What is recurring revenue?

26.5.2021
Angelica A.
  |  

Making constant money and relying on that as part of running a startup is probably every entrepreneur’s dream come true, no? Well, we’re answering the question of “What’s recurring revenue” today, hoping doing so will help think of alternatives to get to that ultimate business goal. Stay with us as we go gently into what recurring revenue is, how to calculate it, what models related to it are like, and other crucial pieces of information around the topic. 

What is recurring revenue?

We’re tapping into recurring revenue (RR for short) whenever we’ve managed to generate a source of income that can be titled as revenue. Tied to that, though, you can furthermore envision those earnings to still come in over a certain period. As such, putting these two R words together means talking about the part of a startup’s revenue that will most likely keep on recording as such over time. 

Term it as such when there’s enough data to justify seeing these income sources as constant and steady. It should be very safe to deem these as regular earnings. Companies should be very confident these are stable numbers to count them as continuous sources of revenue. Making sure of that is very important. 

How it works for a business

MRR or ARR are calculations, and we shouldn’t lose sight of that. As such, these deriving figures help a business make more projections and other numbers. So, for instance, for a startup, splitting revenue into what came in from new customers over a certain period can be as helpful as knowing what upsells or cross-sells have brought into our accounting. 

We even value potential losses as clients leave and cancel or renew plans. That churn is another valuable MRR figure. Add all the above, and you can come up with your net worth in these terms. Just subtract your churn from your extensions or new sign-ups, and you should be able to arrive at that net sum. 

These help a business know where we’re standing financially and map out quarterly, monthly, or yearly plans. Our most relevant financial stakeholders will undoubtedly be on top of these numbers to measure how their potential return on investment is coming along. Or they can ask for these just to know how the company is doing. 

What is a recurring revenue model?

When we speak of a recurring revenue model (RRM), we’re talking about setting up our businesses to seek these kinds of RR. This means stepping away from one-time sales, for example. 

Other businesses can be based on items we sell to a consumer just once, while RRMs seek to grow based on recurrent events in a client’s lifecycle with us. 

In the end, remember keeping clients who come back to us for more can be much easier and more inexpensive than continually drawing in new clients. 

Why is recurring revenue important?

Well, imagine being able to calculate if you can pay for electricity and team member salaries every month based on this figure. Suddenly, RR becomes awfully relevant when you’re depending or counting on it to keep a business alive. It’s that crucial for some, especially as we seek growth during a startup’s early stages. 

How to improve recurring revenue

Improving something starts by adhering to all it has to offer. So, start measuring what’s coming in on a steady basis. If you do so monthly, that immediacy can help determine what’s working on the marketing and sales fronts, for example. You’ll be better able to see what measures are paying off and how. And you can thus see what’s resulting from your new releases, campaigns, and mostly even tiny moves. All of these will come afloat. And they’ll be visible to you as you sit down to check your incoming revenue.

Scale progressively with these figures. Seek growth with a steady pace as you check your Excel sheets (or, hopefully, your devoted software for this.) 

Use your annual reviews to fine-tune what you’re considering as necessary cash flow, for example. Check your budgets this way and regroup to set new goals for the new long term coming up. Using these figures is a way to improve them as visibility gives us a grasp over what we can change or leave to keep flourishing. 

To all of the above, also work side by side in reducing your churn. Boosting loyalty programs is a way of cutting back on your cancellations, which should help your RR. Crank customer retention strategies by studying patterns and behavior. Keep a close eye on the points where you’re losing and winning clients. And seek to maintain a healthy offer to inevitably work on your RR. 

Okay - to do that, you first need to know how those calculations take place, right? Let’s get to that now. 

How to calculate recurring revenue

Right off the bat, standard terms for these calculations happen per month or yearly. We call them monthly recurring revenue (MRR) and annual recurring revenue (ARR) based on either case. And what we do for that is use models to generate stable projections. 

Commonly, calculating such a result can be a matter of taking what your users or consumers are paying per a single period and splitting it. Divide that between your total number of clients for that specific timeframe. 

So, say you’re interested in calculating your MRR. You’d take the average revenue per account (ARPA being our new simple term here) and multiply that by the total number of accounts you have. Doing so should give you the MRR for which you’re looking. 

Need further help with this? Always feel free to get in touch with our consulting and design agency. It’s especially aimed at helping startups succeed. While we’re at it, we’ll leave you with one final practical suggestion. 

Keep better track of expenses with Recurring.

Keeping an automated and precise track of incoming sources out of subscriptions, for example, is something software as a service (SaaS) platforms can help to do. Recurring, for instance, can help track usage and even expenses. 

Also, you can manage most other software your company might be using on it. And that can happen while also getting smart recommendations to optimize spending and remove orphaned tools, for example. 

Check Recurring out now to learn more of how this tool can help manage a startup’s recurring revenue.

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