In contrast to traditional sales models that consist of one-off purchases, recurring revenue delivers a predictable and stable revenue stream. Occurring at regular intervals, recurring revenue provides companies with revenue on a monthly basis (MRR), annual basis (ARR), and/or other predetermined time frames.
Want to dig a bit deeper? Read on to gain a better understanding of recurring revenue, the importance of this revenue model, its benefits, what it takes to maximize recurring revenue success, and how you can put recurring revenue management on autopilot.
What is Recurring Revenue?
As described by Investopedia, recurring revenue is the portion of a company’s revenue that is expected to continue in the future. Sounds pretty self-explanatory, doesn’t it? Let’s look at the most common formulas for recurring revenue.
Formula 1: Recurring revenue equals total revenue.
Example: We’ll assume that your software as a service (SaaS) organization sells 2 different packages and that software package A generates $20,000 in revenue per month and software package B generates $25,000 of revenue per month. Your MRR would be $45,000 ($20,000 + $25,000).
Formula 2: Used when there are an abundance of customers and/or products, this formula is based on ARPA (average revenue per account) (customer or product).
Example: For this illustration, the SaaS organization has 8,000 customers using a variety of software packages and the ARPA is $1,500. Your recurring revenue would be $12,000 (8,000 x $1,500).
Gain even more insights into recurring revenue. Check out our blog – How Does a Recurring Revenue Model Work? – for common types of recurring revenue business models and its most popular billing models.
The Importance of Recurring Revenue
Leveraging advanced technologies such as the Internet of Things (IoT), recurring revenue business models continue their upward trend. With a growth rate of 435% over the past 9 years, the subscription economy is set to grow to $1.5 trillion by 2025. Equally as promising, 70% of business leaders report subscription business models are crucial to their prospects in the future. And not to be overlooked, subscription businesses have grown an astonishing 3.7 times faster than the S&P 500. The benefits, however, don’t end there.
From predictable revenue to improved customer loyalty, the benefits associated with a recurring revenue business model are undisputable. Aside from its predictable revenue stream and inherent customer retention, recurring revenue also provides revenue stability, higher valuation, and increased growth potential.
Given the broad range of recurring revenue business models, do all recurring revenue businesses receive the same benefits? The short answer to this question is no. However, there are ways to keep your recurring revenue flowing. Learn the four tips to projecting cash flow with recurring billing.
Maximize the Success of Recurring Revenue
As with any revenue model, there are advantages and disadvantages. Let’s look at the top seven issues and the pro tips that will help you get the most from a recurring revenue business model.
1) Revenue Management
Regardless of the business model, staying on top of your performance is critical. However, due to the nature of the recurring revenue business model tracking performance can be tricky. Some questions to ask yourself – what does it cost to acquire new customers? Is customer churn outweighing customer acquisitions, and is profitability growing or declining?
Pro Tip: We’re all accustomed to tracking a variety of business metrics (MRR, ARR, churn, recurring profit margins, etc.). By tracking the metrics in combination instead of individually you’ll gain the insights needed to keep your recurring revenue business running at peak performance. Using the right business intelligence tools such as reports, dashboards, and analytics provides the comprehensive view needed to understand the financial health of your business and maximize opportunities.
2) Customer Management
Fostering customer loyalty is essential for long-term recurring revenue success and this relies on your ability to consistently deliver value. However, as your customer base increases, delivering on customer expectations can become overwhelming and time-consuming.
Pro Tip: To avoid disconnected customer interactions and provide customers with exceptional service, your critical front- and back-office systems need to be fully integrated. In addition, be sure that your billing system is able to automate the entire quote-to-cash process.
3) New Product/Services
One of the appeals of this business model is in the opportunity it provides to upsell and cross-sell new products and services to existing customers. However, pricing and launching new products/services on an ongoing basis takes time, effort, and funds.
Pro Tip: Stay ahead of the competition by quickly launching innovative packages, pricing, and promotions. The right billing system should enable you to generate new revenue streams from any combination of one-time charges, subscription, consumption, hybrid, or dynamic – all on a single system.
4) Secure Payments
The ability to accept recurring payments requires you to provide the security needed to collect sensitive information, as well as be in compliance with PCI-DSS and other regulations such as ASC 606 and IFRS 15.
Pro Tip: Your billing system is a fundamental component in your ability to securely collect recurring payments and adhere to compliance standards. The system should offer a variety of payment methods, including debit/credit cards, checks, PayPal, and ACH on a PCI-DSS compliant platform.
Additionally, it should have the ability to automate credit card and ACH payments with SOC and PCI compliant payment gateways. When customers opt to pay by check, the billing system needs to provide for easy configuration of lockboxes.
5) Revenue Recognition
As your recurring revenue business grows, so do the complexities. The numerous performance obligations in combination with a growing customer base can lead to errors and customer dissatisfaction. This is especially true if processes are manually handled.
Pro Tip: The nature of how you manage a recurring revenue business model adds nuances that compound inherent difficulties. A billing system built for recognizing recurring revenue enables you to automate revenue management and reduce errors. With a single solution you can automate and simplify revenue recognition for better accuracy and auditability.
6) Customer Churn and Dunning
Losing revenue due to failed payments can quickly turn profits into monetary losses. However, the majority of involuntary customer churn can be avoided through effective dunning management.
Pro Tip: When payments aren’t made or are declined, put dunning on autopilot with messages that are easily scheduled and tailored to keep customers informed of outstanding balances or failed payments. A fully automated process allows you to quickly manage late fees, account suspensions, and customer notifications.
7) Global Growth
Taking your business across borders opens another set of challenges such as supporting various payment methods, currencies, and languages, as well as adhering to local tax regulations and accounting standards.
Pro Tip: While not a trivial undertaking, a billing platform that enables you to localize your solution to satisfy region-specific requirements and compliances such as GDPR, while meeting the needs of diverse customers provides the flexibility needed to confidently expand your recurring revenue business.
The key to overcoming these challenges is with an agile billing system that manages the entire quote-to-cash process.
Put Recurring Revenue Management on Autopilot
The success of your recurring revenue business relies on having the right billing system. A system that meets your unique requirements and simplifies the complexities inherent to recurring revenue business models – and BillingPlatform delivers.
With BillingPlatform you can automate recurring revenue management and align all internal stakeholders – sales, finance, customer service, finance, and partners. We built BillingPlatform with the future in mind and the system’s unmatched agility fulfills 100% of today’s recurring revenue business requirements, enabling you to maximize revenue opportunities, improve cash flow, quickly adapt to changing market needs, and gain competitive advantage.
Ready to learn more? Contact our experts.
