What do Adobe, Microsoft, Netflix, Amazon Web Services (AWS), and Peloton have in common? While very different companies and in different industries, each has become highly successful using the recurring revenue model. Although historically 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. The CEO Project, “Repeat revenue is good, but recurring revenue is great.” Before looking at the benefits of recurring revenue, let’s discuss what recurring revenue is and what it isn’t.
Recurring Revenue: What it is, What it isn’t, and How to Calculate it
Recurring revenue is commonly described as income that a business earns on a regular and predictable basis. Unlike one-off sales, recurring revenue provides the business, with a high degree of certainty, future earning potential.
So, what isn’t recurring revenue? In a nutshell, non-recurring revenue refers to income that a business earns irregularly or one time only. Typically, there are no expectations that the revenue will be repeated on a regular basis.
Let’s take a closer look at what recurring revenue is and what it isn’t.
Kategorie | Recurring Revenue | Non-Recurring Revenue |
Predictability | High – Predictable and stable | Low – Often unpredictable and variable |
Sales Effort | Lower once the customer subscribes | Higher – Each sale requires effort |
Customer Relationship | Ongoing relationship | Short term, often transactional |
Revenue Visibility | High – Easy to forecast future income | Low – Difficult to project future earnings |
Business Valuation | High due to consistency | Lower as seen as less reliable |
Skalierbarkeit | High – Can scale with minimal incremental cost | Low – Often tied to time or inventory |
Risk Level | Lower – More stable cash flow | Higher – Subject to market and demand fluctuations |
Examples | Subscriptions, maintenance contracts, and SaaS fees | One-time sales, consulting projects, etc. |
Calculating Recurring Revenue
To calculate recurring revenue, use one of the following formulas.
Monthly Recurring Revenue (MRR) Calculation
Depending on your pricing model, there are two ways to calculate MRR.
Formula 1: MRR = Number of Customers x Average Revenue per Customer per Month
However, if you have a variety of pricing tiers, the calculation becomes a bit more involved. For example, let’s assume that you have 3 pricing tiers – basic, pro, and enterprise, and each tier has different pricing and number of subscribers.
Tier | Price per Month | Number of Subscribers |
Basic | $100 | 500 |
Pro | $300 | 300 |
Enterprise | $500 | 200 |
Your MRR would be $240,000 ($50,000 + $90,000 + $100,000)
Basic Tier MRR = $100 x 500
Pro Tier MRR = $300 x 300
Enterprise Tier MRR = $500 x 200
Annual Recurring Revenue (ARR) Calculation
To calculate ARR, simply take the number of Customers x Average Revenue Per customer per Year.
Alternatively, ARR = MRR x 12
MRR and ARR Calculation Considerations
Prior to, during, and after calculating MRR or ARR, be sure to:
- Determine which products or services generate recurring revenue.
- Stay focused on revenue that is predictable and expected to occur regularly.
- Subtract any lost revenue due to subscriber churn or downgrades.
- Include additional revenue from existing customers who upgrade their subscriptions.
- Track changes in MRR and ARR to assess business performance over time.
- Factor in any discounts or promotions.
Benefits of Recurring Revenue
Regardless of whether you run a B2C or B2B organization or sell products or services, the advantages provided by this revenue model are plentiful. Let’s focus on the top 5 benefits of recurring revenue.
1) Predictable Cash Flow
Primary benefits in this category range from strategic and operational through financial, and include:
- Financial stability provided by a consistent income stream and improved forecasting.
- Simplified operations for better resource planning and less reliance on new sales.
- Improved customer lifetime value (CLV) due to higher retention rates and increased upsell opportunities.
- Improved valuation that includes investor appeal and stronger business valuation.
- Operational efficiency due to lower customer acquisition costs (CAC) and the ability to use software to streamline recurring billing, renewals, and account management.
- Easier scalability such as in marketing, product development, or geographic expansion, as well as more control over pricing models.
2) Easier Financial Forecasting
Recurring revenue and financial forecasting are closely linked with benefits that include a predictable income stream, higher CLV, reduced need for ongoing new sales to maintain cash flow, and more precise planning for growth or investment. With a recurring revenue model, your revenue is more stable month-over-month, you are better able to forecast cash flow, expenses, and profits, and since churn and growth rates are key variables, forecasting becomes more data driven.
3) Higher Customer Lifetime Value
Both recurring revenue and CLV are two key financial metrics that are prioritized in this business model, especially for subscription-based or service-based organizations. CLV measures the total revenue a business expects to earn for a customer over the duration of their relationship with the business. Recurring revenue naturally improves CLV since customers typically remain longer with the business, they make repeat payments, and it’s inherently easier for the company to upsell or cross-sell to loyal subscribers.
4) Stability and Scalability
Let’s look at the benefits of stability and scalability separately.
Stability
The stability found in recurring revenue business models offers numerous benefits, including:
- Predictable cash flow to more easily forecast revenue, plan budgets, and manage expenses with greater accuracy.
- Improved financial planning to better support long-term investments and resource allocation decisions.
- Higher company valuation due to lower risk and consistent returns.
- Improved customer retention, reducing the need for ongoing customer acquisition.
- Optimization of operations and the ability to scale more efficiently.
- Greater resilience during economic downturns or market disruptions.
- Incentivizes better customer service and support.
Skalierbarkeit
The scalability found in recurring revenue business models contribute to long-term business success, such as:
- Increased profit margins.
- Predictable and stable income which improves budgeting, hiring, and investment decisions.
- Increased CLV without proportional increases in cost.
- Lower CAC – overtime.
- Operations automation, standardization, and digitization, reducing the need for manual labor.
- Faster growth potential.
- Attractiveness to investors.
5) Investor Appeal
In general, investors typically view recurring revenue businesses as lower risk and higher reward due to their built-in financial predictability and customer loyalty advantages. These benefits can be further described by what we’ve already touched upon – predictability and stability, scalability, higher valuations, increased CLV, and growth efficiency.
Additionally, recurring revenue businesses are prime acquisition targets for larger organizations, as well as IPO markets which tend to favor predictable, high-margin businesses.
Overall, recurring revenue models tend to provide businesses with more resilience and adaptability, while positioning them for long-term success.
Recurring Revenue: Key Challenges
While the benefits of recurring revenue are clearly visible, this revenue model also has some specific challenges. Here’s some key challenges of recurring revenue and how you can overcome them.
Challenge 1: Customer retention or lack thereof can cancel out expansion, making long-term growth and profitability difficult to attain.
Overcoming this challenge can be summarized in 10 steps:
- Improve the onboarding process by offering personalized onboarding, offering step-by-step onboarding processes, providing product tutorials, and sending welcome emails.
- Understand your customer’s needs and behaviors by monitoring usage, sending surveys, and obtaining regular feedback.
- Provide consistent value by regularly adding new features/functionality, providing educational content, and creating customer success teams to work closely with your subscribers.
- Create stronger customer relationships through personalized communications and offering loyalty programs.
- Offer flexibility in pricing and terms such as a variety of billing cycles and the ability to easily upgrade, downgrade, or cancel.
- Use data analytics to identify early warning signs of churn. Proactively address customer churn signals and target at risk customers with engagement campaigns.
- Onboard referral programs and offer rewards or discounts to customers that refer new subscribers.
- Keep customers informed about any changes in pricing, services, or policies, and when issues arise, resolve the problem quickly.
- Leverage data and technology such as CRM, ERP, and billing systems, and use automated engagement methods such as emails, SMS, and in-app messaging.
- Regularly measure retention metrics and track customer churn over a given period.
Challenge 2: Finding the right balance between value, competitiveness, and profitability
While overcoming this challenge can be tricky, it’s not insurmountable. There are 8 solutions to this issue which can be used individually or in combination.
- Segment subscribers based on their needs, usage, and value to your business. This will enable you to better tailor pricing plans to suit each segment. Additionally, offer a variety of pricing plans like tiered pricing or usage-based pricing, enabling customers to choose the plan that works best for them.
- Focus on the value you provide to customers and set prices accordingly.
- Provide a discount to customers who commit to an annual subscription. For customers that are hesitant to making a long-term commitment, offer the product on a short-term trial basis.
- Implement dynamic pricing based on factors like demand, customer behavior, or specific use cases. You can also use different pricing tiers based on the features customers find most attractive.
- Encourage long-term contracts with incentives like discounts or exclusive features/functionality. You may also want to implement a loyalty program that rewards customers for renewing their subscription.
- Expand revenue by upselling and cross-selling additional features/functionality to existing subscribers.
- Regularly assess your pricing models to ensure they remain competitive and modify them when necessary. Remember to A/B test different pricing models to help determine optimal pricing.
- Invest in a customer success team to help subscribers get the most value from your products or services.
Challenge 3: Unreliable billing, customer management, and automation tools.
Overcoming technology and infrastructure challenges requires strategic planning, scalable technology, and efficient operational processes. You can address these challenges by:
- Investing in subscription management software.
- Investing in automated payment systems.
- Investing in customer relationship management (CRM) solutions.
- Investing in data analytics and reporting.
- Investing in cloud infrastructure services.
- Investing in automated customer support systems.
- Investing in revenue recognition software.
- Implementing customer retention programs.
- Ensuring your subscription tools and payment systems comply with standards and regulations.
- Creating a self-service portal for customers to manage payments, refunds, and cancellations.
- Investing in integration platforms to connect and automate workflows between systems.
Challenge 4: Revenue flow interruptions caused by credit card expirations, declined payments, or billing disputes.
Keep your revenue flowing by following these 6 strategies.
- Educate customers on payment terms and regularly communicate with subscribers about upcoming payments.
- Use subscription management platforms to automate recurring billing, track failed payments, and send automated payment reminders.
- Offer discounts or benefits to customers that pay in advance of the payment due date.
- Set up automatic retries for failed payments.
- When payment issues arise, adhere to clear escalation guidelines.
- For persistent payment failures, reduce days sales outstanding (DSO) with automated collections software.
Maximize Your Revenue Potential with Recurring Revenue
The success of your recurring revenue business model relies on having a comprehensive revenue management and billing solution that provides end-to-end support for the entire quote-to-cash (QTC) lifecycle. One that gives you the freedom to adapt to any billing need or business requirement quickly and effortlessly. BillingPlatform provides a complete solution that offers product setup, quoting, billing, invoicing, and revenue recognition – all while automating processes for efficiency and compliance.
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 pricing. Are you ready to maximize your revenue potential with the benefits of recurring revenue? Take a free guided tour to see exactly how BillingPlatform stacks up!
