Recurring Revenue: Models, Benefits and Why It’s Important

Recurring Revenue

What is recurring revenue? 

As the name suggests, recurring revenue implies a stable portion of a company’s revenue that continues to be earned periodically in the future. As opposed to one-off sales, recurring revenue offers the guarantee of sales happening at specific intervals. As such, recurring revenue is a predictable stream of revenue that provides a high degree of certainty. 

Recurring vs. non-recurring revenue

As aforementioned, recurring revenue is a stable, predictable portion of a company’s revenue that repeats at specific intervals. Recurring revenue is a major revenue stream for subscription-based companies wherein their customers pay a recurring amount to stay subscribed to their services of choice. This makes it easier for the company to predict future income accurately.  

On the other hand, non-recurring revenue represents the one-off payment a company receives in exchange for a product or service. This non-recurring revenue may or may not happen again. As such, companies do not expect their non-recurring revenue to continue in the future. 

Why is recurring revenue important?

Recurring revenue essentially represents the lifeblood and livelihood of an organization. Since it is a predictable chunk of revenue that a company can count on, it helps accurately demonstrate how much a company is worth. Since recurring revenue enables accurate prediction of available funds, it helps companies manage their expenses more efficiently. 

What are the benefits of recurring revenue?

According to the 2022 Global MSP Benchmark Survey, nearly half of the respondents experienced an MRR growth of more than 10% over the last three years. That said, it is the right time for businesses to ensure that they incorporate some kind of recurring revenue stream to achieve greater financial stability in the long run. Now that we know how important recurring revenue is for businesses, let’s look at some of the key benefits it offers: 

  • Revenue forecasting: One of the most important benefits of recurring revenue is that it provides companies with the ability to accurately predict their future income. Having stable recurring revenue forecasts helps build trust among investors and boosts corporate fundraising.
  • Growth measurement: With accurate recurring revenue forecasts, companies can easily measure their growth rates and plan recruitment and expansion accordingly. When companies know how much funds they’ll have available in the future, they can plan their expenses accordingly and also increase or decrease the expenditure to adjust revenue.
  • Customer relationships: Making new sales to existing customers is simpler and more cost-effective than acquiring entirely new ones who know nothing about your product or service to begin with. The nature of recurring revenue creates a standing relationship with customers and helps retain them for longer.
  • Financial stability: Since it accurately predicts future income, recurring revenue represents the financial stability of an organization. As such, it helps establish the worth of a company and also helps provide guidance in the overall decision-making process.  

MRR vs. ARR 

When it comes to recurring revenue, most companies operate on either a monthly recurring revenue (MRR) or annual recurring revenue (ARR) basis, or both. MRR and ARR are essentially measures of the revenue that a company earns from its subscribed customers. While similar in the fact that they are both types of recurring revenue, MRR and ARR differ in some respects. Let’s discuss each individually and note the differences. 

Monthly Recurring Revenue (MRR)   

As the name suggests, MRR represents the sum of all subscription revenue that is generated on a monthly basis. It essentially demonstrates the company’s growth on a monthly basis. MRR is an efficient metric to measure the immediate impact of any changes made to the pricing strategy or the product/service on the subscription renewals. 

Annual Recurring Revenue (ARR)         

ARR, on the other hand, represents the sum of all subscription revenue that is generated on an annual basis. ARR enables companies to evaluate their year-over-year progression that can be used for long-term product planning as well as creation of business road maps. This is especially applicable to SaaS companies. 

How do you calculate recurring revenue? 

MRR can be calculated in two ways, i.e., by using either the revenue per customer or the average revenue per user. Calculating the MRR by determining the monthly recurring revenue of each customer is the easiest way to do it. Once the monthly revenue from each customer is determined, we can find the sum of all the revenues generated from the customers. 

When it comes to ARR, there are a number of different factors that you must consider such as the complexity of your business model, your current pricing strategy and so on. Companies calculate ARR by subtracting the amount of revenue lost owing to cancellations from the revenue that is generated from yearly upgrades and subscription renewals. 

What are examples of recurring revenue? 

Now that we have discussed recurring revenue in detail, let’s look at some of its most common examples

Managed services 

Managed service providers (MSPs) operate on the recurring revenue model, wherein they charge their customers a fixed regular fee to manage their IT systems. Security-as-a-service and endpoint management are examples of managed services that help generate recurring revenue for MSPs. 

Cloud services business model 

Many companies offer outsourced cloud services to their customers in exchange for a recurring subscription fee. Companies earn recurring revenue from a host of different cloud services, such as cloud computing, storage, backup and more, which the customers can avail in exchange for a regular subscription fee. 

What is a recurring revenue model? 

The recurring revenue model is a business model wherein the company provides its customers with a product or service in exchange for a specific fee that is charged to them at regular intervals such as monthly, quarterly or yearly. Subscription and membership-based businesses operate on the recurring revenue model.  

The recurring revenue model ensures that the customer continues to pay a certain amount for the product or service at regular intervals, thus making it easier to predict cash flow and generating sustainable profit margin for the business. As opposed to conventional one-off sales, wherein the customer’s relationship with the business ends right after the sale, the recurring revenue model helps build a long-lasting and loyal relationship with customers, leading to greater customer retention.  

Here’s a list of the most commonly implemented recurring revenue models: 

  • Per-user: Also known as the per-seat billing model, per-user is a type of recurring revenue model wherein companies charge their customers based on the number of people that are using their product/service.
  • Per-device: As the name suggests, the per-device billing model is a type of recurring revenue model wherein companies charge their customers based on the number of devices being serviced/managed by the former.
  • Per-cloud-based services: This billing model is a type of recurring revenue model wherein cloud service providers charge their customers a recurring fee based on the types of services availed by them.
  • Flat fee: This is a type of recurring revenue model wherein companies charge their customers a recurring flat fee for a single plan or product. 

Generate recurring revenue with Kaseya 

Kaseya offers a comprehensive suite of IT management solutions that MSPs can offer their customers and create a recurring revenue stream that helps them stabilize their earnings. BMS enables automated billing of recurring revenue, which further streamlines the process. Having a steady recurring revenue stream helps businesses accurately predict their future cash flow and manage their expenses more efficiently. Additionally, a recurring revenue stream is also useful in winning the trust of investors and expanding business operations

Want to know more about the various Kaseya products that you can leverage to establish a recurring revenue stream? Talk to us today

Download Your Copy of the 2021 IT OPs Survey Results
2022 Benchmark Survery Results

Archives

Categories