Recurring Revenue

Recurring Revenue refers to a part of income or revenue that recur again and again constantly in the future at regular intervals like monthly or yearly and this kind of revenue is relatively stable as it can be predicted with reasonable confidence. It gives an organization the space and resources to plan for commitments well in advance.

It is considered an important quality of a company to which attracts customers to invest in that because a company with high monthly recurring revenue will always have a high profile in the Market. Moreover, the customer will always see a return on investment, which will be done only if they have such revenue.

Recurring revenue model is a good quality for a business as any customer who would like to invest or buy goods would use this as a metric. Though it has a lot of benefits, it takes time to attain this stage, and initial costs will be high compared to other forms of one-time revenue.

It is considered as a vital quality of a company as the majority of expenses are done with this revenue, as it is recurring in nature it will be consistent over a period of time which will be helpful to run the business in a good state.

It can take any form from sales that are made during the year, which makes the base for income for many years or any contracts that generate stable income over a period of time, etc.

Let us understand the formula to calculate the annual or monthly recurring revenue which is useful to calculate the total repeated incomes of an organization.

Recurring Revenue = SUM (Total Revenue)

Or

Recurring Revenue = ARPA * Total Number of customer/product

• Where ARPA – Average Revenue per Account (customer or product)

This method is used when there are too many customers or products, and it will not be easy to sum everything.

A monthly recurring revenue model helps a business plan their expenses and their growth strategies well in advance. It also gives the business a well-deserved advantage over their competitors. Let us understand the concept in detail with the help of a couple of examples.

Example #1

Let’s consider if a company sells cosmetics products, and with good marketing of their products, they have earned a set of loyal customers, assume that product X generates revenue of $15000 per month, and Product Y generates $20000 as revenue per month.

The MRR will be:

• = $15000 + $20000
• =$ 35000

Example #2

Consider this Example if the same company has 100 customers, and the revenue from 100 customers will differ for different products they sell, it will be complicated to calculate; hence the second method is used.

Solution:

Here consider ARPA as $150

Calculate Recurring Revenue:

• = $150* 100
• =$ 15,000

For a business to have a set amount coming in on a regular basis gives them better leverage to perform their business activities or even execute their expansion or growth plans. Let us understand the benefits of adopting a recurring revenue model through the discussion below.

• Consistency - Profits from such will be consistent compared to other companies in the market.
• Calculable - Mostly, if a customer makes a payment once he will be a regular customer, hence revenue can be predicted easily.
• Stable Metrics - There are a number of ways to calculate the Recurring revenue, which is an added advantage.
• Lifetime Value - As the Service or sales will be for more time the customer will also be there for the company
• Loyal customer Base - Such revenue means a set of loyal customer bases, which is also a reason for their consistency in the market.

On the other extreme, it is also important to understand that a monthly recurring revenue is a difficult position to achieve, Let us understand why  a significant number of businesses struggle to reach this position for years through the explanation below.

• Initial costs that are spent to earn such revenue will be high compared to Non-recurring Revenue, e.g., infrastructure, marketing, etc.
• As the customers are an important source of income if they don’t like the product it has to be altered as per their wish
• In the case of subscription business, some would choose yearly plans, for which the company has to give some discounts.
• If the revenue has to be stable, the company’s service or products must be of high quality and should provide offers occasionally.

The differences between a recurring revenue model and a non-recurring revenue model are in their fundamental and moreover, the names themselves are self-explanatory. However, there are a few other factors that set them apart. Let us understand them through the comparison below.

• Recurring Revenue is made of incomes or profits that recur again and again consistently, but One-time revenue is an income or revenue from a single event that may or may not occur again or inconsistent manner.
• Recurring profits will be almost the same due to its consistency, but Non-Recurring profits will be high as one-time event.
• One-time revenue can’t be predicted or calculated easily as there won’t be consistency like recurring revenue.
• Return on business will be much faster and higher in Non-Recurring than in the Recurring.
• Higher lifetime value will be more in Recurring than the One-time Revenue making business.

This has been a guide to what is Recurring Revenue. Here we explain its formula, examples, benefits, limitations, and compare it with non-recurring revenue. You may learn more about financing from the following articles –

• Revenue Cycle
• What is Revenue Accounts?
• Ancillary Revenue
• Revenue Streams
• Revenue vs. Earnings