What is Recurring Revenue?

Explanation

  • It is considered as a vital quality of a company as majority expenses are done with this revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more, as it is recurring in nature it will be consistent over a period of time which will be helpful to run the business in a good state.Recurring revenue can take any form from sales that are made during the year, which makes the base for income for many years or any contracts that generate stable income over a period of time etc.

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Formula

Recurring Revenue = SUM (Total Revenue)

Or

Recurring Revenue = ARPA * Total Number of customer/product

  • Where ARPA – Average Revenue per Account (customer or product)

This method is used when there are too many customers or products, and it will not be easy to sum everything.

Examples of Recurring Revenue

Let us understand with some examples.

Example #1

Let’s consider if a company sells cosmetics products, and with good marketing of their products, they have earned a set of loyal customers, assume if product X generates revenue of $15000 per month, and Product Y generates $20000 as revenue per month.

The MRR will be:

  • = $15000 + $20000=$ 35000

Example #2

Consider this Example if the same company has 100 customers, and the revenue from 100 customers will differ for different products they sell, it will be complicated to calculate; hence the second method is used.

Solution:

Here consider ARPA as $150

Calculate Recurring Revenue:

  • = $150* 100=$ 15,000

Importance

It is considered an important quality of a company to which attracts customers to invest in that because a company with high recurring Revenue will always have a high profile in the Market. Moreover, the customer will always see a return on investment, which will be done only if they have such revenue.

Recurring vs. Non-Recurring Revenue (One time)

  • Recurring Revenue is made of incomes or profits that recur again and again consistently, but One-time revenue is an income or revenue from a single event that may or may not occur again or inconsistent manner.Recurring profits will be almost the same due to its consistency, but Non-Recurring profits will be high as one time event.One time revenue can’t be predicted or calculated easily as there won’t be consistency like recurring revenue.Return on business will be much faster and higher in Non-Recurring than in the Recurring.Higher lifetime value will be more in Recurring than the One-time Revenue making business.

Benefits

The following are the benefit which is listed below:

  • Consistency – Profits from such will be consistent compared to other companies in the market.Calculable – Mostly, if a customer makes a payment once he will be a regular customer, hence revenue can be predicted easily.Stable Metrics – There are a number of ways to calculate the Recurring revenue, which is an added advantage.Lifetime Value – As the Service or sales will be for more time the customer will also be there for the companyLoyal customer Base – Such revenue means a set of Loyal customer base, which is also a reason for their consistency in the market.

Limitations

  • Initial costs that are spent to earn such revenue will be high compared to Non-recurring Revenue, e.g., infrastructure, marketing, etc.As the customers are an important source of income if they don’t like the product it has to be altered as per their wishIn the case of subscription business, some would choose yearly plans, which the company has to give some discounts.If the revenue has to be stable, the company’s service or products must be of high quality and should provide offers occasionally.

Conclusion

Recurring Revenue model is a good quality for a business as any customer who would like to invest or buy goods would use this as a metric. Though it has a lot of benefits, it takes time to attain this stage, and initial costs will be high compared to other forms of one-time revenue.

This has been a guide to what is recurring revenue and its definition. Here we discuss formulas and examples to calculate recurring revenue along with benefits and limitations. You may learn more about financing from the following articles –

  • Revenue CycleWhat is Revenue Accounts?Ancillary RevenueRevenue StreamsRevenue vs. Earnings