The importance of recurring revenue

One of the things we’ve tried to do with Tula is inject some lessons we’ve learned from the software industry to influence the brick and mortar world of yoga studios. One example of this is in the way we focused on making it super easy for our customers to set their students up on passes that renew each month and automatically charge their credit cards.

Products such as Tula are considered Software as a Service, or SaaS for short. The idea is that instead of purchasing a single desktop license once for the software, our customers find the product useful enough to pay us a small fee every month.

This model isn’t new of course. Cell phone companies, cable companies and others all have business models based on recurring revenue.

But I don’t think a lot of people realize exactly why establishing recurring revenue is so important, and how it can be just as beneficial to small businesses like yoga studios as well.

While the benefits are many, there are three primary reasons that recurring revenue is so important that I’d like to expand on.

1. Loyalty, not volume.

When you’re selling something where you get a one time fee, you’re always only as healthy as your last month/quarter/year. You made 200 sales this month? Great, now how about next month?

It’s a vicious cycle where every month you need to get as many new sales as the month before just to stay in the same place.

But when you begin to focus on the value you can provide customers that come back on a regular basis, you start rewarding loyalty instead of first timers. Instead of always trying to figure out how you’re going to get 100 new people in the door, you focus on how to keep your 10 members happy, and then your 20 members happy, and so on.

Whenever I see a yoga studio running a Groupon, I view it as an indicator they may not have enough recurring revenue.

2. It helps control the cash-flow peaks and valleys

As all small business owners know, revenue is one thing, cash flow is another. Let’s say in order to break even you need to bring in $8,000 per month – just as an example.

You very well might bring in the $24k you need for that quarter, but it’s very likely not going to be evenly distributed. You may have a couple $10k months and a $4k month. The problem is that during that $4k month you still need to make payroll, pay the rent, and keep the lights on.

Now imagine that $4,000 of the $8,000 you need to break even is predictably going to come in the form of monthly memberships. Instead of having an $8k mountain to climb, you’ve cut it in half. Surely some of those members would still have bought on a one time basis, but what you end up creating is at least some predictabilty to your revenue stream.

The result is lower peaks and shallower valleys, and very likely a little less stress when it comes time to pay the bills every month.

3. Building a solid foundation

Most importantly, recurring revenue establishes a solid foundation upon which you can build your business. Using our example, once you have 80 people paying you $99/mo for a membership, you know that every month you can pay your bills. Everything after that is profit.

The result is that you end up with a business that has a strong, solid foundation, with predictable revenue upon which it can grow.

And, even better, you can experiment with different things and new ideas knowing that if something doesn’t work out it isn’t going to end up being catastrophic because you’re working on top of a solid foundation.

Our focus on yoga

I’ve written before about why we’re focusing so strictly on introducting our software to yoga studios, but the question comes up so often as to why we’re not actively marketing to dance studios, martial arts studios, and others that I wanted to take a moment to expand on some of the things I’ve mentioned in the past. It’s easy to think that a product is all about it’s features, it’s functionality, and what it allows users to do. But products that people love go far beyond any particular piece of functionality. They tell a story. They empathize with their users. They know what you’re struggling with because it’s makers have been there too.

Great products have personalities, they have opinions, and they guide users to do things with their business that they might not otherwise have thought of.

These personalities of a product though, they develop over time, not overnight. And we’re making sure that the personality of our product is one that meshes perfectly with that of independent yoga studios.

Facebook has a very different personality now than it had when it was only available to college students. Twitter will have a different personality in 3 years than it does now because they need to start turning a profit. And our software would have a different personality if we were trying to please everyone.

While yoga studios may share some of the same requirements out of their software that others do, I believe they all have different personalities. Their customers are different, and while maybe nuanced, the differences between these businesses are very real. What works for one may not necessarily work for another.

Over time, Tula will be seen as the best software in the world for yoga studios becuase we recognize and embrace this reality. And I hope, in the process, we’ll be able to help you make your studio business a little better than it might otherwise have been.

Of course, it will have nothing to do with our features, and everything to do with the soul and the spirit of our product.

"For your own protection"

Maile and I heard someone mention the other day that MINDBODYrequires new studios to sign a one year contract. This didn’t sound right to me so Maile got in touch with a sales person that she had communicated with over there in the past. Sure enough, they require every new studio to sign a one year contract. Here’s exactly what they wrote:

We do ask for you to commit to a year. The contract is more to protect you. It includes what we guarantee in our services and also will keep the price at the price you sign up for.

I love the whole It’s really to protect you! bit. This of course is nonsense.

This protects MINDBODY and their investors. They could provide new studio owners the same exact protections without requiring them to sign a one year contract – but they don’t.

Nothing displays a companies confidence in their own products more than their contract terms.

We don’t require anyone to sign a contract, and we believe that we’ll retain our customers because we’ve provided a clean, powerful, easy to use system for independent yoga studios to run their businesses.

We wan’t people to keep using us because they love our software, not because they’re contractually obligated to do so.

Apparently MINDBODY isn’t as confident in their product as we are.

The Customer

One of the things I find fascinating is how businesses can lose focus on, or misunderstand from the beginning, who their customers are. It’s understandable, because as it becomes more and more possible to connect and provide value to anyone, the temptation is to do so with everyone. A new restaurant opening that’s trying to be the best in the neighborhood might look and act a lot differently than the restaurant trying to be the best in the city. And certainly the best Italian restaurant is going to be different than the sushi place, which will be different than the bar down the way.

The thing with this is that it isn’t about right or wrong. It’s about understanding your market, who your customer is, what your intentions are, and making the best decisions based on those intentions.

As with many things, in the world of software these lines can be a bit more blurred. The walls are less rigid and the barriers are fewer. And while this flexibility has allowed us to connect with each other in ways never before possible, it can cause vertigo when developers are trying to figure out who to please.

When everyone’s a user, who wins when the tradeoffs have to be made?

The opinion of our software, is that the studio owner is always the customer. This is why we embed our calendar inside our customer’s site. It is so disrespectful, for example, to take a studio’s visitors away from their site for any reason – but especially to get their class schedule.

Likewise, our software is of the opinion that small studio owners should focus on cultivating a sense of community and creating lasting relationships with their students. This is why we have built a way to easily create recurring monthly memberships, but we have not built a way for people to pre-register for oversold classes because a studio sold too many Groupons. We’re of the opinion that you shouldn’t do that, and so we don’t even try to handle that use case.

If you own a yoga studio, think about how your software is treating you. Are they treating you like your the customer? Or are they servings someone else?