Recurring revenue is an important part of any business model and is a great indicator of the health of a company. It provides a steady stream of income and can have a tangible impact on the longevity of a business. It is particularly relevant for companies that offer subscription-based products and services, such as software-as-a-service (SaaS), media streaming services, and subscription boxes. But how can companies ensure they’re maximizing the potential of their recurring revenue? In this blog post, we will discuss the basics of recurring revenue and how businesses can use it to grow and remain profitable. We’ll discuss how companies can create effective strategies to ensure their recurring revenue is as successful as possible. We’ll also provide some tips on how to optimize it and identify areas where improvements can be made in order to maximize its profitability. Finally, we’ll discuss how businesses can use recurring revenue to scale their operations and expand into new markets.
What is ARR? Annual recurring revenue explained
Examples of recurring revenue
Depending on the business model and products or services offered by your organization, you can integrate a variety of recurring revenue models:
Long-term contracts
Service contracts, in which customers pay a regular fee to use a service for an extended period of time, are common long-term contracts that generate recurring revenue. Cell phone companies, internet service providers, insurance companies, and other service providers with long-term contract obligations are a few examples of long-term contracts that produce recurring income. The long-term contract model aids companies and organizations in determining the length of time and ongoing payments that clients are required to make in order to maintain the service. Additionally, some long-term agreements require customers to sign up for the service for a minimum amount of time in order to receive it.
Cross-selling
Cross-selling is a strategy used by businesses to sell additional items that customers require in order to continue using a primary product or service. For instance, when customers purchase their service contracts, a cell phone provider that offers a subscription-based cell phone service may cross-sell cell phones and mobile accessories. Cross-selling is advantageous for businesses that sell specific products in the beginning and then keep giving customers things they need to keep using the product. Companies can also incorporate one or more of the other recurring revenue models into their cross-selling recurring revenue model.
Monthly recurring revenue
Monthly recurring revenue is a type of recurring revenue that businesses can anticipate receiving from clients who consistently buy goods or services. The monthly recurring revenue model calculates the total normalized monthly revenue from sales of a company’s goods and services. A business that offers a range of product or service prices (such as tiered pricing) can normalize this revenue with monthly recurring revenue, making it a reliable metric to understand total recurring revenues. Companies offering subscription-based services frequently turn to the monthly recurring revenue model as a source of recurring income.
Annual recurring revenue
Similar to long-term contract models, the annual recurring revenue model involves customers setting up recurring payments to businesses for specific goods or services. However, annual recurring revenue generates income for businesses annually, unlike long-term contracts. Therefore, if a business sells a good or service that needs to be renewed, it might use an annual recurring revenue model to get payments from clients once a year. Online magazines and memberships for streaming services are a few examples of subscription-based services that use the annual recurring revenue model.
What is recurring revenue?
The income a business expects to consistently and continuously generate is known as recurring revenue. Recurring sales of unique accessories required for an initial product purchase and subscription-based services are two common sources of recurring revenue. A recurring revenue model, which identifies the goods and services required for recurring sales, is used by businesses and organizations when they depend on anticipated cash flows on a regular basis.
Differences between non-recurring and recurring revenue
In addition to a predictable stream of income, non-recurring and recurring revenue differ in the following ways:
One-time transactions vs. long-term revenues
Your revenue from customers’ one-time purchases is referred to as non-recurring revenue. One-time purchase models are common in industries like auto sales, grocery sales, restaurant and dining sales, and retail sales, where customers only buy a product once. While businesses that make one-time sales frequently keep repeat customers who buy more goods or services, the amount of money a business makes from a one-time sale can vary depending on the goods or services it sells. For instance, a retailer of clothing offers one-time discounts to customers who buy a range of clothing items at various price points.
However, recurring revenue includes repeat purchases and lengthy payment cycles that produce a steady stream of income, with each customer paying the same prices for a particular good or service. A magazine publisher, for instance, might offer a long-term subscription service where each user pays the same subscription fee. Depending on the type of magazine content, the publisher can then decide how much to charge for its service.
Customer retention rates
There are also differences in customer retention rates between non-recurring and recurring revenue models. Companies that generate non-recurring revenues, for instance, might have higher customer retention rates than those that do so. This may be the case because non-recurring revenue necessitates a large number of customers making purchases every day in order for a business to generate a steady income. However, businesses and organizations that generate recurring income may have lower customer retention rates as they may not need the same volume of customers to continue to generate a steady income.
Market reach potential
Recurring and non-recurring revenue can both boost your customer reach. The methods you employ to broaden your market reach can vary depending on which of the two revenue models you choose. Non-recurring revenue models frequently include promotions, discounts for new customers, and other unique pricing schemes to encourage more people to buy a company’s goods or services. Businesses can still grow their market reach by using tactics that attract potential customers and offer value.
You can offer adaptable or affordable entry prices to new clients who sign up for your company’s services in a recurring revenue model. This strategy can encourage new clients to interact with your business, and you can also provide tier-based pricing, a variety of payment methods, and additional services or goods that improve the customer experience.
Financial analysis and planning
A non-recurring revenue model and a recurring revenue model may require different strategies for budgeting and allocating revenue back into your company, respectively. Essentially, when you can estimate your expected earnings per month, year, or period of service payment cycles, recurring revenue provides you with a predictable cash flow. Since the majority of non-recurring revenues come from one-time purchases, they might not be as predictable as recurring revenues, though. By implementing efficient marketing and sales strategies that attract customers and generate dependable cash flow, non-recurring revenue can still be used to plan budgets, calculate future cash flows, and generate financial forecasts.
Calculating recurring vs. non-recurring revenue
Financial experts use different formulas to calculate total recurring and non-recurring revenue. Most businesses determine revenue at the conclusion of an accounting period because non-recurring revenue typically results from one-time purchases. Using the data they determine through non-recurring revenue streams, business and finance analysts can then create forecasts and plan budgets. Most businesses can determine revenue per customer in a recurring model because service and subscription costs are probably the same for all clients.
Calculating recurring revenue
You can calculate recurring revenue using two methods:
Calculating recurring revenue per customer
The most typical method used by businesses to determine recurring revenue is by calculating the total revenue generated by each customer during a payment cycle. Using this technique, you estimate the total revenue generated by a single client each billing cycle. The total value is then multiplied by the number of clients you have. This technique calculates the total revenue you can expect to bring in based on the number of customers you currently have. You can raise the number you multiply to your service price as you bring on more clients.
Consider a scenario where a provider of internet services charges $45 per month per customer under a contract for its entry-level internet package. The provider multiplies $45 by 12 months to obtain an annual total recurring revenue for this particular service tier of $540 for each individual customer. The annual recurring revenue would be $540 multiplied by the provider’s current customer base of 27,346. This would equal $14,766,840.
Calculating by ARPU
The average revenue per user (ARPU) that your business generates over the course of a particular payment cycle is the alternative method you can use to determine your recurring revenue. Find the total revenue your company generates for the time period you want to measure by looking at your income statement. Divide the total revenue for the accounting period by the typical number of customers who use your services each month if you’re measuring monthly recurring revenue. Your ARPU will be the outcome, and you can use it to calculate your monthly recurring revenue.
For instance, a subscription service provider can calculate its ARPU and monthly recurring revenue by dividing its annual revenue of $125,000 by the typical number of customers. The business’s ARPU is $17 if it averages 1,500 monthly customers using its service. 85. The provider of the service then multiplies its $17 ARPU to determine its monthly recurring revenue. To get a monthly recurring revenue of $29,220, multiply 85 by 1,637 customers. 45. With its recurring revenue model, the subscription service provider can anticipate earning this amount each month.
FAQ
What are examples of recurring revenue?
- Rent. Rent received under a contract that may last a year or longer, such as from the rental of a property
- Leasing. Equipment and vehicle leasing.
- Advertising. …
- Service Contracts. …
- Service Subscriptions. …
- Product Subscriptions. …
- Content Subscriptions. …
- Support Contracts.
What means recurring revenue?
The portion of a company’s revenue that is anticipated to continue in the future is known as recurring revenue. These revenues, as opposed to one-off sales, are predictable, stable, and can be reasonably expected to continue to occur at regular intervals in the future.
What is recurring revenue in software?
A business model known as recurring revenue is one in which the revenue is predictable, steady, and likely to continue in the future. Gainsight is aware that businesses prefer service offerings with the highest level of revenue predictability and the least amount of risk.
What is recurring and non recurring revenue?
Recurring revenues are periodic earnings from regular business sources, and as a result, they are typically financial in nature. Non-recurring incomes can be either revenue- or capital-based; for example, a one-time windfall profit in a business could be revenue income, but profits from the sale of real estate would be capital-based.
