What do Adobe, Ecolab, Netflix and Chegg have in common? While very different companies, each of them generate more than 80% of their revenue through recurring revenue. Although typically associated with software and eCommerce businesses, the recurring revenue model is making its way into other industry sectors – and for good reason. In the words of Jim Schleckser, CEO at Inc. CEO Project, “Repeat revenue is good, but recurring revenue is great.” Let’s start by taking a look at why recurring revenue is great, and the leading benefits of recurring revenue.
Top Three Benefits of Recurring Revenue
Regardless of whether you run a B2C or B2B organization or sell products/services, the benefits provided by this revenue model are plentiful. Let’s focus on the top 3 key benefits to the model.
1) Investor Appeal
It’s not surprising that companies that embrace the recurring revenue model are attractive to private equity investors and venture capitalists (VCs) alike. The appeal of these businesses include:
- Financial forecast predictability: The recurring revenue model provides companies with the ability to more accurately demonstrate predictable and reliable monthly recurring revenue (MRR) and annual recurring revenue (ARR) streams than a single payment model. In addition, the recurring revenue model can increase a company’s valuation by up to 8 times. For example, say you own a $15 million dollar company with 75% of revenue received on an annual recurring basis. That means that you can count on receiving $11,250,000 annually.
- Expenses: There’s nothing worse than not having the available funds to pay incoming bills or unexpected expenses. The predictability of recurring revenue enables you to manage your expenses more accurately, and increase or decrease expenditures to correspond with revenue.
- Stability: When you know how much you’ll receive each month, you’ll never again start the month at a zero. With the ability to forecast revenue more precisely, you’ll be able to use the information to manage the business with greater consistency to keep it moving forward.
2) Scalability
With a positive and predictable cash flow, you’re able to put cash back in the business with minimal risk. A hallmark of recurring revenue is the deep data insights you receive, enabling you to make more insightful investment decisions and quickly grow as your customer base increases. A classic example of the scalability provided by the recurring revenue model is Netflix. In the early 2000’s, Netflix disrupted the video rental market by offering digital entertainment services at a reasonable price. This model virtually was the end of the Blockbuster’s of the time, as people began flocking to digital offerings and recurring payment options.
3) Customer relationships
Perhaps the most powerful of the key benefits is the customers you acquire, and the relationships built over the long term. Let’s compare customer relationships from both a single transaction and recurring revenue point of view. The one-time payment model provides revenue from a single sale, but in order to make additional money you need to make another sale, which of course takes resources. Alternatively, once a sale is made in the recurring revenue model, the customer continues to pay on a monthly, bi-annually, or annual basis – as long as they continue to find value in the products or services you’re providing. Basically, the customer relationship is embedded into the recurring revenue business model, enabling you to focus on customer retention and develop deeper relationships.
Behind the Phenomena of Recurring Revenue
The recurring revenue business model is poised to expand and grow – across all industries. Highly beneficial and desirable by investors, organizations and customers, it provides attractive benefits that aren’t available with other revenue modesl. As we look towards the future, here are some statistics that substantiate the impact of recurring revenue. Did you know that:
- Gartner expects the SaaS market to reach $120.9 billion in 2021 – up from more than $104 billion.
- 75% of business leaders say subscription business models are key to growth. (Global Banking and Finance Review)
- IDC predicts that by 2022, 53% of all software revenue will be purchased with a subscription model.
- Valued at $50.11 billion in 2020, Grand View Research expects the global video streaming market size to expand at a compound annual growth rate (CAGR) of 21.0% from 2021 to 2028.
With projections like these, it’s easy to see why companies are increasingly incorporating recurring revenue into their business models. However, one has to ask – are there any potential challenges? Like any revenue model, you will face obstacles.
From an operational perspective, some organizations struggle with not being able to track and manage recurring revenue. When it comes to accounting and reporting, recurring revenue has to be recognized when realized and earned, not necessarily when it’s received. And when mismanagement or errors occur, you may find yourself facing audits and compliance issues. In addition, given the varying subscription levels, term lengths, and product or service bundling options, daily tasks such as calculating and managing pricing can become more complex.
Does this mean that the recurring revenue model should be avoided? Absolutely not!
Choosing the Right Recurring Revenue Billing Solution
The success of your recurring revenue business model relies on having the right billing platform. One that gives you the freedom to adapt to any billing need or business requirement quickly and effortlessly. BillingPlatform provides a complete solution that supports all of your business requirements – any product, any service, any business model.
Our cloud-based platform is the only solution that helps you solve today’s business problems, while enabling you to grow revenue by complementing your subscription models with innovative metered and usage-based pricing. Are you ready to maximize your revenue potential with recurring revenue? Take a free guided tour to see exactly how BillingPlatform stacks up.
