Recurring revenue might be the most important metric you can track in your business. With over half of all B2B e-commerce sales coming from recurring sales, more companies starting today opting to follow this non-traditional model, it’s easy to see why this trend is taking over.
Not only does recurring revenue lead to higher predictability of income in your business, but it also allows you to scale more efficiently with compounding total revenue, as well as increasing the total lifetime value (LTV) of your customers - meaning more profit at the end of the day overall.
If you’ve been curious about trying out a recurring model in your business, you’re going to love today’s post. We’re going to cover the “ins-and-outs” of everything recurring revenue below - from the terms used in the industry, to the reasons you should consider adopting a subscription-based model.
A recurring revenue model is simply a sales model for your business that emphasizes a recurring pricing structure, as opposed to a one-time cost. If you think about all of the products and services you use today, chances are that you take part in quite a few recurring revenue streams.
Some great examples of this would be your monthly internet/cable bill, your subscription to streaming services like Netflix, or even your Gmail for Business account. All of these companies have found great success charging a small amount each month to a large group of people.
This model has proven to be one of the most effective ways to grow and scale your business while allowing you to continually reinvest new funds into improving your product, services, marketing, and customer support.
Related Reading: How To Sell Digital Products On Your Website (For Free!)
Monthly Recurring revenue is the most important metric you can track in a subscription-based business. This metric will show us very plainly how our business performed any given month. Once you have this metric calculated, you can identify other helpful insights and metrics that we’re going to cover down below.
We can calculate monthly recurring revenue with this simple formula:
When you first start learning about recurring revenue models, it may feel like there is a lot of jargon floating around. I thought it would be helpful to first take a look at these terms and understand exactly what they mean, and their importance to the MRR model. Below are some of the most popular terms you’ll see when discussing recurring revenue tactics and metrics for your business.
If math and manual calculations stress you out, don't worry! Companies like Baremetrics and ChartMogul automatically calulate these stats for you. If you'd like to explore some real MRR data, checkout Baremetric's Open Startups project where you can sneak a peek at real company revenue data.
MRR stands for monthly recurring revenue and is calculated by multiplying the total amount of customers by the price of the monthly membership. This can be applied to different plans and prices but will end up with your total expected monthly revenue.
ARR stands for annual recurring revenue and is essentially your MRR multiplied by 12 months. This number will fluctuate based on the revenue generated in previous months but is a common statistic tracked for year over year (YOY) growth.
Churn is the total amount of revenue your business loses each month. Churn can be viewed in units (ie. number of customers lost) but is more commonly thought of as a percentage of MRR.
For example, if you have 100 paying customers and 10 of them quit this month, you have a 10% churn rate. Churn is the antithesis of MRR and should be monitored closely. Usually, recurring revenue-based businesses will consistently focus on lowering churn while growing sales. Any churn rate of about 15%+ can be detrimental to a business.
LTV stands for the lifetime value of the average customer. This statistic is calculated by determining the average months the user will stay on with your company. For example, if you sell a $100/mth product and your average customer stays on for 10 months, your LTV for your business will be $1000/customer.
This metric is so important because it can be used to determine the amount of money you’re willing to spend to acquire one customer. If you know that on average you make $1000/customer, it’s much easier to rationalize paying up to $700 or more to acquire one.
New MRR is the amount of new revenue (new customers) you bring into your business each month. If your subscription-based business sells a product for $100/mth and you sell 20 units throughout the month, your new MRR for that month would be $2000. New MRR is an indicator of how effective your current sales cycle is producing new customers. This allows you to monitor trends and fluctuations based on the sales month.
Expansion MRR is the amount of revenue generated from existing customers through up-sells, higher-tiered pricing packages, and add-ons. Expansion MRR is calculated by the difference between two pricing options. For example, if 3 of your customers paying $100/mth decided to upgrade to your “Pro Plan” for $150/mth, your expansion MRR would be $150. This metric is a major indicator of how successful your business is at up-selling and growing existing revenue without new customers.
Net New MRR is the final metric that takes into account all of the metrics above. We want to know exactly how much new MRR we’ve added to the bottom line each month. To calculate net new MRR we take the New MRR + Expansion MRR - Churn MRR. This figure will highlight the total impact of monthly activity (customers gained and lost) on the business.
Now that we’re all caught up on the terms involved in recurring revenue models, let’s explore some of the main benefits that make a subscription-based model so attractive for your company. Most of the benefits are side effects of compounding growth over time, which allows you to continually reinvest more and more into your products and services.
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When you do this, some amazing things happen - you build an unstoppable business with a larger and larger moat that makes it much more difficult for new competitors to enter your niche. Below are some of the most important benefits that a recurring revenue model can provide for your business.
When you sell one-time single purchase products, your monthly sales are bound to the performance of your sales team, website, or store that month. This means for example if December is a slow month for your business you’ll make significantly less than you would normally in the summer months. This makes it very difficult and much more stressful to manage marketing spend, employee hiring, and recurring expenses for your business.
On the other hand, when you operate in a recurring revenue cycle, it’s very easy to estimate your monthly income with high accuracy because most of your stats like churn and new MRR are usually incrementally worse or better off each month. This leads to the high predictability of total income, which makes planning for expansion and growth, as well as expenses much easier.
If you’ve been following along so far, we can both agree that having predictable monthly revenue is an amazing thing. We know almost exactly how much our business will make this month which makes it easy to plan new features and expansions for our products and services.
By growing month after month, we can afford to spend time and money improving our offerings and implementing customer requests. We can improve not only or app or tool, but we can also make sure we’re reinvesting enough into the team that will support our customers. Over time, this will lead to a stand-out product that was built intentionally for our customers and audience, and a much more engaged happy clientele.
Reinvesting monthly income into our businesses doesn’t stop at product and customer service. Another well-known benefit that many business owners miss is the opportunity to expand their marketing reach and ad spend. When you’re first starting out, it feels almost impossible to be able to rationalize expenses like $100 for a blog post, or $4.00 per click on Google/Facebook PPC ads - and that’s because it is!
When you continually expand the resources devoted to marketing and advertising, you can scale your marketing budget with numbers that make sense for your business. When you’re making $15,000 MRR it’s not unreasonable to spend a few thousand dollars each month driving new traffic and customers into your funnels. Decide on a percentage of MRR that you’re willing to devote to new growth, and scale it as you grow.
One of the lesser discussed phenomena of monthly recurring revenue is called “ghost revenue”. We all have products and services that we pay for each month that we may use very little if at all - this is ghost revenue for a company, meaning we didn’t even use the service we purchased!
For example, this month I finally cancelled my Spotify subscription that I purchased last summer. This means that for over a year, I paid Spotify $12/mth and I hardly ever used the app. While this may seem like a rare insignificant case, you’d be surprised how large of a percentage of ghost revenue some companies have. It’s worth emphasizing that this kind of dynamic will never happen in a one-time product-based sales cycle.
If your goal is to eventually sell your company someday, you’re going to find this one particularly interesting. Not only does recurring revenue allow you to efficiently fund and scale your business, but it also increases the valuation of your business when it comes time to sell. Sometimes by multiples of 2-3x or more.
For example, if you were selling a grocery store, the current inventory and value of the brand assets, as well as the property owned, would all factor into the sale price of the business. You would end up with a reasonable multiplier (most likely 2-3x profit) as well as the cost of all hard assets. Compare this with the recurring revenue model: 4-15x ARR profit.
Did you catch that? Investors are willing to pay 4-10x more for your company if the monthly income is highly predictable, stable, and meets their churn requirements. This alone might be the biggest reason for you to start exploring recurring revenue in your business today.
So far we’ve covered a lot of information about the reasons you may want to consider adopting a recurring revenue model in your business. Now let’s take a little time to check out some examples of ways that popular companies today are using subscription-based models to scale and grow their business.
In the last 10 years, the growth of online tools and services has seen a massive increase in both popularity, and the amount of money an online consumer is willing to spend. Most businesses run on a combination of these tools and services that make it easier to perform business-related tasks. Creating a tool or web app is one of the most popular business models that support recurring revenue with customers expecting to pay a monthly or annual fee.
Related Reading: The 9 Most Profitable Digital Products You Can Sell Online
E-Learning and personal coaching programs have taken the internet by storm in recent years. With influencers on Instagram, Snapchat, YouTube, and more opting to create programs that sell online to help their audience, this medium has become one of the most profitable ways to start a recurring revenue-based business. This large niche covers everything from fitness to business growth, to skill development, and more.
With the rise of streaming sites like YouTube and Vimeo, the cost to consume content has been driven down to almost $0. You can watch millions of videos for free, read unlimited content on the web, and access many eBooks and resources for little to no cost. However, a recent trend that is becoming much more popular is to lockdown this content, or offer curated content about a specific topic while charging a monthly fee.
Recurring revenue is one of the best ways you can continually drive growth in your business whether online or in person. The benefits of having a predictable amount of revenue flowing into your business each month make this pricing strategy worth pursuing. SecuraCart was created to make this process as easy as possible.
Not only does this provide a flexible way to expand your marketing reach, but it also allows you to reinvest into your company, your employees, your product, and of course your customers. Continual improvement is the secret to success in most businesses, and having a stream of recurring revenue takes a lot of the pressure to perform quickly off of you and your team.
Do you have any tips for getting started collecting recurring revenue in your business? Let us know in the comments below!
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