a number of benefits: you can scale your company more quickly if you’re not acting as a bottleneck; you get more time to enjoy life outside of your business; and a business less dependent on its owner is much more valuable to an acquirer.

Pulling yourself out of the day-to-day operations of your business is easier said than done. Here are three specific strategies for getting your company to run without you.

1. Think Like LEGO

Pre-school children can make a collection of generic looking pieces come together in a complex creation by following the detailed instruction booklet that comes with every box of LEGO. Your employees need LEGO-like instructions to execute the recurring tasks in your business without your input.

Ian Schoen is the co-founder of Two Tree International, a design and manufacturing firm that brings products directly from concept to customer. The company was started in 2008 with a $50,000 loan and had grown to sales of over $4 million and a staff of 15 employees when it was sold in 2015. Schoen credits his operating manual for allowing him to sell his business for a significant premium: “We started creating standard operating procedures in the business and had a set of documents that helped us run the business. Basically we could plug anyone into any position and have them understand it.”  

2. Imagine Hosting Your Own AMA

Everyone from Barrack Obama to Madonna to Bill Gates has participated in an “Ask Me Anything” (AMA) forum where participants are encouraged to ask the featured guest anything that is on their mind.

Now imagine you invited your customers to an AMA. What questions would they ask you? What zingers would your most skeptical customers pose? These are the questions you need to document your responses to in a Frequently Asked Questions document that your employees can leverage in your absence.

3. Shine the Media Spotlight on Your Team

It’s tempting to take the call from a local reporter who wants to interview you about your company, but consider inviting an employee to take the interview instead.

Stephan Spencer founded Netconcepts in 1995 and grew it into a multinational Search Engine Optimization (SEO) agency before selling it to Covario in 2010. His first attempt to sell his business in the late 1990s failed because potential acquirers viewed Netconcepts to be too dependent on Spencer himself: “My personal name and my company name were too intermingled. If I didn’t go with the business, nobody was going to buy it.”

Spencer set out to reduce his company’s reliance on him personally and one of his strategies was to position his employees as SEO experts: “I encouraged key staff, various executives and top consultants within the company to speak and write articles, and I introduced them to the editors I knew.”

It can be tempting to run your company as your own personal fiefdom but the sooner you get it running without you, the faster it can scale into something irresistible to an acquirer.

Fame can take interesting men and thrust mediocrity upon them. David Bowie

Have you set a goal for your company this year?

If you’re like most business owners, you’re striving for an increase in your annual sales. It’s natural to want your company to be bigger because that’s what everyone around us seems to celebrate.

Magazines profile the fastest growing companies, industry associations celebrate their largest members, and bigger seems to be better in the eyes of just about every business pundit with a microphone.

But growth can come at a steep price and can even detract from your ability to build your personal wealth.

The Contrasting Exits of Michael Arrington

For example, let’s take a look at an entrepreneur named Michael Arrington. Arrington started Achex in 1999. It helped facilitate payments in the early days of the internet, and Arrington was focused on growing it. He accepted two rounds of outside capital to fund the company’s expansion.

Achex was ultimately sold to First Data Corporation for $32 million in 2001. Unfortunately, because Arrington had been focused on growth above all else, he had not only raised two rounds of financing but also reduced his personal stake in the company down to next to nothing. As he told Business Insider, “When I started my first company, Achex, we raised $18 million in venture capital in 2000 from DFJ. The company later sold for $32 million, but due to a 2x liquidity preference (common in those days), the founders essentially got nothing, just a few hundred thousand dollars to not block the deal.”

Arrington then went on to start the technology blogging website TechCrunch in 2005. This time Arrington wanted to grow the business, but not at the expense of his equity. Instead, they grew the company within their means and funded the business largely out of cash flow. Arrington still owned 80% of the company, according to Business Insider, when he sold it for approximately $30 million.

Apparently Arrington had learned his lesson—growth is good, but not at the expense of all else.

The Alternative to Growth at All Costs

The alternative to focusing on sales growth as your primary objective is to focus on the value of your equity within your company. Growth will have a positive impact on your company’s value, but your growth rate is only one of the eight drivers that impact what your company is worth. As you build your business, you will be faced with many forks in the road where growth may come at the expense of both your company’s value, and your personal wealth. For example:

  • You may have to dilute your personal stake in the company by taking on outside capital. Depending on the return your investors are looking for, and the performance of your company after you take on outside investors, your smaller slice of the larger pie may be worth less than a larger slice of a smaller pie.
  • Cross selling your largest customer more products and services may be a relatively easy way to grow your top line, but if they already represent more than 15% of your sales, the extra revenue may dilute the value of your company because acquirers discount companies with too much customer concentration.
  • Giving lazy customers 90 days to pay may keep them buying, but those charitable payment terms may detract from the value of your business because an acquirer will have to fund your working capital.
  • You could choose to invest your sales and marketing resources into winning a big, one-time project that would boost your sales but this may not boost the value of your business, which may be more positively impacted by a smaller amount of recurring revenue.

Growth is important and how big your company can get is one of the eight drivers of your company’s value. But growth is only one of eight factors—to learn about the other seven, get your Value Builder Score.

https://score.valuebuildersystem.com/provengain/paul-wildrick

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Did you know that Facebook acquired Internet messaging service WhatsApp for $19 billion? It represents the largest-ever acquisition of an Internet company in history.

WhatsApp is a pearl for sure. The messaging service allows users to avoid text-messaging charges by moving texts across the Internet instead of the mobile phone carrier networks. This can save people who travel, or who live in emerging markets, hundreds of dollars a year, which is why WhatsApp is adding one million new users per day.

At the time of the acquisition in February 2014, WhatsApp had acquired some 450 million users. Their business model is to charge a subscription of $1 per year after their first full year of service. Even if all 450 million WhatsApp users were already paying, that is still less than half a billion in revenue. Why would Facebook acquire WhatsApp for a number that is somewhere north of 40 times revenue?

Nobody know for sure what is in Mark Zuckerberg’s head, but we can only assume that at least part of the opportunity Facebook sees is the opportunity to sell more Facebook ads because of the information they glean from WhatsApp users. Global advertising giant Publicis estimates 2013 online advertising spending in the US alone to be around $500 billion. Presumably Facebook believes they can get a larger chunk of the global online ad buy because they know more about its users by owning WhatsApp.

And therein lies the definition of a strategic acquisition. Most acquisitions run a predictable pattern of industry norms, but a strategic can pay a significant premium for your business because they are looking at your business for what it is worth in their hands. Rather than forecasting out your future profits and estimating what that cash is worth in today’s dollars, a strategic is calculating the economic benefit of grafting your business onto theirs.

There can be many strategic reasons why a big company might want to buy yours. Here are a few to consider:

1. To control their supply chain

In 2011, Starbucks announced it had acquired Evolution Fresh, one of their providers of juice drinks, for $30 million. Now Starbucks is no longer beholden to one of its suppliers.

2. To give their sales people something else in their briefcase

Also in 2011, AOL announced the acquisition of The Huffington Post for $315 million, even though HuffPo had just turned its first modest profit on paper. AOL wanted to give its advertising sales people more inventory to sell and HuffPo had 26 million unique visitors a month.

3. To make their cash cow product look sexier

Microsoft bought Skype for $8.5 billion dollars even though Skype was losing money. The good folks in Redmond must have assumed they could sell more Windows, Office and Xbox by integrating Skype into everything they already sell.

4. To enter a new geographic market

Herman Miller paid $50 million to acquire China’s POSH Office Systems in order to get a beachhead into the world’s fastest growing market for office furniture.

5. To get a hold of your employees

Facebook reportedly acquired Internet start-up Hot Potato for $10 million, largely to get hold of the talented developers working at the company.

Most acquisitions are done for rational reasons where an acquirer agrees to pay today for the rights to your future stream of cash. You may, however, be able to get a significant premium for your company if you can figure out how much it is worth in someone else’s hands.Curious to see what your business is worth and how you might improve its value to both strategic and financial acquirers?  Complete the Value Builder Score questionnaire today and we’ll send you a 27-page custom report complete with your score on the eight key drivers of company value. Take the test now:

The Swiss are known to value their independence. They don’t use the Euro currency despite being sandwiched between France and Germany, and they never officially picked sides in the World Wars for fear of tying their wagon too closely to one geopolitical regime over the other. 

That’s why we give the name the Switzerland Structure to a business model that is set up to be free of a reliance on a key customer, employee, or supplier. 

You probably already know that a customer or employee dependency can undermine the value of your business, but have you ever stopped to think how one of your suppliers could also lead to a valuation drop?

Acquirers want to invest in businesses that inoculate themselves against danger and being dependent on a supplier can be a risk. 

The $4 Million Haircut

In 1994 Robert Hartline started selling phones in the back of his car. By 2019 he had built Absolute Wireless into a chain of 56 wireless stores and 350 employees. He had two main carriers that supplied him with the bulk of his data plans.

Hartline was able to systematize his business while he grew by creating employee onboarding videos and delegating key processes for his new employees to follow. 

The business was a success, and Hartline was riding high up until early 2020. The pandemic hit, and two of his wireless carriers merged, leaving Hartline’s business spinning out of control.  

One carrier assumed the dominant position in the marketplace and promptly delisted its legacy dealers from their Google search listings. Panicked by the abrupt change of posture from his wireless carrier, Hartline decided to sell to another dealer, who was on better terms with the now dominant carrier. 

Hartline agreed to an acquisition offer, but as diligence progressed, the carrier insisted Hartline drop 10 of his stores. Hartline’s acquirer promptly dropped the acquisition offer by $4 million. Frustrated but still happy to get out, Hartline agreed to the lower number only to be told the acquirer was not prepared to pay cash and that he would be asked to finance almost half of their acquisition over time. 

Hartline has gone on to create successful businesses since his experience with Absolute Wireless and now prefers software businesses, which are not beholden to a major supplier. 

If you find yourself too dependent on a supplier, make sure you invest in your customer relationships so that your customer thinks of themselves when buying from you, not your supplier. Next, consider cultivating a relationship with alternative suppliers even if it costs you a point or two of margin in the short term. Over time, the diversity of suppliers will allow you to avoid the valuation discount you incur when you become too dependent on a single supplier. 

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If your goal is to build a more valuable company, stop selling your time. 

Billing by the hour or day means customers are renting your time rather than buying a result, which means that your business model lacks leverage. To grow, you need to either work harder or hire more people. Since it can take months to ramp up new employees, fast growth is just about impossible.

One of the eight factors that acquirers look for in the businesses they invest in is your company’s Growth Potential. Simply put, they want to know how fast they could grow your business, and nothing diminishes your Growth Potential more than selling your time.

Billing by the hour can also drag down your customer’s satisfaction with your business — because customers dislike the feeling of being nickel and dimed. They know you’re incentivized to lengthen the time a project takes, while they want a solution in the shortest time. This misalignment leads to unhappy customers, which can destroy the value of your business. 

Peddling time also invites competition. When you sell your time, you allow customers to compare you with others offering the same service. This can lead to downward pricing pressure and lower margins as you become commoditized. 

How Likeable Media Stopped Selling Time

Carrie and Dave Kerpen started Likeable Media, a social media agency, in 2006. Facebook was emerging as a dominant platform, and marketers were trying to figure out how to monetize users of their platform.

The Kerpens started selling their time but quickly realized the limitations of an hourly billing model. They realized that customers didn’t want to buy their time. Instead, Likeable customers wanted to buy social content. Marketers wanted a video they could post to their Facebook feed, or a blog post they could publish on their site.

The Kerpens decided to switch from an hourly billing model to the Content Credit System. They assigned each piece of content several credits. For example, a tweet might be one credit, a written blog post might be ten, and a video might cost twenty credits. Customers signed up for an annual allotment of credits they could roll over month to month. 

The Content Credit System transformed Likeable Media for the better. To begin with, customers were no longer buying time. Instead, they were happy to pay for tangible output rather than trying to scrutinize an hourly bill. The credits also made it easier for Likeable’s Account Managers to upsell customers. They no longer needed to justify why a particular project would take more time. Instead, they suggested that customers buy more credits if they needed more content. 

The Kerpens’ innovative billing approach also created recurring revenue because The Content Credit System relied on annual contracts renewed each year. 

The Content Credit System also transformed Likeable’s cash flow because customers paid for their credits upfront.

Most importantly, the Content Credit System enabled the Kerpens to stop selling their time and build a team. By 2020, Likeable was up to more than 50 full-time employees when they caught the attention of 10Pearls, a digital strategy company which acquired Likeable Media for 8.5 times EBITDA, a healthy premium over a typical marketing agency.

The bottom line? If your goal is to grow a more valuable company, stop selling your time and start selling your customers’ results.

A football defensive coordinator needs to protect against an “end run,” a tactical play where your opponent sends the running back wide around the offensive line to try to evade the oncoming tackle.

Just like in football, you have to defend against an end run coming from a supplier that chooses to go around you to get to your customers. The more of your supply you get from a single provider, the more vulnerable you are to that supplier deciding they don’t need you and instead deciding to go straight to your customers.

TheAmazeApp

Let’s take TheAmazeApp as a case in point. Sebastian Johnston co-founded TheAmazeApp in 2014. The idea was simple. Social media influencers could upload a picture of what they were wearing (i.e., a “look”) and tag the items on TheAmazeApp’s database of e-commerce wholesalers. Then, when one of the influencer’s social media followers liked their look and wanted to purchase one or more of the items the influencer was wearing, TheAmazeApp would receive a commission, 20% of which was shared with the influencer. 

TheAmazeApp’s founding team raised $800,000 through the San Francisco-based accelerator 500 Startups. By leveraging their influencers to drive traffic, TheAmazeApp quickly grew to 4 million active users per month.

The app was a huge success on the outside, but there was a flaw in their model that held back their valuation. 

For the model to work, influencers needed to be able to tag whatever they were wearing, so TheAmazeApp needed to get a comprehensive catalog of hundreds of thousands of the latest fashion items. That meant that TheAmazeApp relied on the data feed of five e-commerce wholesalers who uploaded their data to TheAmazeApp.

TheAmazeApp was increasingly becoming dependent on Zalando, one of their five data suppliers. Zalando is one of Europe’s largest fashion wholesalers and controlled around 70% of TheAmazeApp’s inventory.

The more TheAmazeApp relied on Zalando’s data, the less leverage they had when it came time to sell. Johnston approached all five of his data providers to buy his business, and two expressed interest in buying TheAmazeApp. This buoyed Johnston’s spirits because he knew multiple bidders would give him some leverage with acquirers.

As the process dragged on, one of the two acquirers dropped out, deciding to set up a competitive app—doing an end run—and leaving only Zalando left. Given Zalando knew they controlled 70% of TheAmazeApp’s inventory and that a comprehensive selection was key to their business model, Zalando knew they were in the driver’s seat.

Johnston also knew that if he pushed Zalando too hard, he risked Zalando also doing an end run around TheAmazeApp and setting up their own competing service.

In the end, Zalando acquired TheAmazeApp for between two to three times revenue, which was a relatively modest multiple given the traffic the app was generating just eight months after being funded by an accelerator.

The lesson? The more of your supply that comes from one provider, the more susceptible you become to your provider doing an end run around you. This liability drags down the value of your business and undermines your negotiating leverage when it’s your time to sell. Do what you can to diversify your suppliers to maximize the value of your business.

As a business owner, you’re likely proud of the results you’ve achieved in the past, but when it comes to the value of your business, your future is critical. That’s why your growth potential is one of eight factors that drive the value of your business.

One metric that acquirers may use to evaluate your growth potential is your revenue per employee.

Alphabet (Google’s parent company) generates around $1.3 million in revenue per employee. Compare that to the advertising agency WPP Group, whose average revenue per employee is around $100,000. For every dollar of revenue, WPP needs more than ten times the employees than Alphabet does.

It takes time to recruit, train, and motivate people, which is why WPP has grown more slowly and suffers much lower valuations when compared to a less people-heavy company.

Measuring your revenue per employee is just one of many ways an investor may evaluate how quickly they are likely to grow your company.

Looking Skyward

For an example of some of the other ways acquirers assess your growth potential, take a look at Verizon’s recent acquisition of Skyward. Jonathan Evans started Skyward in 2012 when he spotted companies like Amazon and Walmart using drones for package delivery. Evans was working as an air ambulance helicopter pilot and realized widespread use of drones would eventually create air safety issues.

Evans saw an opportunity where others hadn’t and launched Skyward to develop software that could safely route drone traffic. While he wasn’t a programmer, his extensive aviation experience enabled him to understand how the current airspace management guidelines could be turned into applications that created “digital train tracks” for drones.

Early adopters like utility, construction, and media companies used Skyward’s software to manage their drone fleets. Investors also came calling. Within a few years, Skyward had raised approximately $8 million.

One of those investors was Verizon. Drones would require fast and reliable Internet connectivity to operate safely, and the telecom giant wanted a piece of the future. Airbus came calling too, and when Verizon heard of the aerospace corporation’s interest, they leaped into action and offered to buy the company. For Evans, marrying his nascent technology to the country’s largest telecommunications giant was an ideal match.

Within days, Evans had sold Skyward to Verizon for top dollar. Investors enjoyed returns of between three and five times their original investment.

Given the growth of the industrial drone market, Verizon knew Skyward had the potential to expand quickly as significant companies started to adopt drones. Verizon also understood that as Skyward grew, so too would the customer’s need for Verizon’s data because drones rely on a data connection to communicate with the ground.

No matter what business you’re in, the critical takeaway is to remember that the value of your business is determined less by what you have done in the past and more by what you will likely do in the future.

You’ve likely heard the adage that it is far easier to cross-sell an existing customer a new product than it is to find a new customer.

And if your goal is to grow at all costs, then cross-selling makes sense. 

However, all of that sales growth may not do much for the value of your company. If you cross-sell your existing customers too much stuff, it could make your business far less valuable.

When you cross-sell a customer so many things that they begin to account for more than 15–30% of your revenue, expect your value to drop. If a single customer represents more than 30% of your sales, expect an even deeper discount.

Customer concentration is one factor that makes up your score on The Switzerland Structure — one of eight drivers the folks over at The Value Builder System™ have discovered drives your business’s value in an acquirer’s eyes.

To summarize in simplistic terms, the least valuable companies focus on selling lots of stuff to a few people. The most valuable businesses do precisely the opposite: by selling less stuff to more people.

How 3D4Medical Made the Switch 

As an example, let’s look at the medical technology firm 3D4Medical. Founded in 2004 by John Moore, the company built 3-D models of the human body, photographed them, and sold or licensed their images to textbook publishers. 

By 2010, 3D4Medical was selling images to a handful of large publishers around the world. Then the recession hit, severely impacting the entire publishing business. 

To make things worse, new generations of students increasingly wanted to learn online, rather than through textbooks. The advent of inexpensive digital photography, and the resulting increase in competition for the same customers, also didn’t help Moore. 

Moore had built a successful company on a handful of customers, but when that segment began to dry up, so did his business. Despite working harder than ever, Moore’s revenue plateaued for four straight years. Instead of punching through to the next level, Moore had his hands full just keeping his company going.

But while Moore had relied on too few customers, he still had something no one else had: thousands of 3-D models of the human body. 

Then Moore had an idea. 

He decided to re-purpose his 3-D images into a mobile app that medical students could use on their phones. Moore expanded the idea to include professors and medical professionals, who could use his 3-D images on an individual basis to learn, teach, and share with patients and students. 

By 2019, 3D4Medical had become the biggest producer of medical apps on every app store. The company boasted over 300 of the top universities in the world as clients. Their app served 1.2 million paying customers and had 25 million downloads. 

Thanks to having a diverse set of customers, Moore sold 3D4Medical in 2019 for $50.6 million. 

The takeaway? Customer concentration is seen as a significant risk when a potential buyer determines the value of your business. That’s why the most valuable companies are the ones that sell less stuff to more people.

Repeat business drives the value of your company, and you can categorize these sales into one of two buckets:

  1. Reoccurring revenue comes from customers who purchase from you sporadically. They’re satisfied with what you offer, and they buy regularly yet not according to a specific timeline.
  2. Recurring revenue is predictable, and you get it from customers who buy on a cadence. Usually in the form of subscription or contract revenue, the main difference is your recurring revenue comes in on a regular rhythm.

Recurring revenue is more valuable than reoccurring sales because of its predictability. Therefore, it’s worth considering how to turn repeat customers into subscribers. 

HP Instant Ink

For an example of an organization that turned reoccurring sales into recurring revenue, let’s look at the “HP Instant Ink” program. HP had been in the business of selling printers for decades before launching their toner replacement subscription. 

HP would sell you a printer in the old days and hope you would come back and buy your toner cartridges from HP. As cheaper replacement options became available, HP started to lose reoccurring revenue from people who owned HP printers but chose a more affordable alternative to refill their cartridge. 

In response, they launched the HP Instant Ink program to solve this problem by offering a toner subscription. HP sends subscribers new toner for their printer each month. You can sign up for a plan based on how many pages you print. If you exceed your page allotment one month, you can top up your account. If you fall short, HP offers to carry over your unused pages. Pricing plans start at $0.99 per month. 

How does HP ensure you never run out of toner? They have embedded a reader in their printer’s hardware that sends a message to HP fulfillment when your cartridge dips below a predetermined threshold. Hence, you never run out. 

It’s a brilliant little program and gives HP some recurring revenue while driving loyalty to HP printers.

Inspired by the HP Instant Ink program, here are three secrets for turning repeat customers into subscribers:

  1. Offer plans based on volume: At HP, their $0.99/month plan allows you to print just 15 pages per month. At the top end, their $24.99 plan gives you 700 pages, and they have a variety of options in between. This range of options gives customers the ability to pick a plan that will work for them most of the time.
  2. Allow carryover: Customers who buy from you on a reoccurring basis will appreciate your various plans. However, they may still hesitate to subscribe if they anticipate their volume will fluctuate. That’s why HP allows you to seamlessly buy overage if your printing volume is higher than expected. Subscribers can also carry over unused pages if they don’t need their entire allotment.
  3. Never let them run out: One of the reasons consumers prefer buying on a subscription over a one-time transaction is that they never want to run out of what you sell. That’s why HP’s integrated toner gauge reads when your cartridge dips below a threshold. Find a way to measure your customers’ supply of what you sell in real time to ensure subscribers never run out. 

Repeat customers are the lifeblood of any business. If you want to jack up your company’s value, consider ripping a page from HP’s playbook, and turn your reoccurring customers into subscribers. 

Many people mix up re-occurring and recurring revenue, but one is much more valuable than the other. 

Re-occurring Revenue

Re-occurring revenue comes from customers that have a re-occurring need for whatever you sell and buy from you on an unpredictable yet regular basis. 

Imagine a health food store. Customers come in to replenish their supply of vitamins when they run out. The owner is never quite sure when a customer will be back, but she’s pretty sure they will return when they run low on a critical supplement. 

Recurring Revenue

Recurring revenue comes from sales to customers that buy from you on a predictable, automatic cadence, for example, a subscription or service contract.

Let’s take the same health food store owner. She recognizes her customer comes in every month or so to buy Vitamin C. She decides to offer a subscription for Vitamin C capsules, where she ships a new bottle to her subscribers each month automatically. The customer doesn’t need to make a dedicated trip to her store, and the owner automatically gets repeat sales. 

Compared to one-off transaction revenue, both re-occurring and recurring revenue contribute positively to your company’s value, but one is much more valuable than the other. 

For example, Mike Malatesta created Advanced Waste Services (AWS), which helped businesses dispose of their industrial waste. Energy giant Covanta (NYSE: CVA) saw acquiring AWS as the perfect way to enter the industrial waste industry and sent Malatesta a Letter of Intent to acquire AWS for $54.5 million.  

Covanta liked that AWS had repeat business from loyal customers that they assumed were on recurring contracts. However, when Covanta started their diligence before closing their acquisition of AWS, they realized some of AWS’s revenue was re-occurring, not recurring, and used that as justification to lower their offer by $4 million. 

To convert re-occurring revenue into recurring revenue:

  1. Start by segmenting your customers that buy on a re-occurring basis.
  2. Look for a segment whose purchase cadence is relatively predictable.
  3. Design an offer for your regular, re-occurring customers that makes it more convenient for them to buy on a subscription or service contract rather than on a transactional business model.
  4. Aim to give re-occurring customers three compelling reasons to subscribe.

For example, in the case of the vitamin store owner, she could make the case that subscribing to a regular shipment of vitamins is 1) more convenient for the customer because there is no need to drive to the store, 2) more reliable because subscribers would be given priority on available stock, and 3) safer because vitamin subscribers would be given a newsletter describing new clinical trial results of emerging vitamin therapies. 

Re-occurring and recurring revenue may sound similar, but when it comes to your company’s value, recurring revenue is far better. Consider converting your re-occurring customers into subscribers, and you’ll build a more predictable—and valuable—business.