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Why recurring revenue models matter, acc. to Scott Galloway

Guilherme Lerner
Guilherme Lerner June 25, 2020
Why recurring revenue models matter, acc. to Scott Galloway

For Scott Galloway, business success depends on recurring revenue models and control of consumers’ interactions

One of the world’s most voracious critics of the sharp appreciation of big tech, NYU Professor Scott Galloway brings a warning to companies about the power of Amazon, Apple, Facebook and Google in the global market. This is not without reason: for instance, in the past five years Apple added to its market value the equivalent of the entire global consumer goods industry, while Amazon’s growth is comparable to the combined billing for all supermarkets in Europe.

“They are very powerful companies that pay very little tax and do not increase competition in the markets in which they operate. Should we be comfortable with this situation?” he asks.

For Galloway, the so-called “four horsemen of the apocalypse” are unregulated monopolies creating ideal conditions for accelerated growth and incredible market appreciation. While this situation is only experienced by a select few, can you learn from their practices and grow your business faster in this digital age? The answer is YES.

At the first Collaborative Commerce Talks, a set of virtual events produced by VTEX touching on companies’ digitalization at a global level, Galloway talked about how to develop a winning digital business strategy and presented success factors that can be applied by companies to forge their expansion.  

The turning point

A figure that shows how much retail is changing during the pandemic is the penetration of ecommerce in the sector’s total sales. In the last decade, ecommerce in the United States has gained, on average, one percentage point of market share per year, jumping from 8% to 18% of total retail. “Since the beginning of the pandemic, this percentage has risen to 28%. Ecommerce has advanced a decade in two months,” comments Galloway.

This movement is due to the closing of physical stores, forcing consumers to increase online spend. “When the situation is normalized, this participation will drop slightly, perhaps to around 25%. But this does not change the fact that digital is becoming much more important in people’s consumption,” says the expert.

Trillion-dollar companies

We are at an unprecedented moment in history. Amazon has already reached a market value of $1 trillion USD, with Apple not too far from its heels. This concentration of economic power is now in the hands of a few, and intensifying: Two years ago, Google, Amazon, Apple, Microsoft and Facebook combined worth was as much as 282 companies in the S&P 500 index. Today, they are equivalent to 350 companies. “The digital transformation of businesses during the pandemic pushed even more, since they are companies that lead global innovation, thus gaining a disproportionate share of the economic value”, he analyzes.

How to get there

For Galloway, these trillion-dollar companies have implemented several actions in common. This can be applied by companies in any segment in their search for more customers, sales growth, and better results. 

Appealing to the human instinct

The most successful companies are able to connect their propositions to our primary instincts as human beings, such as survival and procreation. “In everything it does, and especially in the design of its products, Apple communicates that their user is special, successful and powerful. This is the primary driver for procreation and has a strong impact on our limbic system,” explains Galloway. This is also reflected in the way we present ourselves on social networks.

Amazon is an example of a company that speaks to our need for survival. “The possibility of getting a good deal and providing more for our children is a powerful instinct that the company exploits very well.” 

Recurring revenue models

Companies with higher rates of recurring revenue perform better on the Stock Exchange. “These are companies that have already ‘married’ their customers, and established deeper relationships with them. They don’t need to spend on expensive clothes or perfume: they invest less in marketing, but more assertively,” says Galloway.

Here, Amazon is the main reference: members of the Prime program, present in more than 120 million American homes, spend an average of $800 USD more per year than an average customer. Recurring revenue equals access to cheap capital.

Vertical integration

Companies that control product design and distribution manage to preserve their margins, increase their degree of differentiation, have more capacity to establish a “brand territory” for themselves and obtain superior financial results. “Vertical integration reduces friction in customer relationships and adds incredible value to those who can do it,” says the expert.

While the benefits are tremendous, it is a behemoth task to establish a vertically-integrated operation. It takes time and requires access to major sources of capital. “Few have this power, but it is a huge differentiator for those who can do it, because it creates a barrier-free relationship with consumers”.

Growth and margins

Trillion dollar companies are a rare combination of high growth and high margins. “They are companies with a luxurious positioning, a strong engine of innovation and present a ‘gangster’ attitude, concentrating all the money in the market for themselves,” says Galloway. For him, this is what Google does when it receives a large share of investments in digital media, or Amazon when it has half of American ecommerce spend.

The “Benjamin Buttons”

In the film, Benjamin Button gets younger with time. In Galloway’s analogy, “Benjamin Button” companies are ones that become more desirable and valuable with age. They take advantage of the network effect (networks increase their value as they have more users and can accelerate their growth) and create more fluidity in their business models. “The more people use Facebook or Google, the more the system is assertive, delivering the right offer in a personalized way,” he explains.

The result appears in the market valuation. Companies whose business models use the network effect make up 35% of the companies listed in the S&P 500 index, but represent two thirds of the total value.

Check out the full episode of Developing your Business Strategy for the Digital Age with Scott Galloway

How do I differentiate? The answer is Marketplaces

Scott Galloway offers a roadmap for companies looking to accelerate their growth inspired by the paths taken by technology giants. Where are the differentiation opportunities in your industry? According to Prof. Galloway the greatest opportunities lie within: recurring revenue and vertical integration, both of which can be achieved through online marketplaces. When it comes to recurring revenue models, every company should actively be pursuing a form of recurring revenue as it will generate more customer data and predictable revenue streams. For many businesses this means shifting to product as a service models and collaborating with partners and suppliers to offer end-to-end solutions that include services for maintenance, repair and operations (MRO). The one who controls the communication and has what is available to customers has the biggest advantage, hence why vertical integration is necessary for success in the digital era. 

This approach creates a collaborative commerce effect that drives rapid growth for marketplace operators and sellers alike. Launching your own marketplace allows you to:

  • Rapidly expand your product assortment and establish new revenue streams without the cost and risk – and scale rapidly.
  • Enhance customer satisfaction and build loyalty by becoming the one-stop-shop for everything customers need, including MRO services.
  • Larger assortment footprint enables you to capture more data around the customer journey and SKU performance.

For more on the benefits of launching your own marketplace and which of the recurring revenue models is the right digital strategy for your business, read our latest brief, here.

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