Johannesburg - Perhaps one of the biggest challenges when building up a small business is to create genuine value which will generate long-term sustainable wealth for you, the entrepreneur.
The concept of "value" varies from business to business, however; it may take the form of annuity contracts and long-term customers, or intellectual property such as patents, software, customers or market niches.
On the recent Fin24 entrepreneur podcast, Tashmia Ismail from the Gordon Institute of Business Science (Gibs) pointed to Blue Label Telecoms [JSE:BLU]
as a South African business which had succeeded in building annuity revenue, and one which could successfully compete in international markets.
The company, which is 12% owned by technology giant Microsoft in the US, is a leading distributor of prepaid secure electronic tokens. It earns revenue from the activation of starter packs, but also from subscription services and loyalty packs.
The group is activating more than 200 000 starter packs per month and apart from earning a rebate on each successful activation, it is also able to generate ongoing revenue from these packs.
The system works, with Blue Label turning a profit of R573m in the previous financial year and revenue topping R9bn.
A nice situation to be in, but not one that many companies achieve.
Technology entrepreneur Rory Mackay told Fin24 that in his opinion entrepreneurs don't do enough to focus on developing annuity income when they put together their business models.
"I think it's essential because firstly, it's hard to get to revenue and then to get sales repeatedly is tough," he said, adding: "If you can cut out that bottleneck, you are doing very very well."Not just technology
Mackay identifies two ways of looking at annuity revenue. The first is where a client has a subscription amount debited from their account each month; the second is by creating a client interface that becomes so trusted that clients are loath to change to something new and unfamiliar.
Technology is one way in which small businesses can develop their annuity income.
In a recent interview with Finweek magazine, Blue Label founder Mark Levy said: "It's not just about the technology - it's about the methodology of how you bank, get customers and retain them. Technology is certainly important, but there are so many other facets to the business that are very difficult to replicate."
Key, the experts say, is just how difficult is it for somebody to reproduce what you are doing when you launch an entrepreneurial venture.
"The level of success achieved by salespeople will always be determined by the number of customers self-generated, that is other than floor traffic or telephone enquiries generated by your advertising," says entrepreneur coach Brad Sugars.
He advises entrepreneurs to put in place a system which will help generate customers from referrals and past customers. The trick then is to track these customers and identify where they are coming from, so you can make sure they are going to come back and spend money with you again.
Less work for repeat business is a critical way of building value within your business.
This is perhaps best summed up by a comment made by Bruce Wade from the Entrepreneur Incubator, who notes in a recent blog post: "If you are doing something in your business and there are no results, then do something different. Do not just work harder and expect it to work better."
On Mackay's second point, there is a second issue to be considered: how much trust customers place in your organisation and its ability to deliver on the product or service you are offering.
Leading small business marketer Scott Cundill comments that this is an area where small businesses often fall short. "Regrettably, the calibre of individual at the helm of a microbusiness falls well below the mark of what is required for people to trust them.
"Until such time as more small business owners become more honest and ethical, people will grudgingly continue to use larger corporations who, with a lot less empathy for their customer, will at least get the job done."
The significant takeaway from this is that if you are serious about building value within your business, then annuity income is a key piece of your business model.
When you are building a business to be sold you need to be able to create an asset which is transferable that a potential buyer would attach a value to. To do this you need to create a reason for clients to not just buy once, but to keep coming back for more and trusting in your brand.