When most people hear 'recurring revenue', the first thing that comes to mind is ongoing profit. Well, they are not totally wrong, but is that really all there is to recurring revenue?
You may have heard of the Skirball Cultural Center. It's a gigantic, blow-your-mind-away, multi-functional complex right at the edge of Los Angeles, California. On February 23rd, 2016, over 200 entrepreneurs from all over the U.S. and other parts of the world gathered at this place for the second annual "Recurring Revenue Conference." Nick Green, the co-CEO of the grocery outlet, Thrive Market, gave one of the most remarkable business tips at that conference. "Acquiring a customer on a subscription model gives you a year to prove your value to them."
Fun fact: as of 2016, Thrive market had made over $100 million in revenue.
Keep reading. As you do, you will learn how recurring revenue works and how you can maximize it for all-round business growth.
Meaning of Recurring Revenue
Recurring Revenue is used to describe steady, predictable streams of income for an organization. It is the repeated inflow of money, usually due to consumer-based systems designed to run almost on autopilot. With this revenue method, a company can count on receiving regular income without expending as much effort as if starting on marketing.
Companies make recurring revenue by offering services that compel customers or clients to keep coming back. It is important to note here that the one-off sales model is also good. There are specific kinds of products and services that function best by one-off systems. Take, for example, a clothing line. As a customer, you will probably prefer to avoid buying a piece of clothing and need to come back for another about a week or even a month later. In fact, its durability is at the top of the list in your criteria for choosing cloth. A recurring revenue model may not be the best idea for that kind of business.
Image taken from Strikingly Product
How to Calculate Monthly Recurring Revenue (MRR)
Recurring revenue can be calculated monthly or annually, depending on how the company evaluates itself. If you have ever come across the question ‘what is monthly recurring revenue?’, it is simply recurring revenue calculated monthly.
To calculate your MRR, you multiply your Average Revenue Per User (ARPU) by the total number of users that month. For example, you have a total of 1000 people subscribed to your movie streaming app. On average, each of your subscribers spends $3 per month, as a subscription fee. Your MRR will therefore be
$3 x 1000 people
That is $3000.
Types of Monthly Recurring Revenue (MRR)
1. New Recurring Monthly Revenue: This is the number of users who newly subscribe to your platform or patronize your business in a month.
2. Expansion Recurring Monthly Revenue: You know how businesses have different subscription plans? You would have noticed that some are usually higher than others. When users move from lower subscriptions to higher ones, that is an expansion. The expansion monthly revenue is the total revenue gotten from subscribers who upgrade to higher plans.
3. Churn Recurring Monthly Revenue: When customers choose a lower plan or cancel altogether, that results in a revenue churn. Thus, churn is the amount of losses a business makes from subscriptions. Businesses must calculate this to track how much progress they are making and how they should improve. For instance, if customers keep unsubscribing from a particular plan, you need to revisit that plan. Perhaps it does not serve your customers, and if so, keeping it will amount to continuous losses.
Relationship Between Recurring Revenue and Recurring Income
Many business owners mistake revenue for income. People sometimes use both words for each other. However, a business must avoid that mistake in calculation. That is because a miscalculation of any of both figures can hamper the growth of the business.
Essentially, revenue is to income, what recurring revenue is to recurring income. Revenue is the amount of money a company makes, before subtracting any expenses. Income is the money a business has left after removing expenses (tax, production costs, electricity bills, etc.). In other words, income is revenue minus expenses. Therefore, recurring revenue helps your business make recurring income. When you have a steady inflow of money, you can take out your costs and decide how much profit you have left.
Why You Should Use a Recurring Revenue Business Model
As earlier noted, other business models are great, depending on the uniqueness of each niche. However, there are benefits specific to the recurring revenue model. These benefits do not apply to your business alone. They also apply to your customers; you know what they say about happy customers. They make for happy businesses. If you maximize these benefits, you will record significant growth in your business.
1. Convenient Spending for Customers
2. Enhances Business Planning
3. Financial Security
4. Better Performance Tracking
5. Improved Accountability
6. Flexibility
7. Better Growth Prospects
Image taken from Strikingly User
1. Convenient Spending for Customers
Let’s be honest. No one really enjoys parting with money. You make it easier for your customers to spend money on your product if the spending is easy and gradual. Typically, recurring monthly revenue works automatically. When you sign up for Netflix, you input your card details, and the subscription amount is removed from your account every month. Even when the customers need to verify such payments, they can get it done with a few clicks. Therefore, the subscription-based revenue model makes spending less tasking for your client or customer.
2. Enhances Business Planning
When you know how much recurring revenue you have, you can plan ahead. You make more accurate sales forecasts and design more workable budgets. Of course, there will be contingencies. However, you will be more prepared for them than if you are just winging your revenue. This flows into our next point.
3. Financial Security
As a business, you may experience emergencies from time to time. That’s okay. What is not okay is not being prepared for these emergencies. A recurring business model provides a cushion to fall back on in the face of such emergencies. When you have steady income, you can carry on with certain business responsibilities, even if there is a financial constraint in other areas.
4. Better Performance Tracking
A recurring revenue model makes for better performance tracking, especially if you have an online business. Most eCommerce websites are designed to record and track your transactions automatically. If you build an online store with Strikingly, for example, you can easily access all the details of your transactions at the end of any week, month or year. Add this to a recurring revenue model, and you have a simplified system for evaluating your company's performance. Remember, you need to know the numbers to know how far you have gone and how fast you are moving.
5. Improved Accountability
Again, the recurring revenue model helps you track cash flow. That way, you will easily find out when there are irregularities and who is accountable for them. This is so much easier if your business is digital.
6. Flexibility
Subscription-based revenue model helps to keep the business flexible. With a predictable monthly income, you have the leverage to take on other aspects of business that you ordinarily would not. The constant cash flow allows you some room for risk-taking, which could eventually result in growth.
7. Better Growth Prospects
Recurrent revenue is one of the surest ways to facilitate business growth. It provides the resources for investment and scaling. In addition to this, constant cash flow indicates that the business is doing something right. Thus, investors are more attracted to businesses that have already shown their ability to generate steady income. They consider it an indication of the business’ scalability.
Best Business Types That Work With the Recurring Revenue Model
1. Software-as-a-Service
2. Membership Clubs
3. Content-Sharing Businesses
Image taken from Strikingly product
1. Software-as-a-Service (Saas)
Software-as-a-Service businesses are the most common subscription-based businesses. They offer their software as ongoing services to clients who, in turn, offer them to their customers. While a few offer Business-to-Customer services (B2C), most Saas products are targeted at businesses (B2B). Marketo and Hubspot offer businesses similar Inbound marketing and Customer relationship management services. Yet, a select few, such as Strikingly, serve businesses and consumers. With only a few clicks, you can set up a world-class website with all the important features for yourself or your business.
2. Membership Clubs
It does not matter if it's an elite golf club or an alumni association. The recurring revenue model works great for membership clubs and societies. With this model, members do not have to go through a long process to renew their membership for every period.
3. Content-Sharing Businesses
Netflix. Your favorite podcast. Photo magazines. These are examples of content-sharing platforms. If you plan to start a content-sharing site, consider using the subscription-based model. Your audience will appreciate the ease of access to your platform. Whether you build a blog website, create an online magazine, or create an eCommerce store, you can own your unique platform on Strikingly. Don’t worry. It’s absolutely free.
To sum up, adopting the recurring revenue model can get you more customers, increase your profitability, and position you to make better business decisions. If you already operate another model, you can introduce a feature or a new product that is subscription-based. Even if you are a personal brand, you can offer your services on a recurring plan. Build a portfolio website with Strikingly, and start targeting your customers.
