Successful businesses all have one thing in common; they don’t just do one-off sales, they all work towards recur revenue.
Recur revenue is, simply put, any predictable and reliable month-over-month income. Essentially it is the magic porridge pot that keeps on giving.
You make the sale once, and the recurring use of the product/subscription leads to a stream of consistent payments. Basically, instead of selling one magazine and getting a one-off payment, you sell a magazine subscription once and receive a monthly payment.
So why is this important to you?
If you’re not creating recur revenue your wasting time and losing money. This blog will help you understand the different kinds or recur revenue and how to make it work for your business.
Firstly, recur revenue can make financial forecasting much easier, especially if companies are able to count it as a good portion of their income. Essentially the more guaranteed recur you have the more stable the predictions of your financial yearly income will be. Tracking and understanding recurring revenue, therefore, is very important.
Secondly, with enough regular recurring revenue coming in, you can move your focus to provide better customer services and with regular assistance and deals. By focusing on customer service, word of mouth marketing and brand loyalty increases bringing in new customers naturally and organically. So essentially recur revenue can actually lead to more sales.
There are actually several types of recur revenue, and some are more financially desirable than others due to stability and spend. Her we will list and explain them.
Hard contracts: the most desirable Recur revenue. A hard contract is practically a guaranteed revenue stream. As the customer signs a contract agreeing to set the duration of time (usually a year or 18 months) they are obligated to pay and on time. This allows the business to create accurate predictions of incoming revenue as hard contracts should guarantee income.
Auto-renewal subscriptions: Though customers are again contracted with Auto-renewal, unlike hard contracts the duration tends to be shorter and the customer has the ability to cancel them after a certain amount of time before the next payment. The reason these are so well sought after is that customers will often allow their contract to be renewed for ease, because they don’t want to shop around again, or because they have forgotten to cancel it in time. How many times where you signed up for three free months or the first box of X free and then you’ve forgotten to cancel the subscription before the next payment was due?
Sunk-money subscriptions: This consists of the customer buying an initial product or platform purchase but with the need to buy compatible accessories or small add-ons to continue to successfully use the product. App games are an easy example of this, you buy a game, then get to a certain point and find you can’t go any further without buying some diamonds, then you find that you need to download and buy an expansion pack to get to the next level… and so on. The first product works and is a product on its own, but it works better and gives you more use, with add-ons.
Standard subscriptions: This is a revenue that will recur only for a limited amount of time – as long as the contract is, but will have the option of being renewed at the end.
Sunk-money consumables: iPhones and Macs are a good example here, they are built to work best along with their own software and products. It is easier for the sake of compatibility for someone with a Mac to have an iPhone, an air printer and an Apple TV. Of course, there are other ways to make technology connect, but for those not tech savvy these seem like simple solutions.
Simple consumables: These are products that are bought once with no intention of buying again, but further product buying occurs when the customer becomes loyal to the business. For this to work you need a good product it either needs to be long lasting and the best there is to ensure trust and loyalty or cheap but does a good job giving a more ‘disposal’ or replaceable element that will lead to recur. Boiling it down to it’s simplest from, I will use shoes as an example; for long lasting work shoes you go for high-quality leather from trusted maker such as M&S. You might buy one pair every two years but you spend around fifty pounds because you trust they are of high quality and will last you. For something to wear on a holiday or festival where your shoes might get ruined, you go and buy a cool, comfy, £5 pair of shoes from Primark, they last for the event, or the summer but that’s it, but then that was all you needed, so you buy again when you look for something similar. You would only make £50 from the second shoe option by selling ten pairs. so you need to ask yourselves do we offer something effective, durable and expensive? Or do we offer something flimsy, easily replaced and cheap? Either is fine, but you need to be honest with your customers about what you’re offering.
There are different metrics and variables that can be recorded for measuring the success of recur and planning on its income. Let’s discuss the three important C.
When we look at the effectiveness of recur we first need to look at Customer Acquisition Cost(CAC). Simply, you are looking at whether the deals and discounts you are offering are bringing in enough recurring revenue to justify them. This is an essential measure as it helps you to judge your company’s success or failure. CAC account for all the costs involved in attracting customers, this is marketing, advertising, and deals and whether they are costing you less than the revenue they bring in. You are essentially adding up all that a sale costs you, so you can check that it creates a return on investment. You want your CAC number to be low as it means your profit will be higher.
Now, in order to asses the ROI of CAC you need to consider Customer Lifetime Value(CLV). This is when you add up all the contracts a customer has taken out with you, or all the products they have bought and look at the overall income they are bringing to the company. This, unfortunately, is often based on estimations and assumptions meaning that it cannot always give an accurate prediction. To accurately assess CLV nominal calculations like the sum of all contracted sales, as well as more complex formulas like the annual discount rate are required.
Finally, you need to consider your Churn Rate. Churn is the number of people subscribed to your service who end their subscription within a given time period. In order for a company to succeed, your churn rate needs to stay low and your number of new customers must exceed it. So in order to correctly calculate churn, take all your monthly recurring revenue at the beginning of the month and divide it by the monthly recurring revenue you lost that month minus any additional revenue from existing customers.
A good product and strong customer service. Customers happy with their product and happy with your business will be a regular customer as you will have built their trust.
While recurring revenue streams come through contracts, monthly billing and other modern reminder systems, all recurring revenue streams are dependent on your relationship with your customer.
If you want to be successful at recur revenue you need to be equally focused on your customer needs as well as your sales targets. It may sound crazy, but it works.