What is Recurring Revenue and How It Can Impact Your Business Value

By Darren Cherry

If you’re reading this, chances are you have businesses that require a lot of time and attention to keep them running smoothly. While some companies operate on auto-pilot for a while, others need constant monitoring and attention to ensure they’re still making money.

You can do this in many ways, but one way you may want to consider is by creating recurring revenue streams. Recurring revenue is money your business regularly receives again and again after the completion of the initial transaction or service. It’s also known as subscription revenue or annuity income in accounting jargon.

Recurring revenue also helps businesses grow as it provides a steady stream of cash for growth. This blog post will discuss recurrence revenue, how it impacts your business value and the pros and cons of implementing it in your business.

What Is Recurring Revenue?

Generally speaking, a recurring revenue model provides your business with payments over regular intervals. Product-related models typically involve payments for corresponding shipments. Service models are far more complex because they usually involve a fixed fee versus a variable amount of services rendered.

To the extent you have recurring revenues, you start each month with a backlog of business. The great thing about this type of revenue is that you don’t have to find new customers to make money. Instead, you leverage existing customers and offer them something that will make them want to continue to pay you each month.

CAUTION: Inconsistent repeat customer purchases are not recurring revenue but “reoccurring revenue.”

How Does Recurring Revenue Impact Your Business Value?

Recurring revenue customers add value to businesses in the following ways.

• Higher average spending – these customers typically pay for convenience or security, making them less likely to be price sensitive.
• Greater loyalty - recurring revenue customers are more likely to purchase other offerings without considering competitors.
• Lower cost to serve – predictable volume helps to balance the workload, while the integration of the model reduces administrative cost.
• Free market research – ongoing engagement makes gathering feedback and test offerings easier.

Recurring customers should provide better cash flow, higher profits, and lower risk resulting in a higher business value.

What are the Types of Recurring Revenue Models?

Recurring revenue models meet customers’ needs or desires and typically fall into the following categories:

Convenience:

Models eliminate the hassle of evaluating alternates, placing an order, and product pick-up. Initial models included beauty products, household goods, and evergreen music/movie content. More recently, services include graphic arts, content writing, cosmetic injections, and public relations.

Piece of Mind:

The model here can range from predictive, so you don’t run out (like printer toner) to reserving time or space if something happens (air conditioning, legal, IT Help ).

Exclusivity:

Perhaps the most extensive category generally involves access to scarce items (country clubs, speakeasy clubs, shared jets)

Pros of Implementing a Recurring Revenue Strategy

- Easy to implement - If you’re looking to implement a recurring revenue model, it’s easier to do so than if you’re trying to sell a one-time product or service. This is because you’ll be selling the same product or service multiple times to the same customers, meaning you won’t have to find new customers each time. - Predictable revenue - As we mentioned above, recurring revenue models are often predictable as customers are likely to continue paying their monthly or annual subscription fee even if they’re unhappy with your service. - Steady cash flow - With a steady stream of cash coming in each month, you’ll have a better idea of how much money is coming in and when. This is something that’s often difficult to predict with one-time sales, especially if you’re selling online. - More money for marketing - Since you’ll have a steady stream of cash coming in from recurring revenue, you’ll also have a steady stream of money to invest in marketing your business. This can help you grow your customer base faster and easier. - Easier to sell your business - As we mentioned above, recurring revenue can make your business appear more valuable when it comes time to sell it. This can help you get a higher price for your business, making it easier to find buyers interested in purchasing your company.

Cons of Implementing a Recurring Revenue Strategy

- Requires upfront investment - If you’re offering a recurring revenue model, you’ll need to make the initial investment to create the product or service that your customers will be paying for. This is different from a one-time sale, where you can earn money even if your product or service doesn’t sell. - Possible issues with customers paying for a recurring service - If you’re offering a service that requires you to be present in order to be completed, there’s a chance that customers may cancel their subscription if you aren’t around for some reason. This can cause issues with your business if you’re relying on those subscription fees to stay afloat. - Weak during slow sales periods - If you primarily rely on one type of recurring revenue, there’s a chance that this particular type of customer could stop buying from you. For example, if you’re primarily selling memberships, there’s a chance that your customers could stop paying for their membership. This could cause your recurring revenue to dry up for a period of time until the customers come back.

Conclusion

Recurring revenue is money that your business regularly receives again and again after the initial transaction or service has been completed. It’s also known as subscription revenue or annuity income in accounting jargon. Recurring revenue is one of the easiest ways to ensure that your company has a steady and reliable stream of cash coming in each month. The great thing about this type of revenue is that you don’t have to find new customers to make money. You can simply take the customers you have and offer them something that will make them want to continue to pay you each month. With a steady stream of cash coming in and a steady stream of money to invest in marketing your business, you’ll have an easier time growing your customer base and increasing your revenue in the process.